An Unlikely Alliance: Understanding the EU-India FTA

N.B. This article was written on 16 January, before the conclusion of the Free Trade Agreement (FTA) between the EU and India on 27 January.

The current global landscape is characterised by unprecedented fragmentation, a transactional approach to international politics and rising geopolitical uncertainty. Yet, in this moment of fracture, India and Europe have found a generational opportunity to forge a strategic partnership.

The EU’s increased focus on India stems not only from a backdrop of convergent values but from a deeper recognition that in today’s climate, the EU’s core geopolitical assumptions have collapsed. Beginning in 2022, Russia’s invasion of Ukraine revealed the extent to which the EU had tied its industrial base to Russian gas, oil and other raw materials. When sanctions were imposed on Russia, energy prices surged and production slowed sharply, resulting in a fundamental rethink of Europe’s external dependencies. Within this reassessment, India emerged as a potential critical partner for supply-chain diversification, economic de-risking and as a strategic counterweight to China’s growing technological dominance and market centrality, which the EU has increasingly sought to hedge against. More recently, the fluctuations in the transatlantic alliance have further amplified Europe’s need for partners whose long-term interests align more reliably with its own, contributing to a recognition that India possesses both the geopolitical weight and economic scale necessary to meet those requirements.

For India as well, China’s increasingly assertive posture across the Indian Ocean region and the wider Indo-Pacific has further elevated the EU’s utility as a like-minded actor in India’s security landscape. Most notably, after Washington raised tariffs to 50% on Indian goods in August 2025 in response to Indian imports of Russian oil – New Delhi has increasingly looked toward the EU as a stabilising partner.

In this backdrop, the long-awaited EU-India FTA, holds mutual benefits for both sides. For Europe, it is about de-risking supply chains away from China and securing access to a large democratic market. For India, the deal offers access to the EU's high-value consumer base, new technology partnerships, and credibility as a manufacturing and regulatory hub capable of meeting global standards.

Several push factors exist for India to finalise this FTA. First, India urgently needs to diversify its export markets, and the EU, already India’s second-largest export destination, is a natural choice. India’s key exports to the EU, including petroleum products, electronics (notably smartphones), textiles, machinery, organic chemicals, iron and steel, gems and jewellery, pharmaceuticals and auto components, have been adversely affected by Trump-era tariffs. An FTA would help expand and safeguard these strategically important sectors.

Second, high EU tariffs—particularly the 12–16% duties on Indian textiles—undermine India’s competitiveness vis-à-vis countries such as Bangladesh and Vietnam, which benefit from preferential EU trade arrangements. An FTA would help level the playing field for Indian exporters.

Third, the agreement is vital for boosting investment flows and technical cooperation, supporting India’s efforts to de-risk critical supply chains away from China. The EU’s assistance would enable European companies to help India in its plan to develop 100 “smart cities” in the near future, as well as helping other Indian initiatives.

Finally, should either the Transatlantic Trade and Investment Partnership (TTIP) or Trans-Pacific Partnership (TPP) be finalised in the absence of an EU–India FTA, Indian goods may face difficulties in accessing European markets. At present, India is hardly integrated into the value chains of European companies, and the mega-agreements could divert investment away from non-members, with potentially devastating effects for India.

Ultimately, the European Union is India’s largest trading partner in goods, with bilateral trade valued at over $136 billion in 2024–25. In this context, the India-EU deal could serve as a hedge against US trade protectionism, providing both parties with greater economic security and alternative trade routes.

Within the last year, there has been a decisive push from senior leadership to finalise the trade agreement, with both sides aiming to conclude FTA negotiations and announcing a deal on India’s Republic Day (January 26), where European Commission president Ursula von der Leyen and European Council chief António Costa are scheduled to be the guests of honour.

Yet, things are easier said than done, and the strategic alignment envisioned in the document is further challenged by the EU and India’s diverging geopolitical worldviews. While Europe frames the partnership around shared democratic values and a rules-based order, India pursues a doctrine of multi-alignment and strategic autonomy.

In this light, India’s continued engagement with Russia, particularly in energy and defence, has remained a point of persistent discomfort for Europe, especially in the aftermath of the Ukraine conflict. Most notably, India’s oil purchases from Russia, as well as its participation in the recent Zapad military exercises with Russia in Belarus, are irritants for the EU.

India has also continued to participate in BRICS while growing its ties with the West, particularly through the Quadrilateral Security Dialogue (Quad) and (formerly) strong bilateral relations with countries like the United States. While maintaining a delicate balance, India has asserted its autonomy by deepening its relationships with some openly anti-western BRICS members like Russia and Iran. This reflects India’s nuanced strategy of multi-alignment, positioning India as a bridge between western and non-western forums. Thus, while the EU expects normative convergence, India has consistently prioritised national interest and pragmatic engagement to preserve strategic flexibility.

Adding to broader divergences in worldview, a series of concrete friction points have emerged in the negotiations that will determine the scope and feasibility of the future EU-India FTA. Chief among them is the EU’s Carbon Border Adjustment Mechanism (CBAM), which imposes a carbon price on imports of selected emissions-intensive goods. Even if an FTA were concluded, CBAM could substantially dilute its benefits for Indian exporters unless exemptions or offsetting mechanisms are agreed. While Brussels initially held a firm line, it has since signalled some flexibility, indicating a willingness to reduce CBAM levies if India were to introduce a domestic carbon-pricing regime.

Agriculture—particularly dairy—remains another major sticking point. The EU has pushed for lower tariffs on products such as cheese and skimmed milk powder, which India shields to protect its vast base of small dairy farmers. Meaningful concessions in this area appear unlikely. India has consistently excluded sensitive agricultural products from its trade agreements, including the recent India–UK FTA, reflecting the government's recognition of the political and economic importance of protecting its agricultural sector.

Limited progress is also expected on Intellectual Property Rights (IPR). As in the EU–Mercosur negotiations, any deal is likely to involve only modest compromises. India has long resisted the EU’s IPR demands, arguing that stricter rules would undermine its pharmaceutical industry’s ability to produce affordable generic medicines. Similarly, India is expected to offer only narrow concessions on EU access to its services sector, given its broader reluctance to liberalise—again evident in the India–UK FTA.

There are, however, clearer areas of convergence. India has shown a growing willingness to partially liberalise its automotive market, as reflected in the UK deal and ongoing discussions to reduce US import tariffs on vehicles and auto parts to offset reciprocal duties. These moves are likely to inform India’s approach to the EU, for whom tariff reductions in the automotive sector are a key priority—particularly in light of rising US tariffs on foreign-made cars.

The agreement is also likely to include phased reductions in India’s import tariffs on European wines and spirits. India has already set precedents by cutting tariffs on UK whisky and gin and halving duties on US bourbon earlier last year. That said, state-level taxes on alcohol imports are expected to remain intact, given their importance as a revenue source for Indian states.

Taken together, these frictions—and the political deadline set by EU and Indian leaders—make a modular FTA the most plausible path forward. Such an approach would allow sector-specific ‘reservations’, enabling both sides to retain control over highly sensitive industries while advancing broader trade liberalisation. The EU and India have already been testing sector-specific cooperation through their Trade and Technology Council (TTC), demonstrating that flexible pathways are possible. They are likely to expand this model into the FTA, allowing both sides to secure early wins while leaving space for complex negotiations, say over agriculture, to evolve gradually.