A pivotal moment

Free trade agreement with EU remains a long haul

The summit between the leaders of the 27 member states of the European Union (EU) and the Indian prime minister this weekend was described in the joint statement that followed the meeting as “a pivotal moment”. Usually, such phrasing is diplomatic exaggeration, but on this occasion there might actually be reason to suppose that the India-EU relationship has reached an inflection point. For one, the atmospherics around this meeting, and the fact that it was supposed to be in person before the devastating second wave of the pandemic hit India, are themselves a reflection of new energy in the partnership. The comparison will inevitably be made to Chinese President Xi Jinping’s meetings with European leaders last year, which were notably tense and cold. In one of them, several of the leaders deputed their ministers to meet with Mr Xi, a visible and obvious snub. India’s outreach to deepen existing partnerships has been energised by the events of the past year — not just the pandemic’s pressures on the global economy but also the fresh tensions on the border with China. Meanwhile, the European authorities have finally come close to evolving a bloc-wide approach to the Indo-Pacific, following widely discussed white papers on the region from several influential member states. In short, both India and the EU are shopping for partners, both have been burned to an extent by the Trump years, and both are wary to a greater or lesser degree of Beijing’s recent weaponisation of economic relations.

This is the context in which the meeting and the joint statement it produced should be evaluated. The question is, in what direction does the EU-India relationship appear to be heading, and what will be the priority sectors? Much attention has focused on the decision to renew efforts towards a trade agreement, independent of an investment agreement. Nothing has changed domestically in India to make progress on free trade more likely than it was a few years ago. If anything, New Delhi has grown more disillusioned with trade openness. Given that it is merely a promise to resume negotiations, this has low cost to India, but looks like a win for Europe — and is unlikely to progress much in the immediate future.

On the other hand, climate change has rapidly moved up the hierarchy of importance, with the leaders calling for a revival of a high level dialogue on the subject. Most importantly from the point of view of growth and investment, the joint statement specifically called for development finance that focuses on climate action, and name-checked various attempts to catalyse private finance into this area. Given Europe’s outsize power in setting the rules of the road for institutional long-term finance in particular, this is a very important future direction for the India-EU partnership. It links to and overlaps with the “sustainable and comprehensive” connectivity partnership that the leaders announced. The EU signed a similar agreement with Japan in 2019; India itself has become part of various such groupings focused on connectivity, with even the Quad leaders’ meeting recently discussing climate finance and sustainable infrastructure. The challenge now is to transform this energy into actual harmonised regulations. Unless the Union government pushes the Indian regulators, including the Reserve Bank of India and the securities regulator, into deeper conversations with their European and global counterparts about what is needed, this connectivity and investment partnership will die swiftly, without any additional financial flows to India.