Can We Expect an India-EU FTA Soon? What Has Changed in the Bilateral Relationship

Posted by Written by Naina Bhardwaj Reading Time: 8 minutes

India-EU FTA prospects are looking up as new geopolitical realities are pushing India and the European Union to get closer by facilitating easier trade and investment.

The Joint Statement at the India-EU Leaders’ Meeting, issued on May 08, 2021, has renewed long stalled hopes for the possibility of a free trade agreement (FTA) between India and European Union (EU).

It declares the commitment of both parties to launch negotiations for a trade and investment agreement, which were earlier halted in 2013 due to sticky issues like tariffs, entry barriers, market access, and investment protection.

The joint statement comes after almost eight years of uncertainty and stalemate and has injected newfound optimism among stakeholders on both sides.

An FTA would be the most logical economic culmination of the trade relationship between “natural allies” that has been deepening over the years. This is evident by the fact that trade in goods between the EU and India increased by 72 percent in the last decade.

Para 17 of the Joint Statement mentions the following regarding the India-EU trading agreement:

  • Resumption of negotiations to reach consensus on a trade agreement that is balanced, ambitious, comprehensive, and mutually beneficial.
  • Decision to start negotiations on a standalone investment protection agreement, which was earlier a major bone of contention during negotiations. (Earlier, in the Bilateral Trade and Investment Agreement (BTIA 2007), both trade and investment were part of the same agreement. But now, with a push from EU on investor protection norms, India has also expressed willingness to formalize a standalone agreement.)
  • Start negotiations on a separate agreement on geographical indications, which may be concluded either separately or integrated with the trade agreement, if it materializes on time.
  • Creation of a joint working group to intensify regulatory cooperation on goods and services, including but not limited to green and digital technologies. 
  • Creation of a joint working group on resilient supply chains, building on the experience gained from the COVID-19 pandemic.

A High-Level Dialogue on Trade and Investment has also been initiated in a supervisory capacity to oversee and steer negotiations. This reflects a new political commitment to seal the deal, where top leadership on all sides are taking the initiative to drive the process forward and not leaving it to bureaucratic negotiations alone.

India-EU economic relations in a snapshot

Timeline

India first established diplomatic relations with the European Economic Community in 1960s. This relationship was further cemented in 1983 with the establishment of the Delegation of the European Commission to New Delhi.

The acknowledgement of each other’s potential led to the signing of strategic partnership agreement in 2004. The core agenda of such strategic partnership was furthering multilateralism, sustainable development, and strengthening economic relations.

In 2007, the negotiations for an FTA began, officially called the Bilateral Trade and Investment Agreement (BTIA). However, despite multiple rounds of negotiations spanning five years, a meaningful consensus could not be reached due to technical disagreements from both sides.

Tensions flared up with the 2012 arrest of Italian marines (who had gunned down two unarmed Indian fishermen to death, confusing them to be pirates). In 2013, the trade negotiations officially came to a stop.

Nevertheless, the course of geopolitics is dynamic, and shifts in trade and investment outlooks tend to happen suddenly, once key factors get aligned. By 2016, market watchers observed India and the EU work out a strategic developing partnership in core areas like climate change, sustainable development etc.

Now, in 2021, both sides have reached a point where a clear commitment to a free trade agreement just makes sense.

For the EU, the landscape may have changed after Brexit and fresh tensions with China; India, on its part, is seeking trade diversification and a shift away from China import dependencies besides looking to gain access to European markets.

There is thus ample reason to draw out fresh narratives around the restarted trade negotiations, and move past long standing sticky issues.

Trade and investment

Since 2014, the India-EU partnership has evolved from a donor-recipient relationship to becoming development partners, and cooperating in different areas like sustainable urbanization, digital transformation, climate change, and renewable energy.

In its 2018 Strategy on India document, the EU professed its willingness to promote India’s advancement, treating it as an equal partner.

In the same spirit, both India and the EU recently announced a ‘Comprehensive Connectivity Partnership to support “resilient and sustainable connectivity projects” in India and other nations and regions, such as Africa, Central Asia, and the Indo-Pacific, where India is looking to boost regional trade and influence.

As of 2020, the EU is India’s third largest trading partner, accounting for US$76.41 billion worth of trade in goods in 2020, next only to China and the US. Trade in services between the EU and India reached US$39.78 billion in 2020.

Among the EU countries, India’s relations with France, Germany, and Italy have particularly progressed over time. India is EU’s tenth largest trading partner.

EU foreign direct investment (FDI) stocks in India amounted to US$92.50 billion in 2019, more than doubling from eight percent to 18 percent in the last decade; they still hold immense potential for expansion in the future. India also hosts over 6,000 European companies, which provide direct and indirect employment to over 6.7 million people.

Germany

Among EU countries, Germany is India’s largest trading partner with bilateral trade standing at US$23.63 billion in 2019. Tracking from April 2000, Germany is the seventh largest FDI investor in India, with FDI stocks amounting to US$11.9 billion. Both countries have a strategic partnership founded on common democratic values.

Italy

Italy, too, has emerged as one of the potential economic partners for India with the leaders of the two countries signing a series of agreements in 2020 and finalizing a Plan of Action 2020-2024. The volume of bilateral trade between India and Italy stood at US$11.62 billion in 2019, and leaders of both countries have committed to increasing the level of economic engagement further.

Spain

Trade and economic cooperation agreement between India and Spain was first established in 1972 and has come a long way since. Going by European Commission data, as of 2020, Spain is India’s sixth largest trading partner in the EU. Spain is the 15th largest investor in India, responsible for cumulative FDI stock of US$2.83 billion from April 2000 to December 2019.

France

India and France have broadened their economic engagement over the years, following multiple diplomatic visits at the prime ministerial and presidential levels. The growing French keenness to expand and establish their economic sphere of influence in Asia in general, and India in particular, is demonstrated by the fact that over 1,000 French establishments are set up in India. In 2020, India-France bilateral trade stood at US$11.04 billion.

India-EU FTA prospects and challenges

Advantages

Both India and the EU stand to gain heavily from a free trade agreement as both parties believe that sustainable development and economic progress is possible only through international cooperation and multilateralism.

India, with its much-hyped demographic dividend, offers unparalleled markets to EU investors and an enabling FTA can accrue wide ranging economic gains to all stakeholders.

Also, with the enabling policy structure aiding smart infrastructural development, and ease of doing business parameters, a rapidly digitizing India showcases the potential of evolving into a world class manufacturing hub.

Therefore, EU investors have much to benefit from investigating opportunities in key Indian sectors.

On its part, India is striving to expand the scale and advanced technology supporting its manufacturing industries through the creation of incentive hubs and establishing industrial and logistics corridors. Growth in India-EU trade and investment flows will be a win-win for both. A mutually beneficial FTA, will also support India’s need for technology transfer as it intends to build capacity to become part of global value chains.

Apart from immediate and direct economic gains, the India-EU FTA can also assist the countries involved in their navigation of geopolitical scenarios; increasingly, politics has begun affecting global trade leading to abrupt closures to free market access. India can build itself as an important trade ally in such a landscape, given its shared ideals with the EU.

Challenges

The talks and negotiation process around the FTA has seen multiple roadblocks on account of the following challenges and issues from both sides.

  • Barriers to trade in services: There are many barriers to the movement of professionals in Europe with cumbersome rulebooks on work permits, wage equality conditions, visa formalities, and non-recognition of professional qualifications. These issues get heightened due to non-harmonization across Europe as different countries have different parameters. India seeks a relaxed, harmonized, and preferential Mode 1 (Cross border services like ITeS/BPO/KPO) and Mode 4 (movement of natural persons like software professionals) of service supplies as defined by the General Agreement on Trade and Services. India also aims to get recognized as a data secure country by the EU. Without such a recognition, there might be hindrance in flow of sensitive data between India and EU, resulting in increased operating costs for Indian businesses operating in EU. Such a data secure status can help bring down compliance costs. EU disagrees with India with respect to Mode 3 services (commercial presence like banking, hotels) and seeks further liberalization of FDI rules in segments like insurance, banking sector. India has not given unlimited access to EU banks and companies.
  • EU demands that India should lower its tariffs on automobiles, wines, and spirits: India has expressed apprehensions stating that such a move might result in European imports flooding the markets, thereby distorting domestic markets. However, following Brexit in 2020, this contention might no more be an issue since demand for lowering duties on wines and spirits came largely from Scotch whisky makers (from the UK) and with them gone, this might be ironed out.
  • India’s demand for lowering of tariff barriers: EU has imposed sanitary and phytosanitary barriers as well technical barriers to trade along with labelling requirements and trademark norms that have led to the reduction of Indian exports to the EU market.
  • Disagreements with regards to intellectual property protection standards: Indian legislation bans both ‘ever-greening’ of patents and the exclusivity of test data (protection of clinical trial data) as they jeopardize the sale of low-priced generic drugs and chemicals in its territory.
  • Termination of Bilateral Investment Treaties (BITs): India has signed BITs with several member states of the EU in order to protect investments. However, in 2016, India unilaterally axed BITs with 57 countries, including the UK, Germany, the Netherlands, and France, scrapping key protections for foreign investors. Instead, India instituted the new Investor-State Dispute Settlement (ISDS) to serve as the model text for new BITs. In the new ISDS, one of the provisions demands that investors exhaust all domestic procedures before seeking international arbitration, which has become a roadblock for negotiations. However, resolution of one of the most contentious issues is on the cards with the recently announced standalone investment protection agreement.

A clearer path forward emerges

India and the EU have navigated multiple obstacles to reach where they stand today, both economically as well as diplomatically.

The two also make for more likely partners at a time where geopolitics is threatening to undo the gains of globalization of the past two decades. The EU also views India as a partner on the international stage. This outlook is reflected in the EU’s Indo-pacific strategy as well.

An FTA will intensify this synergy, and support EU businesses by clearing new market access while also assisting India in the expansion of its industrial capacity and greater participation in global supply chains. There are several areas where mutual benefits are up for grabs.

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