Opinion FTA with EU strengthens India domestically, regionally and globally
It is likely to cause dismay in Islamabad, which until recently had been basking in the attention that it had enjoyed from President Trump in the wake of Operation Sindoor. With an economy a tenth of India’s size, dependent, yet again, on an IMF bailout, it may soon discover that kowtowing to Trump has yielded few dividends
New Delhi’s decision to arrive at this deal, without a doubt, was quite belated. External forces, obviously, prodded India’s otherwise lethargic trade negotiators to see the writing on the wall and act with alacrity On January 27, India signed a free trade agreement with the European Union. Under its aegis, over 90 per cent of goods and services will be exempt from tariffs. It is worth noting that the accord was reached after two decades of torturous negotiations. Many observers of EU-India relations within the EU, in fact, had, for all practical purposes, abandoned hope that such an agreement would ever come to fruition.
What explains this sudden breakthrough, which was celebrated with considerable fanfare right after Republic Day? Was European Commission President Ursula von der Leyen’s statement that this was beyond “the mother of all deals” mere hyperbole?
The answer to the first question, though based on inference and attribution, is straightforward: In all likelihood, the accord was reached because of the extraordinary economic pressures that India had faced from the Trump administration before Delhi and Washington themselves arrived at a deal this week. Trump, as is his wont, lost no time in congratulating himself and his trade policies, asserting they helped precipitate this free trade agreement. In an ironic sense, he may, for once, be right. Given the damage that the now reduced tariffs had exacted on areas of the country’s economy, hastening an accord with the EU, no doubt, had become an imperative.
Von der Leyen’s remark was probably aimed at two distinct audiences. At one level, it was directed toward her Indian interlocutors as she was not only on Indian soil but had been invited as the Chief Guest at India’s Republic Day celebrations. It was also very likely directed at an audience back home since the continent is suffering to varying degrees due to Trump’s erratic trade policies and whimsical use of tariffs.
The significance of this FTA is manifold. At a global level, it represents a dramatic retreat from the past, albeit patchy, commitment to multilateral trade deals. Over the last decade or so, the world has seen a steady departure from multilateral trading arrangements and the growth of regional trading blocs. For example, until President Trump withdrew from it, the proposed Trans-Pacific Partnership (TPP) would have involved 12 nations and created a free trade zone covering 40 percent of global GDP. Despite America’s withdrawal it was nevertheless reincarnated as the Comprehensive and Progressive Trans-Pacific Partnership. It should be mentioned that fears of widening the trade gap with the People’s Republic of China among other concerns led India to stay away from the TPP as well as its successor.
At a regional level, it is likely to cause dismay in Islamabad, which until recently had been basking in the attention that it had enjoyed from President Trump in the wake of Operation Sindoor. With an economy a tenth of India’s size, dependent, yet again, on an IMF bailout, it may soon discover that kowtowing to Trump has yielded few dividends. Given the dire state of its economy, thanks to chronic mismanagement, not to mention the overweening influence of its armed forces, it is likely to find itself further marginalised in South Asia.
Finally, how is India likely to fare in the wake of this accord? At the outset, some industries are now likely to face the winds of foreign competition. The shares of two of India’s most prominent carmakers, Tata and Mahindra, took a beating almost immediately in the aftermath of the announcement of the agreement. Nevertheless, both manufacturers and consumers should welcome the competition: Producers will have to become more innovative, nimble and cost-conscious. Consumers, who have long borne the brunt of extortionate import duties, are likely to see steady relief as far as prices are concerned and will also benefit from increased choices.
Also, within India, middle-class consumers will now have access to a range of European goods without needlessly paying prices that had been grossly inflated owing to India’s tariff regime. The thirst of middle-class consumers has grown to include wine and various other spirits beyond beer and whiskey. The FTA will induce the Indian wine and liquor industries to offer superior products at more attractive prices.
New Delhi’s decision to arrive at this deal, without a doubt, was quite belated. External forces, obviously, prodded India’s otherwise lethargic trade negotiators to see the writing on the wall and act with alacrity. With this agreement now inked, the Indian consumer can only hope that the country’s bureaucracy, rarely known for its reputation for efficiency and zest, will display some verve in implementing the terms of the accord. If the country hopes to achieve Prime Minister Modi’s laudable goal of turning it into a developed state in 2047, the time to make a concerted effort to achieve it is at hand.
The writer directs the Huntington Programme on strengthening US-India relations at the Hoover Institution, Stanford University
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