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

Business Standard February 17, 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.

Trump tariff shock: A wakeup call for India as challenges intensify

Business Standard August 19, 2025

In an unexpected development, India now faces a 50 per cent tariff on its goods exports to the United States, a hurdle higher than that of almost any other country in the world. As a result, the government needs to consider how it should respond. While there are political considerations that it will need to take into account, the objective is clear from an economic point of view: Mitigate the damage, so India can return to rapid growth. Unfortunately, this task is complicated because overseas prospects have dimmed even as the domestic economy has been slowing down.

How severe is this tariff shock? Many analysts have argued that its impact will be limited. They point out that goods exports to the US account for only 2 per cent of India’s gross domestic product or GDP, only two-thirds of which will be affected, since pharmaceuticals, electronics, and petroleum products have been exempted.

However, this line of reasoning overlooks the bigger picture. The US is not just India’s largest export market — it is also a critical economic partner. Consequently, the tariff shock will not only affect trade flows — it will rattle investor confidence, disrupt supply chains, and chip away at India’s long-term export competitiveness. The real risk lies in these ripple effects, which extend far beyond the immediate numbers.

To understand why, consider the plight of three types of firms.

The first and the most obvious are global manufacturers. India has been pitching itself as the next global manufacturing hub, especially for firms exporting to the US or diversifying away from China. This was seen as a potential game-changer for India’s growth path. With a young, increasingly skilled workforce and democratic stability, the advantage seemed clear. However, that edge has now been wiped out by a 50 per cent US tariff. Even at the reciprocal 25 per cent imposed on August 7, India would remain less competitive than most of its Asian rivals who face only 19–20 per cent tariffs on their US exports. If this differential persists, India risks losing out on a once-in-a-generation chance to become the world’s manufacturing workshop. 

It’s not only exporters of goods who stand to lose. The impact could extend to services exporters too. Nearly 60 per cent of India’s 1,700-plus Global Capability Centres are US-headquartered. While tariffs don’t directly touch them, worsening US–India relations could make the parent firms wary of expanding here. That would be a serious setback, since services exports have been a cornerstone of India’s post-Covid growth.

Finally, consider domestic manufacturers. They may not export much but many of them rely heavily on foreign inputs. If India even considers imposing retaliatory measures on the US, to add to those imposed earlier on China, it risks stalling their investment plan further. 

The tariff shock therefore threatens to ripple through the entire economy. Added to this, high-frequency data already point to an economic slowdown. Non-food bank credit growth has slipped to 10 per cent from 14 per cent a year ago, merchandise exports rose just 2 per cent in April–June, GST collections slowed to 6 per cent from 11 per cent, passenger vehicle sales have slumped, indicating sluggish urban demand, and the real estate boom of the past few years has stalled, creating a growing stock of unsold homes in major cities. 

In other words, the US tariff shock could not have come at a worse time.

How should India respond? First and foremost, India must resist the temptation to turn inward. Protectionism has never delivered rapid growth —India’s own pre-1991 record proves it, and no other country has succeeded that way. The US may be leaning protectionist now, but India cannot afford to repeat that mistake.

Instead of turning inward, India should help its exporters by deepening trade ties with multiple other countries. The deal with the United Kingdom is a welcome step, while negotiations with the European Union are vital and must be expedited. India should also pursue agreements with East and Southeast Asia, to integrate more firmly into global supply chains. That will mean lowering its tariff and non-tariff barriers, which remain among the highest in Asia. In today’s interconnected world, a strategy of self-sufficiency would be self-defeating.

At the same time, Indian policymakers must move beyond firefighting and implement reforms that unlock India’s growth potential. Reviving private investment, boosting manufacturing competitiveness, and creating jobs at scale will require cutting red tape, simplifying regulations, improving the ease of doing business, and investing in skills and not just physical infrastructure. Recent announcements — such as rationalising goods and services tax (GST) rates and setting up a Reforms Committee — are encouraging, but the real test will lie in the details and, above all, in implementation.

Finally, this setback must not push India into an anti-US stance. Frictions are inevitable in such relationships, but the US remains far too important an economic partner to sideline. India’s long-term objective should be to strengthen, and not weaken, its economic engagement with the US, by negotiating progressively better and more comprehensive trade deals.

In many ways, this could be India’s second 1991 moment. The crisis may not be as visible this time, but the stakes are just as high: the economy is at a crucial crossroads, and any policy misstep now could trap India in lower-middle-income status for decades to come.

Trade war: A second chance for India to attract global manufacturing

Business Standard July 15, 2025

India, like any country, integrates with the world through goods, services, and financial flows. It has done very well in the latter two. Now, it has a chance to emerge as a key player in global goods trade—potentially boosting its slowing GDP growth. The key question is: Can policymakers enable this shift?

Services trade from India has become a major success. From 2005 to 2023, India’s share of global services exports doubled—from under 2 percent to over 4 percent. Over the past decade, services exports grew over 8 percent annually and now make up 44 percent of India’s total exports, well above the global average of 25 percent. At the same time, gradual easing of capital controls has deepened India’s financial integration. Between 2011 and 2023, foreign portfolio inflows rose from $180 billion to $460 billion, with their share of GDP increasing from 11 percent to 14 percent.

In contrast, goods exports have fallen behind. From 2014 to 2024, they grew at just 3 percent annually—down from 17 percent in the previous decade. This slowdown coincided with a rise in protectionism, as average import tariffs doubled from 6 percent in 2013 to 12 percent in 2023.

In contrast to India’s journey, China’s share of global goods exports jumped from 4 percent in 2001 to over 14 percent in 2024. However, its rise hasn’t been without controversy. China has often been accused of violating WTO rules by unfairly supporting its manufacturers with subsidies, tax breaks, and cheap loans. Things got worse from 2017 as China grew more authoritarian. Its strict, nearly three-year long Covid-19 lockdown and the resulting supply chain disruptions exposed the risks of over-reliance on its economy. This raised political concerns in the U.S.—China’s largest export market—and triggered efforts to reduce dependence. The major shift in U.S. trade policy today stems largely from this.

After Covid, global manufacturers adopted a “China+1” strategy, shifting parts of their supply chains to other countries. Vietnam, Thailand, Cambodia, and Malaysia benefited—but India largely missed out due to policy hurdles. From 2017 to 2023, India’s share of global goods exports remained flat at around 1.7–1.8 percent, while tiny Vietnam’s rose from 1.5 to 1.9 percent.

In the latest phase of the trade war, the U.S. has threatened tariffs of 25–40 percent on imports from 16 countries, including Canada, Mexico, and a 30 percent tariff on the EU by August 1. Tariffs on Chinese goods already exceed 30 percent while India continues to face a baseline tariff of only 10 percent.

With rising export costs from many countries, multinationals will keep seeking alternative manufacturing hubs. This gives India another chance to expand its role in global goods trade—a crucial opportunity given that the domestic economy is slowing down. A surge in goods exports could lift overall GDP growth. The key question remains: can Indian policymakers seize this moment? There are two important objectives here: preserving or gaining market access and significantly increasing the share of exports in global manufacturing trade.

Ideally, India would secure a favourable trade deal with the U.S., giving it a strong edge over competitors. If not, it can still benefit from lower tariffs compared to what the other countries are facing now. And regardless of U.S. outcomes, India has the rest of the world to trade with. Progress with the UK and potential talks with the EU offer opportunities. Beyond this, India must integrate into global supply chains through agreements with China and ASEAN, and revive Bilateral Investment Treaties to boost FDI inflows.

Indian policymakers must make manufacturing far more attractive to foreign investors and implement key reforms to ease business hurdles. Despite efforts like Make in India (2014) and the Production Linked Incentive (PLI) scheme (2020), manufacturing’s share of GDP has stayed flat at around 17 percent. Private investment remains weak, and FDI inflows—despite the China+1 trend—fell to just 2.3 percent of capital formation in 2024, down from 8.8 percent in 2020.

This shows that subsidies alone cannot overcome the bureaucratic and regulatory hurdles firms face. Policymakers must simplify and reduce costs for manufacturers—making it easier to acquire land, hire workers, get approvals from ministries, and import raw materials without excessive barriers.

Firms—foreign or domestic—invest more when returns are high and risks are low. In India, however, policy risks remain high due to unpredictable moves like retrospective taxes, increased tariffs, import restrictions, and sudden regulations. To attract investment, India must create a stable, and predictable policy environment, ensure consistency across policies, and relax FDI rules. India also needs a clear, and credible trade policy that lowers tariffs, and removes arbitrary non-tariff barriers like the surge of Quality Control Orders (QCOs) since 2014.

The U.S.-led trade war has reshaped the global economy. Short-term growth may slow as countries adjust, but Indian policymakers must focus on the long term. This is a key chance to grow India’s share in global manufacturing. With the goal to become a developed nation by 2047, missing this opportunity would be costly.

India's overzealous anti-dumping response

Business Standard June 17, 2025

For years, several countries, including India, have worried about imports of cheap Chinese goods undermining local industries. These fears have grown in recent months due to rising US-China trade tensions. As of June 16, the US has increased the effective tariff on Chinese imports to 55 percent. The higher costs of selling to the US have raised concerns that China will dump its surplus goods in other markets. In response, many countries, including India, are using trade remedies such as anti-dumping duties (ADDs) to protect themselves. India is now the world’s biggest user of ADDs --- not only against China but also other nations. While dumping is a real risk, India’s heavy use of ADDs can create new problems, and hence, policymakers should apply them carefully.

In international trade, dumping occurs when a country sells goods abroad at prices lower than their fair market value. While the World Trade Organization (WTO) does not consider dumping unfair by default, it allows countries to impose ADDs if the practice causes “material injury” to local industries.

China has been the main target of ADDs, facing about 25 percent of all anti-dumping investigations since it joined the WTO in 2001. India on the other hand, is among a select few developing countries with a long history of liberal use of ADDs. From 1995 to 2023, India initiated over 1,100 investigations – more than the U.S. or EU – targeting not only China but also the EU, Switzerland, South Korea, Japan, and others. In 2024 alone, India launched 47 trade remedy investigations – 37 aimed at Chinese products like aluminium foil, vacuum flasks, and steel.

While in some instances ADDs can help protect local industries, their use comes with several drawbacks.

First, ADDs can raise costs for local industries that use the taxed imports as raw materials, making them less competitive. In March 2024, India imposed a 30 percent ADD on bare printed circuit boards (PCBs) from China and Hong Kong. This raised production costs for IT hardware manufacturers by 1–4 percent. Many of these companies were part of the government’s Production Linked Incentive (PLI) Scheme, and the added costs hurt their profits and global competitiveness, thereby undermining the PLI’s goal of boosting manufacturing and exports. Domestic PCB suppliers were unable to fill the gap due to quality issues, forcing electronics and lighting companies to either absorb the higher costs or pass them on to consumers.

Secondly, ADDs disproportionately hurt Micro, Small, and Medium Enterprises (MSMEs), which already struggle with regulatory compliance. Unlike large firms that can lobby for exemptions, MSMEs are forced to absorb the higher input costs triggered by ADDs or shut down. When India imposed ADDs on jute yarn and fabric from Bangladesh and Nepal in 2017, Indian jute mills benefited temporarily, but the move hurt small packaging and textile businesses. Many of these single-unit plants struggled with supply shortages and rising costs.

Third, ADDs can conflict with broader, national policy objectives. In 2024, India imposed ADDs on solar glass from China to shield local producers, which pushed solar photovoltaic (PV) module prices up by 10–12 percent. This, in turn, drove up project costs by 7–8 percent, forcing developers to renegotiate contracts and postpone major projects – likely impacting India’s clean energy adoption push. In effect, the ADDs made solar power costlier and less appealing for investors, undermining national renewable energy targets.

Finally, frequent and unpredictable imposition of ADDs create uncertainty for businesses and disrupt long-term planning. In the past five years, India has imposed 133 anti-dumping measures on 418 products, many in the chemicals sector. Firms that rely on these chemicals as inputs face constant threat of sudden duties, resulting in price volatility and supply disruptions.

Having said that, China’s unfair trade practices remain a real concern and select instances of dumping put local players at a disadvantage. So what should India do?

Indian policymakers should use ADDs carefully and only when backed by strong evidence. There must be clear proof that goods are being sold below fair value and causing serious harm to key industries where India has a comparative advantage. A cost-benefit analysis should also look at the impact on related sectors. One useful step would be to adopt an Economic Interest Test (EIT), like the UK does. This would help balance the needs of producers, consumers, and downstream industries, and align India with global best practices. It would also prevent a few big companies from misusing ADDs to block imports. In the past three years, over a third of ADD cases were based on complaints from only one or two domestic firms—suggesting they are sometimes used to protect monopolies or duopolies.

ADDs should not turn into yet another form of protectionism – a growing trend in India. Instead, policymakers should focus on reforms that enhance competitiveness of local firms, such as better infrastructure, simpler rules, and factor market changes. To boost manufacturing and benefit from trade, India needs to integrate into global supply chains, not retreat from them. This requires using tools like ADDs carefully and selectively.