Opinion In a year of unpredictability, India needs to accelerate EU FTA
By 2024, the cumulative FDI from the EU was around $120 billion, and it offers substantial potential. With focus on areas like electronics and infrastructure, this matches India’s own current areas of interest well. Germany will be leading the effort in this context.
PM Narendra Modi, German Chancellor Friedrich Merz fly kites in Ahmedabad, Monday. (Express Photo by Bhupendra Rana) German Chancellor Friedrich Merz’s kite-flying with Prime Minister Narendra Modi, along with announcements on cooperative defence production and visa-free transit travel for Indian travellers, holds out a promise that an EU-India trade agreement may finally be on the anvil, with the EU-India Summit less than two weeks away. Considering that an FTA has been held hostage for the last decade to issues of environment and labour rights, this is no mean feat. As a new year dawns, the question is what lies ahead, especially with US President Donald Trump continuing on a disruptive path. Developments in the world’s two largest economies — the United States and China — will shape the broader context in which India must navigate the year ahead, underscoring the growing importance of regional trade agreements such as the \India-EU pact, following the concluded India-UK agreement.
The US economy ended 2025 on a strong note, registering robust 4.3 per cent growth in the third quarter, driven largely by consumer spending. Yet the underlying structure reveals significant imbalances. Investment growth is almost entirely concentrated in the expansion of AI capacity, a momentum unlikely to be sustained. Corporate hiring has virtually stalled, AI-related stocks display unsustainably high price-to-earnings multiples, and it remains unclear what final consumption demand for AI-enabled output will be. At the same time, AI capacity expansion is highly energy intensive, an issue that will grow as capacity building shifts to developing countries.
Consumption growth is heavily skewed toward upper-income households and is likely to taper off. Broader trends will depend on how Trump’s proposed tax cuts are financed. If tariff revenues are used, this may work briefly — at least in FY 2025–26. However, the sharp rise in average tariffs will feed into domestic inflation, choke consumption demand, and eventually erode tariff revenues.
Tax cuts will also add to government debt, pushing it onto an unsustainable path and raising interest rates. The combined effect will be a contraction in both consumption and investment demand. A similar sequence followed the imposition of “reciprocal tariffs” earlier, raising doubts over whether the late-2025 spurt in US growth can be sustained.
China’s outlook is even more troubling for global demand. Long-term growth has been on a secular decline — from 8-10 per cent in the decades after 1980, to about 5 per cent in 2024-25, and now trending towards 4 per cent or lower.
The real estate crisis continues to depress demand, while ageing demographics further constrain consumption.
Even China’s recent export surge offers limited reassurance. Much of it reflects diversion of exports away from the US toward developing countries, many of which are responding with higher tariff and non-tariff barriers. Another portion is driven by tariff arbitrage, with Chinese goods reaching the US indirectly via partners such as Mexico and Vietnam. This channel is unlikely to last. The US is expected to block such routes, and Mexico has already imposed tariffs of 35 per cent on non-FTA partners and 50 per cent on automobiles and auto parts.
From India’s perspective, traditional global trade prospects in 2026 are therefore limited, except for some resilience in services trade, largely linked to the US economy. The recent spurt in commodity trade towards the last months of 2025 was largely driven by pre-emptive purchases ahead of the Trump tariff regime that took effect after August last year.
Trade diversion away from the US then offers the main scope of trade expansion. Here, the importance of the UK and EU free trade agreements looms large. Amid the media focus on the US and Trump, it is often forgotten that the EU is India’s fourth largest market. In addition, the EU, increasingly wary of the US amid emerging frictions — from Greenland to potential confrontation over Chinese trade — must reassess new partnerships, particularly in skilled immigration. Germany’s Skilled Immigration Act already provides quotas for Indian professionals. So, for the first time, India may find movement of skilled persons (Mode 4 in WTO parlance) a negotiable instrument in the forthcoming India-EU trade agreement. The recent India-Germany cooperation could thus prove more than a kite-flying exercise.
The dominance of Germany in EU trade is well known, so one can expect an Indo-German cooperation agreement to broaden into an India-EU trade deal incorporating new elements of service trade and an investment agreement to bring in technology where Germany is at the forefront today. A technology component could also give a fillip to foreign direct investment (FDI). It is well known that the best long-term source of technology is an inflow of FDI. Studies show that FDI and trade are actually complementary. India-EU trade is already at a very high level. By 2024, the cumulative FDI from the EU was around $120 billion, and it offers substantial potential. With focus on areas like electronics and infrastructure, this matches India’s own current areas of interest well. Germany will be leading the effort in this context.
In our last column (‘Why is India signing so many FTAs? It’s not just economics’, IE, December 15), we suggested that there may be a method to India’s rush to sign FTAs. Now, some of these must translate into tangible economic gains. The talks with Germany could well mark the start of a meaningful India-EU FTA, where a services agreement incorporating Mode 4, alongside an investment pact, finds pride of place. That would indeed be a happy new beginning.
The writer is visiting professor at Shiv Nadar University and former VC, IIFT
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