India, EU look to seal trade deal

In recent weeks, India and the European Union (EU) have been actively engaged in discussions about a major Free Trade Agreement (FTA), with a target to conclude the deal by end of 2025.

Key Highlights of the India-EU Engagement

• The FTA negotiations between India and the EU began in 2007, but were stalled for several years due to several unresolved issues.
• However, negotiations were relaunched in 2021 and now both sides are working with a specific deadline of end of 2025 to finalize the deal.
• This decision about the deal comes amidst growing global challenges, including US tariff policies and geopolitical tensions.
• Both India and the EU are bracing for reciprocal tariffs from the US, as President Trump has signaled plans to impose a 25% tariff on EU goods.
• Global Geopolitical Context: The world is experiencing significant geopolitical shifts, with major economies like China and Russia asserting more influence, especially in regions like the Indo-Pacific. Both India and the EU are looking to reimagine their partnership to counter these challenges.
• The India-EU FTA is seen as one of the largest potential trade deals, which could be the largest of its kind in the world. The deal is expected to open new trade opportunities, increase market access, and enhance cooperation across sectors like technology, investment, and security.

Why India is Crucial for Europe’s Future?

• Economic Growth: India is the fifth-largest economy globally and is projected to overtake Germany and Japan to become the third-largest economy within this decade. This makes India a vital economic partner for Europe as it seeks to diversify from over-reliance on China and maintain strong relationships with other advanced economies like the US.
• Manufacturing Potential: India is emerging as a key alternative supplier of manufactured goods. As global reliance on China diminishes, India’s growing manufacturing sector offers significant opportunities for Europe, especially with India’s expanding labor force and improving infrastructure.
• Energy Needs and Climate Change: India’s rising energy demands make it essential for any global strategy addressing climate change. India is increasingly focusing on renewable energy sources, and Europe needs India’s participation in the global transition to a low-carbon economy.
• Geopolitical Stability: India, as the world’s largest democracy and a key player in the Indo-Pacific region, serves as a stabilizing force in a geopolitically uncertain world.

The ‘Old India’ vs. the ‘New India’

Historically, European views of India have been shaped by outdated impressions of poverty, poor infrastructure, a reliance on coal, and bureaucratic inefficiencies. This view has led to a focus on areas such as:

• Trade Policy: Discussions around market access, such as visa agreements for Indian workers in exchange for reduced trade barriers for European goods.
• Climate Change: Europe’s emphasis on persuading India to reduce coal dependency and commit to climate change goals.
• Economic Development: Europe's attempts to replicate its own model by pushing for institutional reforms and market liberalization in India.
• Security: Encouraging India to side with the West in opposition to authoritarian regimes.

However, this perspective is outdated, and a new India has been emerging for some time, with significant reforms and transformations reshaping the country.

Key Changes in India’s Economy and Society

• Economic Transformation: India has become one of the world's fastest-growing economies. Over the last few decades, India’s growth has been robust, with GDP growth averaging more than 3% annually since the 1990s. The economy has shifted towards more open trade and higher exports, surpassing even China and Japan in some areas.
• Export Growth: India’s exports have grown at a faster rate than China’s between 2007 and 2019. Foreign Direct Investment (FDI) in India has also increased significantly, surpassing China as a percentage of GDP.
• Service and Manufacturing Sectors: Services, especially IT, have long been a strength of the Indian economy, but manufacturing is also growing. India has become a significant production hub for products like mobile phones and is home to more unicorn start-ups than the UK or Germany.
• Infrastructure Development: India’s infrastructure, particularly in electricity generation, has improved significantly. Over 50% of the country’s new electricity generation capacity comes from renewable sources, and digital infrastructure has expanded, improving financial inclusion.
• Reforms: The Indian government has launched several initiatives, including:
  • Make in India: Aimed at boosting manufacturing through FDI, workforce skill development, and reducing administrative costs.
  • PLI Schemes: To encourage investment in critical sectors like solar panel production.

Challenges India Still Faces

Despite significant improvements, India continues to face challenges:

• Income Inequality: Economic growth has been uneven, with many segments of society unable to benefit from the new opportunities.
• Job Creation: While productivity growth is strong among those employed, India faces a massive challenge in creating sufficient jobs for its growing labor force. Around 10 million people are expected to enter the labor market annually for the next decade.
• Governance and Implementation: India’s ambitious reforms often struggle with weak governance, leading to poor implementation and outcomes. The country’s financial system remains dominated by state-owned banks, and the judicial system faces inefficiencies.

What This Means for Europe?

Europe has a clear stake in India’s success. An economically strong and stable India will be a key ally for Europe in the following ways:

• Geopolitical Stability: India can help maintain global stability and provide an alternative source of goods and services, reducing Europe’s dependence on China.
• Climate Change: India’s efforts to expand its renewable energy sources are critical for global climate goals, and Europe can play a role in enabling India’s energy transition.
• Economic Growth: As India’s economy continues to grow, it will become an important market for European goods and services, creating new opportunities for European businesses.