India–EU FTA: Need for Faster Progress

Source: The post  “India–EU FTA: Need for Faster Progress’’ has been created, based on “In a year of unpredictability, India needs to accelerate EU FTA” published in “Indian Express” on 16th January 2026.

UPSC Syllabus: GS Paper-3- Economy

Context: The global economy in 2026 is characterised by uncertainty arising from slowing growth in China and policy-induced disruptions in the United States. Rising protectionism, geopolitical tensions, and fragile global supply chains have reduced the reliability of traditional trade partners. In this context, accelerating the India–European Union Free Trade Agreement has become strategically essential for India to ensure export stability, attract long-term investment, and sustain economic growth.

Global economic context: Rising uncertainty

United States

1. The US economy recorded strong growth of 4.3 per cent in late 2025, largely driven by consumer spending.
2. However, this growth is structurally weak as investment is heavily concentrated in artificial intelligence infrastructure, with uncertain future consumption demand and high energy requirements.
3. Corporate hiring has slowed, and AI-related equity markets show signs of overvaluation.
4. The Trump administration’s tariff-led revenue strategy is likely to increase domestic inflation, weaken consumption demand, raise public debt, and eventually slow overall economic growth.

China

1. China’s economic growth has been on a long-term secular decline, falling from 8–10 per cent in earlier decades to below 4 per cent.
2. The continuing real estate crisis has reduced household wealth and domestic demand.
3. Ageing demographics further constrain consumption and labour supply.
4. Recent export growth is largely driven by trade diversion and tariff arbitrage, which is unlikely to be sustainable as partner countries raise tariff and non-tariff barriers.

Implications for India’s trade prospects

1. Slowing growth in the world’s two largest economies has reduced the scope for broad-based global trade expansion in 2026.
2. The commodity trade surge witnessed in late 2025 was largely temporary and driven by pre-emptive imports ahead of the US tariff regime.
3. India’s services exports remain relatively resilient, but their performance continues to depend heavily on economic conditions in the United States.
4. As a result, trade diversion away from the US market presents the most realistic opportunity for India to expand exports in the near term.

Strategic importance of the India–EU Free Trade Agreement

1. The European Union is India’s fourth-largest trading partner and a major destination for both goods and services exports.
2. Despite its importance, EU markets have received comparatively less attention than the US in India’s trade strategy.
3. Growing trade and political frictions between the EU and the US, as well as concerns over Chinese trade practices, are pushing the EU to seek alternative partnerships.
4. The successful conclusion of the India–UK FTA strengthens India’s negotiating credibility and sets a precedent for deeper engagement with the EU.
5. An India–EU FTA would help India diversify export destinations, reduce excessive dependence on the US market, and improve trade resilience.

Germany’s pivotal role in advancing the FTA

1. Germany is the largest economy in the European Union and plays a dominant role in shaping EU trade and industrial policy.
2. Recent India–Germany cooperation agreements signal renewed momentum toward a broader India–EU trade framework.
3. Germany’s Skilled Immigration Act creates an opportunity for India to negotiate Mode 4 provisions related to the movement of skilled professionals.
4. Inclusion of labour mobility would be a major gain for India, particularly in IT, engineering, healthcare, and research services.
5. Germany can act as an anchor for cooperation in advanced manufacturing, green technologies, industrial infrastructure, and defence production.

Investment and technology dimension

1. By 2024, cumulative foreign direct investment from the European Union into India had reached approximately 120 billion dollars, indicating strong existing economic ties.
2. Significant untapped potential remains, particularly in high-technology and infrastructure sectors.
3. Empirical studies show that trade and FDI are complementary, with FDI being the most reliable channel for long-term technology transfer.
4. Priority sectors such as electronics, infrastructure, renewable energy, and advanced manufacturing align closely with India’s development objectives.
5. A combined framework comprising an FTA, a services agreement, and an investment pact would maximise economic gains for India.

Way Forward

1. India should fast-track negotiations for a comprehensive and balanced India–EU Free Trade Agreement.
2. Greater emphasis must be placed on services trade, especially mobility of skilled professionals under Mode 4.
3. The agreement should include strong provisions for technology transfer, investment protection, and industrial collaboration.
4. Strategic engagement with Germany should be leveraged as a gateway to broader and deeper EU economic integration.

Conclusion: In an environment of slowing global demand, rising protectionism, and geopolitical uncertainty, accelerating the India–EU Free Trade Agreement is both an economic and strategic necessity. A well-structured agreement can strengthen India’s trade resilience, boost services exports, attract technology-intensive foreign investment, and provide a stable foundation for long-term growth.

Question for Practice: In the backdrop of slowing global demand and rising protectionism, regional trade agreements are becoming central to India’s economic strategy.”
Discuss this statement with special reference to the proposed India–EU Free Trade Agreement.

Source: Indian Express