As the world continues to navigate the economic challenges brought about by the COVID-19 pandemic and geopolitical tensions, the European Union and India are embarking on the number of rounds of negotiations for a free trade agreement. This agreement holds the potential to bring significant benefits for both regions, including increased trade and investment, and economic growth. However, as with any trade agreement, some hurdles need to be addressed. This article will examine the progress made during the third round of talks and will provide an in-depth analysis of the potential impact of the agreement on various sectors such as agriculture, manufacturing, and services. It will also explore the potential implications for businesses and consumers in both regions, and will identify the challenges that need to be overcome to make the agreement a success. Furthermore, the article will provide solutions to these challenges, highlighting the potential benefits and opportunities for growth and prosperity.
The History and Current Status of India-EU Free Trade Agreement Negotiations:
Economic links between India and the European Union (EU) have a long history. India originally established diplomatic ties with the European Economic Community (EEC), the forerunner to the EU, in the 1960s. In 2004, a strategic partnership agreement was signed as a result of recognizing the potential of both parties. In 2007, the negotiations for a Free Trade Agreement (FTA) between India and the EU, officially called the Bilateral Trade and Investment Agreement (BTIA), kicked off. However, after five years of negotiations spanning 17 rounds, a meaningful consensus could not be reached due to technical disagreements from both sides. The trade discussion officially reached a deadlock in 2013.
Recently, both parties have come to understand the need for an all-encompassing Free Trade Agreement that aligns with their shared interests. The EU may have reevaluated its priorities post-Brexit and amid escalating tensions with China, while India is looking to expand its trade options and decrease its dependence on Chinese imports, as well as gain access to European markets.
After an eight-year hiatus, India and the EU resumed their negotiations for a Free Trade Agreement in goods and services in early 2021. The paragraph 17 of the Joint Statement issued at the Summit in 2021, the EU and India stated: "We agreed to resume negotiations for a balanced, ambitious, comprehensive and mutually beneficial trade agreement... " The prospects of a Free Trade Agreement between India and the EU are brightening as both regions have recently finished the third round of discussions and engaged in additional negotiations concerning the Investment Protection Agreement and Geographical Indications. Additionally, the prospect of accelerated negotiations seems to be heightened with Sweden assuming the EU presidency in 2023. Sweden has stated that one of its key objectives during its presidency in 2023 is to advocate for the successful completion of the Free Trade Agreement discussions with India. Despite this, the negotiations will not be rushed, as the EU maintains high standards for Free Trade Agreements. However, stakeholders are aware that general elections in India take place in 2024, the same year that EU parliament elections are due to take place.
India-EU Trade: A Growing Partnership
Trade between India and the EU is expanding. Bilateral commerce between India and the EU has grown dramatically over the last decade, from EUR 50 billion in 2004 to EUR 115 billion in 2014. India is the EU's tenth largest trading partner, accounting for 2.1% of overall EU goods trade. In 2020, the EU-India trade in services will be worth €30.4 billion.
Imports, exports and trade balance between the EU and India, 2011-2021.
After the United States, the EU is India's second-largest commercial partner and the second-largest destination for Indian exports. Despite global disruptions, bilateral trade increased by 43.5% year on year in 2021-22. Bilateral trade between India and the EU reached USD 116.36 billion in 2021-22.
The European Union and India's free trade agreement negotiations aim to achieve the following objectives:
Remove impediments to let enterprises, particularly smaller ones, grow their exports.
Increase competition and growth potential by opening up markets for services and governmental procurement.
Ensure the protection of geographical indications to safeguard unique products and identities.
Pursue ambitious commitments on trade and sustainable development to promote responsible and sustainable economic growth.
Ensure the agreed rules are enforceable to ensure compliance with the agreement.
The overarching purpose of the agreement is to deepen the EU-India economic and strategic cooperation as well as to generate new prospects for growth prosperity and sustainable development. The EU also presented a new draft text on capital movements, payments and transfers and temporary safeguard measures.
For the first time in India, a chapter in the proposed FTA would make a connection between commerce and sustainable development. Due to the regulatory structure inside the EU, the investment protection agreement was split from the free trade agreement. While an FTA can be approved by the European Parliament, investment promotion pacts must also be passed by the parliaments of member states.
The European Union and India are negotiating investment protection agreements with the following goals in mind:
Providing a predictable and safe environment for investors on both sides by subscribing to non-discrimination, protection against expropriation without compensation, and equitable treatment of investors and their investments while retaining the authority to regulate.
Ensuring the safe transfer of profits for investors.
Establishing a cutting-edge dispute resolution system that will effectively enforce the rules and offer a speedy means of settling conflicts.
Overall, the objective of these negotiations is to develop a system that guarantees a steady and secure business climate for investors on both sides, while upholding governments' prerogative to regulate in the public good.
The Potential Benefits of the Agreement:
A Free Trade Agreement (FTA) between India and the European Union (EU) has the potential to greatly enhance bilateral trade, economic cooperation and investment. This in turn is expected to generate jobs, boost economic growth and provide better choices to consumers.
It will also help the EU to achieve its goal of promoting economic integration in the Indo-Pacific region.
India's high demographic dividend offers unparalleled markets to EU investors.
The FTA is expected to provide greater market penetration for goods and services in respective markets. It'll also create a level playing field for companies operating in each other's territories.
The FTA is expected to provide greater certainty and predictability for EU investors in India. The agreement will also help to protect and promote EU investments in India and vice versa.
The FTA is expected to promote cooperation between the two regions on issues such as sustainable development and climate change.
The FTA is expected to provide a boost to Prime Minister Narendra Modi's "Make in India, Make for World" campaign. The agreement is also poised to position India as a leader in the region and a hub for global manufacturing. India showcases the potential of evolving into a world-class manufacturing hub. Therefore, EU investors stand to gain much by exploring opportunities in key Indian industries.
Recent initiatives by India to support manufacturing
The FTA is expected to provide a boost to the EU's economy. The agreement will also help to establish the EU as a leading trade and investment partner in the Indo-Pacific region.
Transfer of Technology, better research collaboration, enhanced cooperation in space, defense, and 4th Industrial Revolution components.
Geopolitics - The EU and India are ideal partners due to shared values and a commitment to stability, prosperity, and democracy in the region, which will help to navigate the current geopolitical landscape and promote a more stable, prosperous, and sustainable world.
Challenges and Hurdles to be addressed:
Services: EU's services trade with India is dominated by transport, telecom/IT, other business services, and travel, accounting for over 80% of exports and 90% of imports. These sectors have seen strong growth between 2010 and 2019, while financial and manufacturing-related services remain low.
The OECD has reported that India has high barriers to foreign operators in professional services, such as accounting, architecture, and legal services. The EU has previously sought to open India's markets to European service providers in trade negotiations, specifically in areas such as commercial presence (Mode 3 services) and further liberalization of FDI rules in sectors like insurance and banking. However, India has not granted unlimited access to EU banks and companies in these areas.
On the other hand, India also faces challenges in terms of trade negotiations, especially in the movement of professionals in Europe due to cumbersome rulebooks on work permits, wage equality conditions, visa formalities, and the non-recognition of professional qualifications. India seeks to ease these barriers and open European markets to its service (Mode 1 and Mode 4 of GATT) providers.
Digital Trade: India has the potential to be a strong trading partner for the EU in terms of professional services as its services exports have grown at a rate about a third faster than goods exports between 2005 and 2019. However, the issue of privacy and security of data is a significant barrier for digital trade between the two regions. The EU's high bar for transfers of private data to third countries constitutes a considerable barrier for trade in digital services, which also affects multinational manufacturing companies with subsidiaries abroad.
India, as a sovereign and developing nation, has genuine concerns with respect to multinational companies using its citizens' data. The country has implemented stricter privacy laws such as the 2017 Supreme Court decision declaring privacy as a fundamental right and the introduction of the Digital Personal Data Protection Bill, 2022, that is partially modeled on the EU General Data Protection Regulation (GDPR) to protect its citizens' data. Additionally, data localisation requirements are put in place to ensure security concerns are addressed. Given the history of multinational companies being used as a war tool by western countries, India has genuine concerns when it comes to data privacy and protection. The Indian government's extensive rights of data surveillance may be a reflection of these concerns.
Agriculture - Agriculture is a sensitive issue for both the EU and India, as it accounts for 41% of employment and a 25% poverty rate in rural India. India is concerned about the impact of opening its market to the highly subsidized EU agricultural industry on its farmers, as it may lead to a negative impact on its domestic agriculture. On the other hand, the EU has been focusing on the protection of its domestic agricultural industry and opening new markets for it as an important goal of EU trade policy.
To address this issue, the EU and India launched negotiations on a potential separate agreement on geographical indications (GI) in May 2021. This could provide a way forward as it could help protect and promote specific agricultural products and handicrafts. The EU is seeking to cut India's tariffs down to zero or near zero levels for 90% of agricultural products, which could allow EU members to export their agricultural products to India. However, this could adversely affect local Indian producers and make Indian agriculture more vulnerable to global market volatility. Therefore, both the EU and India have to find a balance in their trade negotiations that would not harm the domestic agriculture industry of either party and also provide fair access to the market.
Goods: The EU is pushing for India to decrease tariffs on certain goods such as automobiles, wines, and spirits. India, however, is wary of this as it fears an influx of European imports that could negatively impact its domestic market.
On the other hand, India has also requested for the EU to remove trade barriers that have been obstructing Indian exports to the EU market. These barriers include sanitary and phytosanitary restrictions, technical trade barriers, labeling regulations, and trademark rules. These issues are currently being discussed in trade negotiations between the EU and India.
Intellectual Property -India is a leading supplier of pharmaceuticals to developing countries and has traditionally advocated for less stringent patent protection regulations under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) to make it easier to produce cost-effective medicines. During the COVID-19 pandemic, India has also pushed for a waiver on TRIPS regulations for COVID-19-related medical products. However, the EU, which argues that such a waiver would not contribute to an increase in vaccine supplies over the medium term, is the last major economy opposing this policy. While the European Parliament has endorsed a resolution in favor of a TRIPS waiver, the EU has been opposed to Indian legislation that bans both the 'ever-greening' of patents and the exclusivity of test data, as they jeopardize the sale of low-priced generic drugs and chemicals in its territory. This disagreement concerning intellectual property rights protection and it's standards has been a major issue in EU-India trade relations.
Bilateral Investment - India and the European Union (EU) are currently in the process of finalizing an investment protection agreement (IPA) that will include standards for protecting investments and an independent mechanism for resolving disputes between investors and nations under international law. However, India's decision in 2016 to terminate BITs with 57 countries, including EU member states, and instituting the new Investor-State Dispute Settlement (ISDS) as the model text for new investment agreements, has become a roadblock for negotiations. In the newly proposed Investor-State Dispute Settlement mechanism, one of the requirements is that investors must exhaust all domestic remedies before resorting to international arbitration. However, the recently announced standalone investment protection agreement may resolve this contentious issue. In order to reach its goal of becoming a $10 trillion economy by 2030, India needs the Investment Protection Agreement (IPA) with the European Union (EU) to attract foreign direct investment (FDI). However, India needs to put its own house in order by evolving a clear position on multilateral investment court (MIC) and maintaining high transparency in negotiations by publicly articulating its position on critical issues such as taxation measures, court-like system, most-favored-nation (MFN) provision, and fair and equitable treatment (FET) provision.
Environment and Labour Laws - The European Union (EU) places a strong emphasis on non-trade policy objectives in its foreign policy. India has ratified two ILO conventions on child labour, but has not ratified the fundamental conventions C087 and C098, which concern freedom of association and collective bargaining.
India is a signatory of the Paris climate accord and is considered to be on a pathway to limiting global warming to 2ºC. India is responsible for 7% of global greenhouse gas emissions, with coal playing a major role in electricity generation, causing harm to both the environment and the health of India's people. The EU's efforts to establish a carbon border adjustment mechanism is seen as protectionist, discriminatory towards developing countries, and contrary to international laws and agreements. India has been expressing discomfort in making commitments on labor and the environment. In the case of a free trade agreement with the EU, India will push to make chapters on labor, and environment ‘best endeavor’ in nature, which means not agreeing upon any binding commitments on these issues.
New Delhi is unwilling to show flexibility in elements such as non-discrimination, and dispute settlement. India, in all its FTAs, implemented so far, apart from the one with the UAE, has not given commitments in government procurement as it doesn’t want to indiscriminately open up the government procurement market valued at $500 billion annually. India is also not part of the government procurement agreement (GPA) being worked out between some member countries at the WTO.
A Free Trade Agreement (FTA) between India and the European Union (EU) could provide a mutually beneficial partnership. Diversifying imports from China, which the EU regards as a 'strategic rival', India aligns more with EU values and has a growing economy which presents an opportunity for the EU to expand trade and investment relations. Cooperation in the World Trade Organization (WTO) and the smooth functioning of the dispute settlement body (DSB) are important areas where both sides can work together. India's growing economic and strategic ties in the Indo-Pacific region can also provide the EU with an opportunity to enhance its presence and influence in the region. The EU and India's push towards sustainable development and inclusive growth aligns with each other's priorities.
India and the European Union (EU) have had a distant relationship in terms of economic relations, but Prime Minister Modi has taken steps to strengthen the relationship. In May 2021, the Modi government agreed to reopen trade negotiations with the EU and look for solutions to long-standing market access issues. India's motives for reopening trade and investment negotiations with the EU may include reducing dependence on Chinese manufactured inputs and gaining access to high-quality manufacturing technology. The devastating impact of the pandemic on India's near-term human development, employment, and growth prospects also adds urgency to these goals. One way forward could be opening up to foreign direct investment (FDI) in manufacturing, as the EU has a lot to offer in this regard. For Europe, India provides a partial hedge against the risk that the emerging trade architecture along the Pacific Rim (CPTPP, RCEP) might adversely affect the EU’s market access to those fast-growing markets. Even in the worst of circumstances in terms of the future of the newly started negotiations, economic relations between the EU and India are bound to deepen.
The Way Ahead:
But India does need to face up to more open markets and there are creative ways to break the current deadlock. For example, if the central bank designates vocational training programs as an approved sector for priority lending, foreign companies can be financed to invest in them as a business venture. This will have a three-pronged benefit — European banks can expand in India, India’s workforce can benefit from European professionalism, and EU companies can capitalize on this new opportunity to invest and establish a supply chain for their manufacturing facilities in India.
More broadly, what is needed is a new template for an FTA that is more suited to a services economy of an emerging market. Rather than narrowing the focus to the automotive and banking sectors, India should push for the exchange of educational and vocational training programs and the increased participation of small and medium-sized businesses from both parties in the negotiations. This will necessitate, above all else, a shift in perspective in New Delhi. There may be a political inclination to reach an early harvest agreement, but it would be much more advantageous to finalize a comprehensive one, solidifying a burgeoning strategic partnership with a crucial global economic player. Such an outcome is vital for India's goal of becoming a 10 trillion-dollar economy by the end of the decade.
(Aniruddh Tripathi is a research fellow at Europe India Centre for Business and Industry.)
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