India-EU trade deal strengthens PM Modi's 'Make in India' ambitions

The EU deal could also revive appetite from foreign businesses looking to diversify their operations out of China, seeing India as a possible alternative to set up factories for export into Europe

By Swati Gupta and Shruti Srivastava

 

India’s trade deal with the European Union gives businesses in the South Asian nation a reprieve from punishing US tariffs, keeping alive Prime Minister Narendra Modi’s ambition to make the country a global manufacturing hub.  

Dubbed the “mother of all deals” by both sides, the free trade pact will open the EU market more widely to Indian exporters, especially in labor intensive industries like clothing and furniture. 

 

The bloc will eliminate or reduce tariffs on 99.5 per cent of imports from India, including phasing out duties on apparel and leather, sectors battered by US President Donald Trump’s 50 per cent tariffs. 

 

 

Farida Group, one of India’s largest shoemakers, expects sales in Europe to rise 10 per cent to 20 per cent once the agreement is implemented, helping reduce its exposure to the US, previously its biggest market.

 

“The deal is a huge relief and is definitely going to help labor intensive sectors,” said Israar Ahmed, managing director, Farida Shoes Pvt Ltd. “With both the UK and EU deal, we get a big consolidated market and now we aim to increase our exports to this region to 50 per cent to 60 per cent.” 

 

India’s gains from the trade pact could be material over the medium term. Exports to the EU, which currently make up over 17 per cent of India’s total overseas shipments, could rise by 5 per cent to 7 per cent within this decade, said Radhika Rao, a senior economist at DBS Bank. That would lift the bloc’s share of India’s exports above 20 per cent, potentially overtaking the US, which currently accounts for over 18 per cent.

 

Textile stocks rallied after the deal was announced on Tuesday, as investors priced in lower customs duties and stronger export prospects, while defense companies also gained on expectations of deeper cooperation with European partners and improved access to technology. 

The EU deal could also revive appetite from foreign businesses looking to diversify their operations out of China, seeing India as a possible alternative location to set up factories for export into Europe. That offers a glimmer of hope to Modi’s faltering manufacturing push.

 

“With tariffs going to zero, there is interest among companies to produce in India,” said Ajay Sahai, director general of the Federation of Indian Export Organizations, a body under the Commerce Ministry. “They want to use India as one of their manufacturing bases to export to rest of the world and even to Europe.”

 

The prime minister’s “Make in India” campaign aimed to lift manufacturing to 25 per cent of the economy, but the sector accounted for just 13 per cent in 2024, down from 16 per cent in 2015, according to World Bank data. Industry leaders said the recent flurry of dealmaking, led by the EU agreement, could help India better integrate into global supply chains.

 

Muralishankar Sambasivam, executive vice chairman at Super Auto Forge which makes automotive components, said manufacturing in sectors such as engineering goods, auto components, aerospace and defense will get a boost as non-tariff barriers come down and paper work becomes easy.

 

“India will now emerge as not just China plus one but Europe plus one too,” he said. “Labor and energy costs are both going up in Europe and firms are looking to shift to trusted nations.”

 

The EU deal is the fourth trade agreement India has concluded since last year, including an ambitious pact with the UK, as New Delhi seeks to shed its protectionist reputation and blunt the impact of Trump’s tariffs. The push has coincided with efforts by major exporters to diversify away from the American market.

 

US Trade Talks 

Trump’s tariffs on India, the highest among major nations, have curbed exports from the country, pushed the trade deficit to a record high and pulled the currency down to an all-time low. 

 

Both sides remain locked in trade talks to lower the tariffs although the prospects of an agreement are still elusive. Shortly after the EU deal was announced, the US trade representative said India still has more work to do to address American concerns over its purchases of Russian oil before it can secure tariff relief.

 

“While we remain hopeful of India securing a trade deal with the USA in the coming months, we believe that India would benefit by continuing to pursue a strategy of multi-alignment and strategic autonomy in trade,” said Kaushik Das, chief economist at Deustche Bank.