India and the European Union (EU) have formally concluded negotiations for a comprehensive Free Trade Agreement (FTA), a move poised to significantly reshape their economic relationship. This marks the end of nearly two decades of talks, positioning the EU as India's 22nd FTA partner. The agreement is expected to be signed later in 2026, pending legal review and approval by the European Parliament.
The FTA aims to provide unprecedented market access and boost labor-intensive sectors and services. The EU has committed to opening 97% of its tariff lines, covering 99.5% of India's exports by value, offering India its deepest preferential market access arrangement to date. Key sectors such as textiles, apparel, leather, footwear, marine products, gems and jewelry, toys, and sports goods, which currently face EU duties of 4–26%, will enter the EU market at zero duty, potentially covering exports worth approximately USD 33 billion.
The agreement also includes liberalization in the services market, with the EU making binding commitments across 144 service subsectors, including IT/ITeS, digital services, professional services, education, and business services. This is expected to ensure regulatory certainty and non-discrimination in these sectors.
One notable aspect of the FTA is the progressive reduction of tariffs on European-made cars imported into India. Tariffs are set to decrease from the current 110% to a mere 10%. While this has generated anticipation that European cars could become more affordable in India, industry insiders suggest that the actual impact may not be as significant as the reduced tariff structure implies. The headline tariff deflation from 110% to 10% applies to completely built units (CBUs), which are entirely imported, and not to cars assembled in India from completely knocked down (CKD) units. The duty on importing CKDs is currently around 16-17%. The reduced tariff will only apply to a limited quota of 250,000 cars imported annually.
The implementation of the India-EU FTA is projected to occur in fiscal year 2027-28, with some sources suggesting mid-2028. Customs duties on EU-made cars costing above 15,000 euros will decrease from 110 percent to approximately 35 percent in the first year, eventually reaching 10 percent. Tariffs on imported car parts are expected to be fully eliminated after five to ten years.
Despite the potential benefits, the FTA faces challenges, including the EU's stringent regulations such as the Carbon Border Adjustment Mechanism (CBAM) and the EU Deforestation Regulation (EUDR), which could act as non-tariff barriers. The CBAM could significantly impact Indian exports like steel, aluminum, and chemicals, while the EUDR could affect commodities like coffee, rubber, and wood. Additionally, the Corporate Sustainability Due Diligence Directive (CSDDD), effective from 2027, may require Indian manufacturers to share sensitive supplier data, raising concerns about business risks.
The India-EU FTA is expected to reshape supply chains, pricing power, and growth prospects across various sectors. Sectors like textiles, gems and jewelry, leather, pharma, and high-tech engineering are expected to benefit significantly from the agreement. In 2024-25, India's goods trade with the EU was $136.5 billion, making the bloc its largest trading partner.
While the FTA is expected to make cars cheaper, this will only apply to a small quota of cars imported to the country as completely built units. The reduced tariff will be implemented gradually, and the new prices may only come into effect by 2028. The rupee's depreciation against the euro in 2025 could also offset some of the benefits arising from lower import duties.
