India-EU Trade Relations Exhibit Promising Prospects for a Future Free Trade Agreement

India's trade relations with the European Union (EU) have been evolving over the years, reflecting the growing economic and strategic importance of both partners. India, as one of the fastest-growing economies in the world, is increasingly becoming a key player in the global trade landscape, and the EU, with its 27 member states, represents one of India's largest trading partners.

Bilateral relations between India and the EU covers a broad spectrum, including goods, services, investments, and technology, with several areas of cooperation holding immense potential for the future.

India-EU trade relations

India and the European Union share a deep and diverse trade relations that spans since decades. The EU, as a bloc, is India's third-largest trading partner, after the United States and China. The bilateral trade relations between India and the EU has grown significantly in recent years, driven by their efforts to diversify economic interactions and strengthen their political and economic ties.

India's trade relations with the EU cover various sectors, ranging from traditional industries such as textiles and garments to high-tech sectors like information technology and pharmaceuticals. The EU is also one of the largest investors in India, making the relations multifaceted, involving not just trade but also strategic partnerships in various sectors.

In the fiscal year 2023-24, India’s bilateral trade in goods with the European Union (EU) reached an impressive USD 137 billion, with exports to the EU amounting to USD 76 billion and imports from the EU standing at USD 59 billion. This solid performance has positioned the EU as India’s largest trading partner in goods, surpassing other major partners like the United States and China, whose trade figures were USD 120 billion and USD 118 billion, respectively, for the same period.

Over the past five years, India’s trade with the EU has experienced remarkable growth. The total value of goods traded has surged from USD 90 billion in FY 2019-20 to USD 137 billion in FY 2023-24, representing an impressive growth rate of over 50%. This growth has been fueled by increasing demand for Indian products such as pharmaceuticals, textiles, and machinery in European markets, along with rising imports of advanced technologies and capital goods from the EU. Notably, India has maintained a trade surplus with the EU, amounting to USD 15 billion in 2023-24, underscoring the strengthening of economic ties between the two regions. The robust trade relationship is expected to continue growing, driven by ongoing efforts to enhance bilateral cooperation and market access.

India and European Union merchandise trade trajectory (Value in USD billion)

Source: Data extracted from Ministry of Commerce and Industry, Govt. of India

India's exports to the European Union (EU) encompass a wide range of products from both traditional and modern industries. Textiles and apparel, one of India's strongest export sectors, contribute significantly to this trade, with India exporting garments, yarn, and fabrics to major EU countries. Chemicals and pharmaceuticals also form a crucial part of India's exports, as the country is a global hub for pharmaceutical production, supplying generic drugs and active pharmaceutical ingredients (APIs) to meet the EU's growing healthcare demands.

India's information technology (IT) and business process outsourcing (BPO) services are in high demand in the EU, with Indian firms providing software development, IT consulting, and back-office support to European businesses. The Indian automobile sector, although relatively new compared to global giants, has seen significant growth and exports vehicles and auto components to the EU, tapping into a niche market. Agricultural products, including spices, tea, coffee, rice, and fresh produce, are also major exports, with the EU being one of the largest markets for these goods. Lastly, India's engineering goods, such as machinery and electrical components, are vital to various European industries, from manufacturing to energy, completing the diverse landscape of India's exports to the EU.

India's imports from the European Union (EU) cover a wide array of sectors, including machinery, chemicals, and electronics, among others. A significant portion of India's imports consists of machinery and industrial equipment, as the EU is a key supplier of high-quality technology essential for manufacturing, energy production, and infrastructure development. The growing demand for advanced machinery in India’s expanding manufacturing sector has further fuelled this trade. Chemicals, including organic and inorganic varieties, fertilizers, and specialty chemicals, are also crucial imports from the EU, supporting India’s industrial and agricultural needs.

Additionally, India imports automobile components and parts from the EU, which play a vital role in enhancing the performance and safety of its rapidly growing automotive industry. In the healthcare sector, while India exports pharmaceuticals to the EU, it also imports advanced medical devices, diagnostic equipment, and specialized medicines, which are crucial for improving healthcare services.

The demand for luxury goods and fashion from European brands has also surged in India, with European fashion, jewellery, and automobiles becoming popular among the growing middle class and affluent consumers. India imports energy products and technologies, particularly in the renewable energy sector, as the EU's expertise in green technologies supports India's transition to sustainable energy sources.

Bilateral investments between India and the EU

Investment flows between India and the EU play a crucial role in their bilateral relations. The EU is one of the largest sources of foreign direct investment (FDI) in India, with European investments focusing on sectors like automotive manufacturing, infrastructure, renewable energy, technology, and consumer goods. These investments are driven by India's large consumer market, skilled workforce, and business reforms such as the Goods and Services Tax (GST) and the "Make in India" initiative. On the other hand, Indian companies are also investing in the EU, particularly in IT services, pharmaceuticals, and telecommunications. Additionally, India and the EU are collaborating on public-private partnerships in infrastructure projects related to transport, energy, and urban development.

EU investments in India have reached a significant milestone, totaling over USD 117 billion, reflecting the growing economic ties between the two regions. This substantial investment is further complemented by the presence of approximately 6,000 European companies operating in India, spanning a variety of sectors such as manufacturing, technology, services, and finance. These companies not only contribute to India's economic growth but also create jobs, foster innovation, and enhance skill development within the country.

India's investments in the European Union have also been increasing significantly, amounting to around USD 40 billion. This growing investment flow from India highlights the strengthening of bilateral economic relations, as Indian companies increasingly explore opportunities in European markets. As both regions continue to expand their economic footprint, these investments are expected to drive further collaboration, trade, and economic growth, benefiting businesses and communities across both the EU and India.

Promising areas for further cooperation

Several areas offer promising opportunities for deeper India-EU cooperation, including:

Renewable energy: India and the EU can collaborate on clean energy technologies, including solar, wind, and energy storage, helping both sides meet environmental goals.

Technology and innovation: With India's growing tech hub and the EU's advanced R&D, there is significant potential for cooperation in AI, big data, fintech, and digital innovation.

Sustainable agriculture and food security: Both India and the EU can work together on sustainable farming, food security, and agri-tech innovations, with India benefiting from European expertise in organic farming and irrigation technologies.

Healthcare and pharmaceuticals: Collaboration in healthcare and pharmaceuticals can leverage the EU’s advanced medical technologies and India’s pharmaceutical manufacturing capabilities for research and production opportunities.

Potential benefits of an FTA

Negotiations for a Free Trade Agreement (FTA) between India and the EU have been ongoing, and its potential benefits are significant for both sides; an FTA between India and the EU would offer several benefits. It would provide Indian businesses better access to the EU market and vice versa, enhancing trade opportunities. The reduction or elimination of tariffs and addressing non-tariff barriers, such as regulatory differences, would further facilitate trade. The FTA would also create a more predictable investment environment, encouraging increased EU investment in India and vice versa, benefiting both economies. Additionally, it would foster deeper cooperation in sectors like technology, pharmaceuticals, renewable energy, and agriculture, leading to enhanced innovation and mutual economic benefits.

Conclusions

In conclusions, India’s trade relations with the EU are crucial for both partners’ economic growth and development. With a diverse trade portfolio, India benefits greatly from its trade relationship with the EU, and the EU enjoys access to a large and growing market in India. Bilateral investments are also flourishing, with cooperation in key sectors such as technology, renewable energy, and healthcare.

A Free Trade Agreement between India and the EU holds the promise of unlocking even more economic potential, fostering deeper cooperation, and promoting mutual prosperity. As both sides continue to strengthen their economic ties, the future of India-EU trade looks increasingly promising.