India-EU trade pact moves from promise to reality but challenges persist

Business Standard January 20, 2026

The announcement of a free trade agreement (FTA) between India and the European Union is a major turning point—not so much for its immediate gains, but for what it signals about India’s economic strategy. After several years of high tariffs and inward-looking policies, the deal reflects a clear recognition by the Indian government that exports must play a bigger role in driving growth. However, an FTA is only a framework. It creates opportunities, but it is not a cure-all. To fully benefit from this deal, India will still need significant domestic reforms.

The deal reflects the government’s confidence that Indian firms are capable of competing more strongly in global markets. Where does this confidence come from? In part, from the sheer room India has to expand its global presence. Despite being the world’s fourth-largest economy, India accounts for less than 2 per cent of global goods exports. Even a two-percentage-point rise in market share would effectively double exports.

Confidence also stems from global shifts. Supply chains are diversifying away from China, and European firms are seeking alternative production bases. With nearly 65 per cent of its population under 35 and significant untapped manufacturing potential, India is well placed to benefit.

Finally, the government’s confidence also comes from the opportunity that FTAs create. The EU pact offers Indian exporters preferential access to 450 million consumers across 27 countries—one of the world’s largest and richest markets. Alongside other proposed deals with the United States, Chile, Peru and the Eurasian Economic Union, it could help generate the millions of jobs India needs each year.

However, market access alone does not ensure higher exports or more jobs. To translate access into outcomes, India will need structural reforms that roll back protectionist barriers. Three such reforms will be key.

First, India’s trade regime requires reform. Tariffs on intermediate goods must be reduced if exports are to become a genuine growth engine. Indian firms cannot compete globally if key inputs remain costly. They need reliable access to low-cost components, supported by streamlined customs procedures and simpler regulations to minimise delays. Yet the recent Union Budget left most import duties unchanged, despite the need for rationalisation. India should also rethink its extensive use of Quality Control Orders (QCOs), which function as de facto import barriers. Although a few have been withdrawn, more than 700 remain, disrupting supply chains and creating uncertainty for firms planning production and exports.

Second, while the EU FTA may expand market access, it will not by itself attract large-scale manufacturing investment. That requires a credible investment protection framework. In 2015, India unilaterally terminated around 77 Bilateral Investment Treaties (BITs), leaving foreign investors with limited recourse in disputes with domestic firms or the government. A revised Model BIT introduced in 2016 mandates that investors exhaust domestic legal remedies for five years before seeking international arbitration—terms few countries have accepted. As a result, India now has BITs with only a handful of relatively minor partners, while major global firms remain cautious about committing long-term capital.

Finally, India should seriously consider joining major regional trade groupings such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These agreements go well beyond tariff cuts. They require members to strengthen domestic standards in labour laws, intellectual property, regulatory transparency and competition policy—areas where India needs reforms, but has found politically difficult to implement.

International commitments can help anchor domestic change. China’s entry into the WTO in 2001 shows how external discipline can accelerate internal reform. Joining high-standard regional agreements would similarly signal that India’s policy direction is stable and long-term. That credibility, in turn, can boost investor confidence and attract greater investment. 

India competes in a global trading system still shaped by China—a dominant exporter with deep manufacturing capabilities and highly integrated supply chains built over decades. In that context, the FTA with the EU is an important step forward. But it must mark the beginning of a larger transformation, not the end of reform. What India needs is a sustained commitment to trade openness. If it wants to become a global manufacturing hub and achieve its “Viksit Bharat 2047” goal, trade agreements must be backed by lower input tariffs, simpler regulations, stronger investment protection and deeper structural reforms.

Global supply chains are being reorganised in real time. The question is not whether opportunities exist—it is whether India will move fast and decisively enough to seize them.

Why growth isn’t saving the rupee

Business Standard January 20, 2026

Last year was not a good one for the Indian rupee. It weakened steadily, even against a soft US dollar, ending 2025 as Asia’s worst-performing currency. Some argue that the rupee’s slide will be a blessing in disguise, giving long-struggling exporters a much-needed boost. Perhaps it will. But before taking comfort, it is worth asking a more fundamental question: Why is the rupee falling in the first place?

The puzzle is sharpened by the apparent strength of the Indian economy. Growth remains brisk, and inflation has fallen to multi-decade lows. It is true that exports have taken a hit from higher US tariffs, with merchandise shipments growing by less than 1 per cent year-on-year between August and December 2025. Yet gross domestic product (GDP) is still projected to expand by 6.5-7 per cent in 2026-27, keeping India firmly in place as the world's fastest-growing major economy.

Ordinarily, such performance would attract foreign capital, as investors chase returns, lifting the currency in the process. That was the pattern during the boom of 2004-08, when equity inflows averaged a little over 2 per cent of GDP and the rupee appreciated by around 2.5-3 per cent a year. This time, the script has flipped. Despite strong growth, the rupee has fallen by more than 5 per cent so far in 2025-26.

What makes the decline more striking is the modest current account deficit (CAD) — around 1 per cent of GDP in April-September 2025. A weakening rupee suggests that even financing so small a gap has become difficult.

The reason lies in a persistent imbalance: demand for rupees has lagged supply, reflecting pressures on both the trade and capital accounts. Merchandise imports averaged about $62 billion a month in 2025, far exceeding exports of roughly $37 billion and leaving a $25 billion trade deficit. Although services exports offset much of this gap, weak goods exports and a rising import bill — driven in part by higher gold and silver prices — have skewed demand towards dollars. Importers are buying more dollars than exporters are supplying, pushing the dollar up and the rupee down.

Normally, such a shortfall would be easy to finance — if capital inflows were behaving as they usually do. Last year, they were anything but normal. In 2025, foreign portfolio investors (FPIs) withdrew about $19 billion from Indian equities on a net basis — the worst outflow on record. This exodus occurred even as capital flows into the broader MSCI Emerging Markets index remained robust. India was a clear outlier.

Foreign direct investment (FDI) has been no more reassuring. This should have been a moment of opportunity, with multinationals diversifying away from China and India opening more sectors to foreign capital while offering incentives through production-linked schemes. Yet investors remain hesitant. Gross FDI inflows have been stuck at around 1.7 per cent of GDP since early 2023, well below the 3 per cent seen in the mid-2000s.

The graph tells the story starkly. Between January 2024 and October 2025, gross FDI inflows averaged about $7 billion a month, while withdrawals ran close to $4 billion, leaving net inflows of barely $3 billion — negligible for a $4 trillion economy. Once rising outward investment by Indian firms, averaging $2-3 billion a month, is taken into account, the picture worsens. In effect, India has received close to zero net FDI each month over the past 22 months.

The conclusion is hard to escape: India has failed to capitalise on the global shift in FDI in any meaningful way. This has in turn soured the mood among portfolio investors who now appear far less confident about India’s long-term growth prospects. Instead, capital is being redirected to East Asia, where economies are seen as better positioned to benefit from the China+1 strategy and the artificial intelligence (AI) boom. Delays to a US-India trade deal have only reinforced this perception. The rupee’s slide reflects this deeper malaise — India’s waning appeal as a destination for foreign capital. The Reserve Bank of India’s heavy interventions in the foreign-exchange market have offered only a temporary fix; a durable remedy lies in reforms that restore credibility and rekindle India’s appeal to global investors. 

All of this places the forthcoming Union Budget firmly in the spotlight. Strong headline numbers — rapid growth, low inflation and a modest current account deficit — have fostered the belief that little needs fixing. That would be a misjudgement. Both foreign investors and domestic firms are signalling that something is amiss, as evident in the prolonged weakness of private investment. The government has taken a few policy steps in recent months. One can only hope that more decisive measures will follow when the Budget is presented on February 1.