India-EU Trade Deal: A historic free trade agreement has been signed between India and the European Union, strengthening economic ties between the two regions. This deal could prove to be a setback for China, potentially reducing its exports. The agreement is expected to significantly increase bilateral trade and create employment opportunities.
New Delhi: A historic free trade agreement (FTA) has been signed between India and the European Union (EU). This agreement comes at a time when the global business environment is uncertain. It is a major step towards strengthening economic ties between the two regions. According to global rating agency Moody’s, this deal will not have a significant impact on credit in the near term. However, in the long term, it will prove to be credit-positive for both economies. It will increase trade, diversify trade partnerships, and stabilize the market. This is expected to cause a significant loss to China, potentially reducing its exports to India by up to 9%.
This FTA was announced on January 27th. The agreement covers a market of approximately two billion people, representing approximately one-quarter of global GDP. It is the largest free trade area ever signed by both sides. According to estimates by the Kiel Institute, this agreement could increase bilateral trade by 41% to 65%. The European Commission estimates that tariff reductions will save approximately 4 billion euros annually on 96.6% of EU goods exports.
What will India gain?
For India, this agreement is in line with its strategy to diversify its trading partnerships and mitigate global shocks. This becomes especially important following recent protectionist measures by the United States. The deal will provide India with improved access to high-value EU markets, such as textiles, leather, marine products, and gems and jewelry. Tariffs currently ranging from 4% to 26% will be reduced on approximately $33 billion in exports. This will increase competition and boost employment, especially in labor-intensive sectors.
Meanwhile, EU exporters, particularly those in the automotive, machinery, and aviation sectors, will benefit from improved access to India’s rapidly growing market. In the long term, EU exports to India could increase by 65%, contributing approximately 0.1% to EU GDP.
India’s services sector, especially the IT sector, is also expected to benefit from increased professional mobility under this new framework. The EU’s share in India’s software services exports is projected to increase to 33% in FY 2024-25 from 23% in FY 2016-17, making the EU India’s second-largest services export market after the US.
Cost Pressures Will Be Reduced
Lower tariffs on imports from the EU, which currently account for approximately 8% of India’s total imports, will ease cost pressures. Additionally, input costs for Indian manufacturers will be lower due to cheaper machinery and components. Consumers will also benefit, as products such as wine, olive oil, and chocolate will become more affordable under a phased liberalization plan.
In addition to tariffs, the agreement also includes provisions such as regulatory cooperation, simplification of customs duties, intellectual property protection, and special support for small and medium-sized enterprises (SMEs). These measures are expected to reduce transaction costs and provide greater predictability for businesses.
China will be hurt
Strategically, this FTA is expected to reduce China’s exports to India by 5-9%. It will provide preferential benefits to the EU. This will diversify India’s supply chain and allow the EU to reduce its excessive dependence on its trading partners.
However, Moody’s cautions that the benefits will emerge gradually. This will depend on India’s ability to adopt the EU’s stringent standards for product quality, digital governance, and sustainability. The overall success of this agreement will also depend on India’s efforts to improve the business environment and enhance regulatory efficiency.
Overall, the India-EU FTA is a strategically timed, comprehensive agreement that is poised to enhance the economic strength of both regions in an increasingly uncertain global trade landscape.
Also Read: https://theglamorholic.com/india-eu-fta-impact-will-a-trade-deal-with-the-eu-enhance-indias-creditworthiness-and-how-will-it-hurt-china/
