MSMEs must prepare for EU non-tariff rules to gain from FTA: Govt

Officials and trade experts said lower tariffs alone would not lift exports unless Indian MSMEs can meet EU requirements on ESG, CBAM, certification and supply-chain standards

Indian micro, small and medium enterprises (MSMEs) will need to prepare for European Union (EU) environmental, certification and other non-tariff requirements to fully benefit from the India-EU free trade agreement (FTA), a senior government official said on Friday.

 

The FTA is expected to become operational in the January-March quarter of 2027, subject to completion of the requisite approval processes.

 

Lower tariffs alone would not guarantee higher exports unless Indian businesses were able to comply with requirements related to environmental, social and governance (ESG) standards, the Carbon Border Adjustment Mechanism (CBAM), certification, child labour and deforestation, said Sanjeev Chawla, additional development commissioner, MSME Development and Facilitation Office, Karnal, Ministry of Micro, Small and Medium Enterprises.

 

“Indian goods going to Europe face a lot of rules,” Chawla said, stressing that MSMEs need to understand the requirements before the FTA becomes operational.

 

He was speaking at a two-day international conference on “India-EU Partnership for MSME Competitiveness, Sustainability & Global Value Chains”, organised by the Federation of Indian Micro and Small & Medium Enterprises (FISME).

 

Chawla said industry associations and export promotion councils would have to play a bigger role in helping MSMEs understand complex EU requirements, as individual small businesses may not have the capacity to interpret and comply with them.

 

The implementation challenge was also highlighted by Sangeeta Khorana, professor of international trade policy at Aston Business School, UK.

 

Indian firms have historically utilised only 20-30 per cent of available FTA tariff preferences, she said.

 

“Negotiation is not an outcome. It’s the implementation which will be the outcome,” Khorana said, adding that MSMEs would need to work with associations and the government to build capacity to use tariff preferences and enter European value chains.

 

Kate Foster, international affairs and trade policy lead at the Federation of Small Businesses (FSB), UK, said an FTA could provide greater stability and certainty for small businesses, but exporters would have to account for compliance requirements across the EU’s 27 member states.

 

She said EU regulations were also evolving in areas such as sustainability, supply-chain transparency and due diligence, meaning exporters would have to continually adapt to regulatory changes.

 

The agreement nevertheless provides significant market opportunities for Indian exporters, particularly in apparel and leather, said Carmine Soprano, economist at Tor Vergata University of Rome and visiting senior fellow at the London School of Economics and Political Science.

 

The EU imports around €80 billion of garments and apparel annually, but only around 6 per cent of those imports come from India, compared with 17 per cent from Bangladesh, Soprano said.

 

India’s share of EU leather imports is also around 6 per cent, compared with 23 per cent for Vietnam.

 

He said the FTA could help address the competitive disadvantage faced by India following the phase-out of the EU’s Generalised System of Preferences for India.

 

Chawla also highlighted opportunities in services, noting that the India-EU agreement covers around 144 services sectors and sub-sectors.

 

He said greater services exports could be particularly beneficial because they have lower import dependence compared with merchandise exports.

 

The government is also seeking to prepare MSMEs through the Export Promotion Mission, which has 11 schemes focused on MSMEs, first-time exporters and labour-intensive sectors.

 

Chawla said the schemes provide support for areas including export credit, overseas warehousing, logistics, branding and capacity building.

 

The emphasis now, he said, should be on ensuring that MSMEs are ready to meet EU requirements and convert the tariff preferences under the FTA into actual export orders.