The India-EU Trade Pact: A Strategic and Urgent Imperative

As the first month of 2026 comes to a close, the global economic establishment is less a coherent system and more a fragmented mirror of competing interests. With the EU – India summit less than a week away, the atmosphere is charged with unprecedented urgency. As the EU President Ursula von der Leyen touches down in India alongside other European leaders for Republic Day celebrations on January 26, the long-anticipated India – EU trade deal stands on the precipice of finalization.

Illustration by The Geostrata

Union Commerce Minister Piyush Goyal’s hailing of the deal as the “mother of all trade deals” has evolved the 19 – year negotiation marathon into a sudden, accelerated sprint. The deal is driven by a mutual recognition that it is no longer optional, but necessary for survival, as the global economic alignments are going through major reconfigurations amid mounting geopolitical turbulence.

The reason for the acceleration of this deal is a world plagued by volatility. The return of protectionist economic policies from the United States of America have proven to be highly disruptive for the world economic order. The Trump administration’s tariff policies, imposed without FTA negotiations, have simultaneously wounded Indian exporters and signalled to Europe that the bilateral relationship with the United States cannot be assumed stable.

The India – EU FTA represents a pivot away from over-reliance on unstable superpowers toward a partnership of mutual resilience. The urgency to shake hands over this deal is driven by the necessity of securing a geoeconomic anchor in a turbulent Indo – Pacific, signalling increasing economic autonomy from both Chinese commercial dominance, and US – centric trade architecture.

THE DEAL ARCHITECTURE: SALE, SCOPE, AND COMPLEMENTARITY

The bilateral trade relationship between India and EU currently stands at approximately €120 billion, making EU one of India’s largest trading partners. According to the European Commission, the enabling of the trade pact could very well catapult the figure to €250-300 billion by 2030-31. The growth rate is projected to be over 100%, signalling massive recalibration of supply chains and possible increase in ease of access to markets.

In fiscal year 2024-25, bilateral merchandise trade reached $140 billion, with India exporting $78 billion and importing $60 billion. Over the past 5 years, bilateral merchandise trade has expanded by 36 percent, growing from $90 billion in 2020-21.

Services trade adds another $53 billion, split between India’s $30 billion exports in the IT sector, consulting, and financial services and the EU’s $23 billion exports.

The trade deal offers a lifeline to the labour-intensive sectors of the Indian economy. Textiles and apparels currently face a 12-16 percent average tariffs in the EU, making Indian goods less competitive at equivalent price points against its counterparts Bangladesh and Vietnam. India’s pharmaceutical sector faces non-tariff barriers that limit market access for India’s general and specialty chemical production. Iron and steel exports, petroleum products, and engineering exports all stand to gain from reduced duties and simplification of non-monetary barriers.

For the EU, the automotive industry is the crown jewel of its economy. India currently maintains 100-150 percent tariffs on vehicular imports, protecting domestic players, causing massive market loss or distortion for foreign manufacturers. EU automakers gain access to a market that is growing at 8-10 percent annually as India’s automotive sector modernises, and quality converges with global benchmarks. German machinery, electrical equipment, beverages (whisky, wine, spirits), and specialty chemicals are equally positioned to benefit from Indian tariff reductions.

NAVIGATING REGULATORY DIVERGENCE: THE REMAINING FRICTION POINTS

Despite the overarching strategic convergence, the path to the India-EU BTIA is not without significant structural friction, primarily stemming from a clash between European normative standards and Indian developmental priorities. The most acute economic irritant remains the EU's Carbon Border Adjustment Mechanism (CBAM), which New Delhi views as a "green protectionist" tool that threatens to impose a 20-35% levy on India's cost-competitive steel and aluminium exports, potentially neutralizing the benefits of tariff reductions.

This is compounded by the EU's rigid insistence on the Trade and Sustainable Development (TSD) chapter, which links market access to binding commitments on labour rights and environmental standards, areas India traditionally guards as sovereign policy domains, not subject to trade sanctions.

Furthermore, historical sticking points over market access persist; European demands for drastic tariff cuts on wines, spirits, and dairy face staunch resistance from India's politically sensitive agricultural lobby, which fears displacement by subsidised European imports. These divergences highlight that while the deal is necessary, it requires a delicate balancing act to reconcile the EU's values-based trade agenda with India's imperative for industrial growth and food security.

THE GEOPOLITICAL IMPERATIVE: WHY NOW?

The question of “why now?” finds its answer in the rapid deterioration of the already established geoeconomic partnerships of the world.

Firstly, the “Chinese dilemma” haunts both parties simultaneously. India faces an $99 billion trade deficit with China (FY 2024), reflecting gaps in machinery, chemicals, minerals, and an overreliance of imports from China. This enables China to treat the Indian market as a place where it can dump its goods at unfairly low prices, causing injury to domestic industries in India.

The EU faces a parallel problem: over-reliance on Chinese exports for finished goods and rare earth minerals essential for its transition to green energy. India has positioned itself as a manufacturing and supply-chain alternative to the EU, as its large, skilled workforce, cost advantage, and democratic governance provide insurance against geopolitical coercions that China cannot.

Secondly, the transatlantic alliance, once the bedrock of Western geopolitical stability, is currently breaking apart. The deterioration of the relationship is most symbolically evident in the resurfacing tensions over Greenland.

Washington’s persistence and transactional interests in the territory is viewed as an eccentric real estate ambition, and a direct challenge to the sovereignty of an EU member state, showing disregard for territorial integrity.

This diplomatic rift is further fuelled by tangible economic tensions, defined by a volley of reciprocal tariff warnings.

With the US administration floating proposals for increasing levies on European automotive and industrial exports, and Brussels preparing counter-measures to protect its industries, the relationship has become combative in nature. Unpredictable and an increasingly unstable relationship with the United States has forced the EU to pivot towards dependable partners such as India to hedge against the volatility of an increasingly isolationist America.

INDIA AS A GEOECONOMIC DEPENDABLE PARTNER

India’s recent track record has positioned itself as a stabilising force in the global economy, as dependability and reliability are becoming the ultimate currency in the global economy.

India has successfully concluded major trade agreements with the UAE and Australia, signed the Trade and Economic Partnership Agreement (TEPA) with the European Free Trade Association (EFTA), signed comprehensive economic treaties with Oman and the UK in the past 24 months.

India is also advancing negotiations with diverse partners like Peru and the Mercosur bloc, proving itself as a trusted, multi-aligned partner capable of de-risking global supply chains. While China utilises trade as a tool of coercion and Russia remains isolated, India provides a safe path. Its engagement with the Quad, BRICS, and the EU simultaneously showcases a foreign policy of "multi-alignment."

For the EU, India represents stability and predictability, which is increasingly becoming scarce across the world.India's democratic system, independent judiciary, and transparent regulatory processes provide EU investors legal predictability.

Cumulative EU FDI in India has already reached $120 billion, with Germany ($15.4 billion), the Netherlands ($55 billion), France ($12 billion), and Spain ($4.3 billion) anchoring the investment base. German firms operating in India plan to increase investment, driven by expanding supply chain integration and market opportunities. This existing capital deployment validates India's reliability to the EU establishment.

CONCLUSION

Ultimately, the India-EU FTA seeks to establish a new geoeconomic paradigm. It represents a structural bet that the coming decade will reward pluralistic reliability over zero-sum dominance. For New Delhi, this pact validates its ascent as a dependable anchor capable of maintaining autonomy while executing complex agreements.

For Brussels, it asserts the institutional capacity to pursue independent interests amidst intensifying US-China rivalry. As the January 2026 summit approaches, this alliance stands as a definitive model for democratic, rules-based integration, proving that in a fractured world, resilience is built on complementary interests rather than coercion.

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BY S. SAI PRASHANTH

TEAM GEOSTRATA

info@thegeostrata.com