In a high-stakes push to finalize a long-awaited trade agreement with the European Union by next month, the Indian government has directed its legal team working on the pact's text to refrain from taking leaves until the deal is signed. This move comes as a key EU delegation is expected in New Delhi this week for critical negotiations.
Final Lap Negotiations and Pending Hurdles
The urgency stems from an approaching deadline and external pressure on India's exports, particularly after the United States imposed steep 50 per cent tariffs on steel and aluminium. With the India-US trade deal still uncertain, sealing the EU agreement has gained paramount importance. Commerce Secretary Rajesh Agrawal and the EU’s Director-General for Trade, Sabine Weyand, held a vital virtual stocktaking meeting recently as both sides enter the final phase.
While 10 out of 23 chapters in the proposed Free Trade Agreement (FTA) have been closed, significant obstacles remain. The most contentious points revolve around rules of origin and market access, especially for agricultural products. In a bid to expedite the process, both partners have likely set aside a few sensitive chapters, including one on state-owned enterprises (SOEs), after New Delhi expressed reluctance to discuss it.
The Carbon Tax Conundrum and Rebalancing Act
A major sticking point is the EU's impending Carbon Border Adjustment Mechanism (CBAM), a carbon tax set to be implemented from January 1, 2026. This policy will impose a cost on imported carbon-intensive goods, a move viewed by India and other developing nations as potentially discriminatory.
In response, India has strategically introduced a 'rebalancing' provision into the FTA talks. This clause is designed as a safeguard: if Indian products face market access restrictions in the EU due to measures like the carbon tax, India will reciprocate by imposing equivalent restrictions on European products. This mechanism mirrors a similar provision India sought in its trade talks with the United Kingdom.
Official data underscores the urgency. Steel and aluminium shipments to the EU fell by 24.4 per cent in FY25, dropping from $7.71 billion to $5.82 billion. This decline is alarming as Indian metals already face high tariffs in the US market, making EU market access crucial.
Broader Trade Landscape and Expert Warnings
The EU is India's largest trading partner, with €124 billion in goods trade in 2023, accounting for 12.2% of India's total trade. Services trade has also surged, reaching €59.7 billion in 2023 from €30.4 billion in 2020.
Trade experts caution that an FTA must meaningfully address these new EU regulations. Ajay Srivastava, founder of the Global Trade Research Initiative, warns that CBAM could effectively act as a 20–35 per cent import tax on Indian firms, requiring them to share detailed production data with the EU. He suggests large Indian companies might eventually need separate, greener production lines exclusively for exports to Europe.
Beyond carbon tax, negotiations on market access for sensitive items like whisky, cars, and automobiles are complex, given the EU's larger market size compared to the UK, with which India recently signed a deal.
The political commitment remains high. Following a conversation with EU leaders in September, Prime Minister Narendra Modi reaffirmed the shared goal for an early conclusion of the FTA. EU leaders have also expressed full commitment to concluding negotiations by year-end, emphasizing that progress is needed now to meet this target.
