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India-EU Trade Pact: A Strategic Shift Toward Growth

Exploring how the India-EU FTA aims to boost exports but demands significant domestic reforms for success.
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Surya
••3 mins read
India–EU FTA: A strategic shift toward export-led growth, contingent on deep domestic reforms and global competitiveness.
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India-EU Free Trade Agreement: Implications and Reforms

1. Context and Strategic Significance of the FTA

India’s announcement of a Free Trade Agreement (FTA) with the European Union marks a strategic pivot from historically high-tariff, inward-looking policies toward export-driven growth. While immediate gains are modest, the agreement signals a deliberate shift in India’s economic strategy, emphasizing global competitiveness and trade openness. India accounts for less than 2% of global goods exports despite being the fourth-largest economy. Even a 2-percentage-point increase in market share could effectively double exports, highlighting significant untapped potential.

Global supply chains are increasingly diversifying away from China. European firms are seeking alternative production bases, presenting India with an opportunity to leverage its demographic dividend — nearly 65% of the population under 35 — and manufacturing potential. The FTA with the EU provides preferential access to 450 million consumers across 27 countries, enhancing prospects for trade and employment generation.

2. Challenges in Translating Market Access into Growth

While the FTA expands market access, it does not automatically guarantee higher exports or job creation. Structural impediments, including high tariffs on intermediate goods, costly key inputs, and procedural delays, limit competitiveness. India’s extensive use of Quality Control Orders (QCOs) — over 700 remain active — acts as de facto import barriers, disrupting supply chains and increasing uncertainty for firms.

Impacts:

  • High input costs reduce price competitiveness in global markets.
  • Procedural bottlenecks delay production cycles and export timelines.
  • Over-reliance on protectionist measures may deter firms from scaling production.

3. Investment Protection and FDI Constraints

The EU FTA alone is insufficient to attract large-scale manufacturing investment. India’s bilateral investment framework remains weak following the termination of 77 bilateral investment treaties (BITs) in 2015. The revised model BIT (2016) requires investors to exhaust domestic remedies for five years before international arbitration — terms few global firms accept.

Consequently, Net FDI inflows fell to $0.4 billion in FY2025, the lowest on record. Weak investment safeguards incentivize European firms to operate via exports or minor assembly rather than committing long-term capital to India. Modernizing BITs and providing enforceable protections are crucial to attracting sustained manufacturing FDI.

4. Need for Broader Structural Reforms and Global Integration

Beyond tariff reductions and BIT reforms, India should consider joining high-standard regional trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These agreements go beyond market access and encourage domestic reforms in:

  • Labour laws
  • Intellectual property
  • Regulatory transparency
  • Competition policy

International commitments create external discipline that can accelerate domestic reform, as seen in China’s WTO accession in 2001, which catalyzed modernization and global integration. High-standard agreements signal policy stability, enhancing investor confidence and facilitating long-term manufacturing investments.

5. Way Forward and Policy Imperatives

To capitalize on the EU FTA and achieve “Viksit Bharat 2047” aspirations, India must:

  • Reduce tariffs on intermediate goods to lower production costs.

  • Simplify customs procedures and regulatory compliance.

  • Rationalize or phase out QCOs that act as trade barriers.

  • Strengthen BITs and provide enforceable investment protections.

  • Actively participate in high-standard regional trade agreements to anchor domestic reforms.

Impacts:

  • Enhanced global competitiveness of Indian firms.
  • Increased export-led growth and job creation.
  • Higher FDI inflows and sustainable industrialization.

6. Conclusion

The India-EU FTA is a pivotal step toward integrating India into global trade networks. However, it must mark the beginning of a sustained commitment to trade liberalization, investment facilitation, and structural reform. Seizing current global supply chain shifts requires fast, decisive action to create a competitive, resilient, and export-oriented manufacturing ecosystem.

"Opportunities don’t wait; neither should policy." — Paraphrased governance principle

Quick Q&A

Everything you need to know

Significance of India-EU FTA: The FTA represents a strategic pivot in India's economic policy from protectionist measures towards export-driven growth. While it is not a panacea, it signals the government's intent to integrate India more deeply into global markets and leverage international demand to boost domestic industries.

Key points:

  • Offers preferential access to 450 million consumers in one of the world’s wealthiest markets.
  • Creates opportunities for Indian firms to expand their global footprint, potentially doubling exports with even a modest increase in market share.
  • Reflects confidence in India’s demographic dividend, manufacturing potential, and emerging role as a supply chain alternative to China.
Implications: Beyond immediate gains, the FTA encourages structural reforms at home, such as tariff rationalization, easing regulatory barriers, and enhancing competitiveness, which are essential to translate market access into real economic outcomes.

Need for domestic reforms: Market access through FTAs alone cannot guarantee growth. Indian firms face structural bottlenecks that limit their ability to compete globally, including high input costs, complex customs procedures, and numerous quality control orders (QCOs) that act as hidden trade barriers.

Critical areas for reform:

  • Reducing tariffs on intermediate goods to lower production costs.
  • Simplifying regulations and streamlining customs to minimize delays.
  • Reassessing extensive use of QCOs to provide certainty to exporters.
Outcome: By addressing these domestic constraints, India can effectively convert preferential access into increased exports, job creation, and sustainable economic growth.

Mechanisms to attract manufacturing FDI: Trade agreements expand market access but do not automatically encourage large-scale investments. To attract foreign capital, India needs a credible and transparent investment protection framework.

Challenges: India terminated many bilateral investment treaties (BITs) in 2015, leaving foreign investors with limited recourse in disputes. The revised 2016 BIT requires investors to exhaust domestic remedies for five years, which few countries have accepted. Consequently, net FDI inflows, especially from major global firms, have declined significantly.

Way forward:

  • Modernizing BITs to provide enforceable safeguards and faster dispute resolution.
  • Ensuring consistent policy direction and legal certainty to build investor confidence.
  • Linking trade agreements with domestic reforms to make India a competitive manufacturing hub rather than just an export market.
Examples from countries like China show that credible legal frameworks combined with external trade commitments can significantly boost manufacturing FDI.

Reasons for limited global export share: Despite its large GDP, India contributes less than 2% to global goods exports due to structural, regulatory, and policy-related barriers.

Key factors:

  • High tariffs on intermediate goods increase production costs for exporters.
  • Complex customs and regulatory procedures delay trade and reduce competitiveness.
  • Excessive quality control orders (QCOs) create uncertainty for domestic firms planning exports.
  • Lack of strong investment protection discourages large-scale foreign investments that could boost export capacity.
Implications: These structural challenges prevent India from fully exploiting global market opportunities. Addressing them through targeted reforms is crucial for increasing India’s share in global trade and achieving long-term economic growth.

Potential benefits:

  • Provides preferential access to a 450 million-strong consumer base in Europe, enhancing export opportunities.
  • Encourages Indian firms to compete globally, fostering efficiency and innovation.
  • Signals policy stability and international engagement, which can improve investor confidence.

Limitations:
  • Market access alone does not attract large-scale FDI without investment protection and regulatory reforms.
  • High input tariffs and bureaucratic hurdles may limit cost-competitiveness of Indian manufacturing.
  • Structural domestic reforms are politically and administratively challenging, potentially delaying real gains.

Conclusion: While the FTA is a strategic step, its success depends on India’s ability to complement external opportunities with internal reforms, lower costs, and enhanced investor confidence, thereby transforming trade agreements into sustainable industrial growth.

Case study: Learning from international experience
China’s entry into the WTO in 2001 serves as a notable example. To comply with WTO rules, China undertook extensive domestic reforms, including modernizing its legal system, reducing trade barriers, and improving regulatory transparency. These reforms helped China attract massive FDI and integrate into global supply chains.

Implications for India: Joining high-standard agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) could similarly anchor reforms in areas where India faces domestic challenges, including:

  • Labour law modernization
  • Intellectual property rights enforcement
  • Regulatory transparency and competition policy
Outcome: External commitments create accountability and credibility, encouraging investors to commit long-term capital and facilitating India’s transition into a global manufacturing hub.

Attribution

Original content sources and authors

RS
Rajeswari Sengupta
BS
Business Standard
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