India and the European Union have finalized a free trade agreement (FTA) aimed at strengthening economic and strategic ties. According to statements from both sides, India will reduce or eliminate tariffs on 96.6% of EU exports, while the EU will reciprocate with similar reductions on nearly 99% of India's shipments by trade value, implemented in a phased manner.
Elara's Recommendations: Sector-wise Analysis
Elara Securities has provided a detailed analysis of the potential impact of the India-EU FTA, identifying sectors and stocks that are likely to benefit or face challenges.
- Potential Winners: Several sectors in India are expected to gain from the FTA, including textiles, leather, footwear, tea, coffee, spices, sports goods, toys, gems, and jewelry. Almost all Indian chemical, petrochemical products, leather goods, footwear, gems, and jewelry will receive duty-free access to the EU. The agreement will also grant preferential treatment to agricultural and seafood products. Indian-made medical devices will see a substantial reduction in tariffs.
- Defence: Export-focused defence companies with existing European exposure could see incremental opportunities as market access improves and regulatory barriers ease. Companies that could benefit include Bharat Electronics, Solar Industries, Mazagon Dock Shipbuilders, Cochin Shipyard, Garden Reach Shipbuilders & Engineers and Data Patterns.
- Potential Losers: The auto sector in India may face increased competition. The BSE Auto Index experienced a 1.0% decline, with Mahindra & Mahindra, Hyundai Motor India, and Maruti Suzuki India dropping by 4.2%, 4.0%, and 1.5%, respectively.
Impact on Specific Sectors
- Automobiles: Tariffs on European cars entering India are set to decrease to 10% eventually, applicable to a maximum of 250,000 vehicles annually. Tariffs on car parts will be fully abolished after 5-10 years.
- Spirits: The India-EU FTA could significantly alter the competitive landscape of India's alco-beverage market, particularly in premium and luxury segments, as import duties on spirits are sharply cut to about 40% from 150%.
- Textiles: Shares of Indian textile companies ended broadly higher, with KPR Mill and Welspun Living climbing 6.9% and 4.2%, respectively.
- Defence: The FTA, along with the India-EU Security and Defence Partnership, could strengthen defence cooperation, particularly as Europe diversifies its supplier base. Import tariffs on aircraft and spacecraft for European companies have been reduced from 11% to zero.
Key Provisions and Expectations
The EU is India's largest trading partner, accounting for €124 billion of trade in goods in 2023, or 12.2% of total Indian trade. Trade in services between the EU and India reached nearly €60 billion in 2023, almost double the level in 2020. Under the agreement, around 70.4% of tariff lines covering nearly 90.7% of India's exports to the EU will receive immediate zero-duty access. Another 20.3% of tariff lines, covering about 2.9% of exports, will see duties eliminated over three to five years. The European Commission said that tariffs charged by India on cars will gradually go down from 110% to as low as 10%, while they will be fully abolished for car parts after 5-10 years. Tariffs ranging up to 44% on machinery, 22% on chemicals and 11% on pharmaceuticals will also be mostly eliminated.
Expert Opinions
Garima Kapoor, an economist at Elara Capital, believes that a simpler, more predictable customs framework could sharpen the competitiveness of India's exports and the effectiveness of free-trade agreements, without posing meaningful fiscal risks. Rajesh Agrawal, India's commerce secretary, has emphasized the importance of making export supply chains more resilient to mitigate challenges. Karan Taurani, executive vice president at Elara Securities, noted that the India-EU FTA directly increases product-level competition, especially in the premium spirits segment.
