The European Union and India have formally announced the conclusion of their Free Trade Agreement (FTA) on January 27, 2026, after nearly two decades of negotiations. This landmark agreement, hailed as the "mother of all deals" by officials, aims to create a market of approximately 2 billion people and boost trade and investment between the two regions. A key aspect of this agreement involves the application of the EU's carbon concessions to India, addressing concerns related to the EU's Carbon Border Adjustment Mechanism (CBAM).
The EU's CBAM, which took effect on January 1, 2026, imposes levies on imports based on the carbon emissions generated during their production. This mechanism is designed to prevent "carbon leakage," where companies move production to countries with less stringent climate regulations. CBAM primarily targets carbon-intensive sectors like steel, aluminum, cement, fertilizer, electricity, and hydrogen. For India, this has significant implications, particularly for its steel and aluminum exports to the EU.
Under the FTA, India will gain flexibility regarding the EU's carbon tax regime, provided similar treatment is extended to other countries. While the specifics of these concessions are still emerging, the agreement aims to mitigate the potential negative impacts of CBAM on Indian exporters. Without these concessions, Indian exporters of goods like steel and aluminum could face increased costs and reduced competitiveness in the EU market. Some analysis indicated that the CBAM tax could erase 15-22% of real prices collected.
The FTA is expected to provide unprecedented market access for Indian exports to the EU, with over 99% of Indian goods gaining preferential entry. The EU will eliminate import duties on 90% of Indian goods from the first day of implementation, with the remaining tariffs being phased out over seven years. In return, India will reduce tariffs on 93% of EU goods over a ten-year period. It is expected that India will remove duties on only 30% of European goods on the first day of implementing the pact. This phased approach aims to provide a level playing field for both sides, while also protecting sensitive sectors.
The FTA is predicted to boost India's labor-intensive industries, including textiles, apparel, leather, footwear, marine products, gems and jewelry, handicrafts, engineering goods, and automobiles. These sectors are expected to benefit from the elimination of tariffs, enhancing India's role as a reliable supplier in international trade. The agreement also includes provisions for visa concessions for students, including post-study work visas.
While the FTA is expected to bring significant benefits, there are also potential challenges. Increased competition from EU goods could pose difficulties for some domestic industries, and Indian companies will need to adapt to meet EU regulatory standards. The EU's Deforestation Regulation (EUDR), aimed at preventing products sourced from deforested land from being sold in the EU, could also impact India's agricultural exports.
Overall, the EU-India FTA represents a significant step forward in strengthening economic ties between the two regions. The inclusion of carbon concessions reflects a commitment to addressing climate change while promoting fair trade. As the agreement is implemented, it will be crucial for both sides to work together to ensure that its benefits are realized and that any challenges are effectively addressed.
