India-EU trade pact moves from promise to reality but challenges persist

India-EU FTA signals a strategic shift toward export-led growth, but without deeper trade, tariff and investment reforms, its full economic potential may remain unrealised

The announcement of a free trade agreement (FTA) between India and the European Union (EU) is a major turning point — not so much for its immediate gains, but for what it signals about India’s economic strategy. After several years of high tariffs and inward-looking policies, the deal reflects a clear recognition by the Indian government that exports must play a bigger role in driving growth. However, an FTA is only a framework. It creates opportunities, but it is not a cure-all. To fully benefit from this deal, India will still need significant domestic reforms.

 

The deal reflects the government’s confidence that Indian firms are capable of competing more strongly in global markets. Where does this confidence come from? In part, from the sheer room India has to expand its global presence. Despite being the world’s fourth-largest economy, India accounts for less than 2 per cent of global goods exports. Even a 2 percentage point rise in market share would effectively double exports.

 

Confidence also stems from global shifts. Supply chains are diversifying away from China, and European firms are seeking alternative production bases. With nearly 65 per cent of its population under 35 and significant untapped manufacturing potential, India is well placed to benefit.

 

Finally, the government’s confidence also comes from the opportunity that FTAs create. The EU pact offers Indian exporters preferential access to 450 million consumers across 27 countries — one of the world’s largest and richest markets. Alongside other proposed deals with the United States, Chile, Peru and the Eurasian Economic Union, it could help generate the millions of jobs India needs each year.

 

However, market access alone does not ensure higher exports or more jobs. To translate access into outcomes, India will need structural reforms that roll back protectionist barriers. Three such reforms will be key.

 

First, India’s trade regime requires reform. Tariffs on intermediate goods must be reduced if exports are to become a genuine growth engine. Indian firms cannot compete globally if key inputs remain costly. They need reliable access to low-cost components, supported by streamlined Customs procedures and simpler regulations to minimise delays. Yet the recent Union Budget left most import duties unchanged, despite the need for rationalisation. India should also rethink its extensive use of quality control orders (QCOs), which function as de facto import barriers. Although a few have been withdrawn, more than 700 remain, disrupting supply chains and creating uncertainty for firms planning production and exports.

 

Second, while the EU FTA may expand market access, it will not by itself attract large-scale manufacturing investment. That requires a credible investment protection framework. In 2015, India unilaterally terminated around 77 bilateral investment treaties (BITs), leaving foreign investors with limited recourse in disputes with domestic firms or the government. A revised model BIT introduced in 2016 mandates that investors exhaust domestic legal remedies for five years before seeking international arbitration — terms few countries have accepted. As a result, India now has BITs with only a handful of relatively minor partners, while major global firms remain cautious about committing long-term capital.

 

The consequences are visible: Net foreign direct investment (FDI) inflows have fallen sharply, reaching just $0.4 billion in FY2025, the lowest on record. Without enforceable safeguards, European firms may opt to serve India through exports or modest assembly operations rather than establish large production facilities. More broadly, modernising the BIT framework will be essential if India is to attract sustained manufacturing FDI.

 

Finally, India should seriously consider joining major regional trade groupings such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These agreements go well beyond tariff cuts. They require members to strengthen domestic standards in labour laws, intellectual property, regulatory transparency and competition policy — areas where India needs reforms, but has found politically difficult to implement.

 

International commitments can help anchor domestic change. China’s entry into the World Trade Organization in 2001 shows how external discipline can accelerate internal reform. Joining high-standard regional agreements would similarly signal that India’s policy direction is stable and long-term. That credibility, in turn, can boost investor confidence and attract greater investment.

 

India competes in a global trading system still shaped by China—a dominant exporter with deep manufacturing capabilities and highly integrated supply chains built over decades. In that context, the FTA with the EU is an important step forward. But it must mark the beginning of a larger transformation, not the end of reform. What India needs is a sustained commitment to trade openness. If it wants to become a global manufacturing hub and achieve its “Viksit Bharat 2047” goal, trade agreements must be backed by lower input tariffs, simpler regulations, stronger investment protection and deeper structural reforms.

 

Global supply chains are being reorganised in real time. The question is not whether opportunities exist — it is whether India will move fast and decisively enough to seize them.

The authors are, respectively, associate professor of economics, IGIDR, Mumbai, and senior research fellow at Bruegel and chief economist for Asia-Pacific at Natixis. Views are personal