India and the European Union (EU) have been trying to negotiate a free trade agreement since 2007. Formal negotiations were stuck over stark differences after 16 rounds of talks between 2007- 2013. However, things seem to look up in the recent times, especially with the Indian Prime Minister’s visit to three European countries (Germany, Denmark and France) in May 2022. These visits acquire much significance as it comes at a time when the Russia-Ukraine conflict has affected the entire world, amid huge disruptions and upheavals already created by the COVID 19 pandemic over the last two years.  

Encapsulating below a few key takeaways from these visits, as noted in the joint statements issued by India and the respective country during the visit.

India-Germany key dialogues, May 2022

• The two countries have signed a joint declaration in May 2022 on Agro-Ecology and Sustainable Management of Natural Resources.
• It aims to benefit the rural population and small-scale farmers in India.
• Germany to provide up to EUR 300 million by 2025 for financial and technical cooperation for projects under this initiative.
• It will promote transfer of technology and scientific knowledge via exchanges, partnerships and research collaboration with the private sector.
• Germany intends to strengthen its assistance to India with a long-term goal of at least 10 billion Euros of new and additional commitments till 2030 under the ‘Partnership for Green and Sustainable Development’.
• An Indo-German Renewable Energy Partnership to be established that would focus on innovative solar energy and other renewables, electricity grids, storage and market design to facilitate a just energy transition. Towards this, Germany expressed its intention to provide assistance, including concessional loans of up to EUR 1 billion from 2020 to 2025.
• Both countries expressed strong support for the upcoming FTA negotiations between India and the EU.
• In the field of taxation, both countries welcomed the OECD Two-Pillar-Solution.
• Both countries underlined their readiness to continue the successful format of the Indo-German Fast Track Mechanism, which has been an important reference for current and future investors.

 

India-Denmark key dialogues, May 2022

• Both countries agreed that a strong partnership between India and Nordic countries can help promote innovation, economic growth, climate friendly solutions, and mutually beneficial trade and investments.
• India also attended the 2^nd India-Nordic Summit in May 2022 in Copenhagen along with Denmark, Finland, Iceland, Sweden, and Norway. The Summit emphasized on how crucial strong people-to-people contacts are through education, culture, labour mobility, and tourism (these are areas where cooperation is expanding).
• India and the Nordic countries agreed on the benefits of partnering on transforming the shipping industry towards a low carbon future. This is to be done through an exchange of good practices and technology transfers. They discussed the potential of stimulating business cooperation and investments in sustainable ocean industries in India and the Nordic countries (including maritime, marine and offshore wind sectors).
• They discussed collaborations around post-pandemic economic recovery, climate change, innovation and technology, renewable energy, the evolving global security scenario and India-Nordic cooperation in the Arctic region.

India-France key dialogues, May 2022

• Both countries have agreed on setting up a bilateral strategic dialogue on space issues, to hold the first dialogue this year at the earliest.
• India and France have strengthened cooperation between their cyber security agencies; agreed to join forces in promoting cyber norms and principles to counter cyber threats.
• India will be the first Country of the Year at this year’s Vivatech (Europe’s largest digital fair) in Paris.
• India and France reiterated their willingness to deepen their cooperation on exascale technology (which includes making supercomputers in India), based upon the successful collaboration between C-DAC and ATOS.
• The have also agreed to work together for more secure and sovereign 5G/6G telecom systems.
• Both countries reaffirmed their commitment to the strategic Jaitapur EPR project for access to reliable, affordable and low carbon energy; they welcomed the progress achieved over the last months; and have expressed the intent to achieve new progress.
• Both countries welcomed the efforts made by AFD and India Exim Bank to step up their support to sustainable finance in the Indo-Pacific region and agreed to intensify their cooperation in this area.

 

India’s economic ties with the 3 countries: An overview

• Germany: As per the Indian Department for Promotion of Industry and Internal Trade (DPIIT), Germany is the 7^th largest FDI source for India. The total FDI from Germany to India during April 2000-December 2021 was over USD 13 billion. According to Indo-German Chamber of Commerce, there are more than 1,700 German companies in India. German investments in India have been mainly in sectors of transportation, electrical equipment, metallurgical industries, services sector (particularly insurance), chemicals, construction activity, trading and automobiles. As per the Confederation of Indian Industry (CII), there are more than 213 Indian companies operating in Germany. They are involved in trade, manufacturing, R&D and innovation, and services. Indian companies have invested in Germany mainly through Mergers and Acquisitions (M&A). Investments are mostly in IT, automotive, pharma, biotech, and manufacturing sectors. Further, the presence of Indian software companies in German market is increasing.

• France: India and France have important bilateral investments, trade and commercial cooperation in sectors like IT corridors, smart cities, railways, capital and trade exchanges, skill development, etc. France is a major source of FDI for India with more than 1,000 French establishments already present in India. It is the 11^th largest foreign investor in India with a cumulative FDI stock of USD 9.83 billion during April 2000-March 2021. There are more than 150 Indian companies operating in France. French infrastructure companies are looking forward to major opportunities in Indian projects including smart cities and renewable energy.

• Denmark: As per DPIIT, the value of total direct investment inflows from Denmark to India during April 2000-March 2021 was USD 677.02 million. The major export items from India to Denmark are textiles, apparels and yarns, vehicles and components, metal goods, iron and steel, footwear, and travel goods. India imports majorly medicinal/pharmaceutical goods, power generating machinery, industrial machinery, metal waste and ore, and organic chemicals. Around 200 Danish companies have invested in India in sectors such as shipping, renewable energy, environment, agriculture, food processing, and smart urban development. Several major Danish companies have built new manufacturing factories under the ‘Make in India’ scheme. The total value of Indian investments in Denmark, as of June 2021, was about USD 450 million. Around 25 Indian companies are present in Denmark in various sectors including IT, renewable energy and engineering.

 

Major Sector Opportunities: With and without projected India-EU FTA tariff

Renewable Energy

In the Union Budget 2022-23, the Government of India allocated around USD 2.57 billion for a Production Linked Incentive (PLI) scheme to boost manufacturing of high-efficiency solar modules. Globally, India ranks 4^th in renewable energy capacity and wind power and 5^th in solar power capacity. In June 2021, India launched the Mission Innovation CleanTech Exchange, a global initiative that will accelerate clean energy innovation among countries. The increased support by the Indian Government improved the sector and has become attractive from an investors’ perspective. As India looks to meet its energy demand on its own, which is expected to reach 15,820 TWh by 2040, renewable energy is set to play an important role.

Potential EU tariff duty savings from an EU-India FTA based on India’s tariff schedule:

Major Sector	Pre-FTA EffectiveTariff Rate (%)	Post FTA EffectiveTariff Rate (%)
Renewable	Customs duty of 25% on solar cells and 40% on solar modules	Around 4% tariff rate

 

Agriculture

Agricultural products might be a small portion of the India-EU trade relations thus far, but small-farm agriculture and related activities are the mainstay of over 70% of India’s population. Amongst them women in agriculture constitute over 60% of the active workforce.

Potential EU tariff duty savings from an EU-India FTA based on India’s tariff schedule:

Major Sector	Pre-FTA EffectiveTariff Rate (%)	Post FTA EffectiveTariff Rate (%)	Tariff Gains(Million USD)
Vegetable Products	30.77 %	27.55 %	USD 10.70

 

Manufacturing Sector

Manufacturing sector plays a significant role in the output of the Indian economy and chemical manufacturing is a crucial segment with roots spread across a wide range of end-use industries. With the Index of Industrial Production (IIP) for chemical manufacturing returning to pre-COVID levels, the industry is expected to grow at a CAGR of about 9.2% by 2025. The Department of Chemicals and Petrochemicals (DCPC), Ministry of Chemicals and Fertilizers, Government of India (GoI) implemented an initiative to improve the overall competitiveness, quality and output of the chemical industry. Mandatory standards set by the Bureau of Indian Standards (BIS), public procurement policies for chemicals and petrochemicals to better trade intelligence, schemes for setting up plastic parks and adequate support for research and innovation are some of the notable initiatives that are catalyzing the industry’s growth.

Potential EU tariff duty savings from an EU-India FTA based on India’s tariff schedule:

Major Sector	Pre-FTA EffectiveTariff Rate (%)	Post FTA EffectiveTariff Rate (%)	Tariff Gains(Million USD)
Machines/Electrical	5.79%.	2.05%	USD 606.51
Chemicals	8.29%	1.13%	USD 500.78
Misc. Manufactures	10.00%	0.89%	USD 39.89

 

Textile

The EU is one of the largest markets for textiles. Cotton and silk textiles have a huge market in Europe. Indian textiles have been by far the most popular, both for their fine quality and exquisite craftsmanship. Different varieties of Indian textiles have been sold in the Western markets, for example, chintz, cossaes or khassa, bandanna and jamdani. High tariffs faced by Indian exporters in key markets such as the EU and the UK after FTA tariffs will be reduced and ease access to market.

Potential EU tariff duty savings from an EU-India FTA based on India’s tariff schedule:

Major Sector	Pre-FTA EffectiveTariff Rate (%)	Post FTA EffectiveTariff Rate (%)	Tariff Gains(Million USD)
Textiles	5.97 %	2.25%	USD 27.41
Footwear/Headgear	10.00 %	2.13%	USD 3.84

 

Automobiles

The Indian electric vehicle market was valued at USD 1,434.04 billion in 2021, and is expected to reach USD 15,397.19 billion by 2027, registering a CAGR of 47.09% during the forecast period (2022-2027). Indian cars can already be exported at 10% duty to Europe. Obviously, India will not gain much by further reduction of EU duties for cars but if Indian duties are reduced by 50% or even more, it will be a substantial reduction in tariff.

The automotive semiconductor market is expected to reach USD 48.78 Billion by 2022. The rising trend of vehicle electrification and the growing demand for advanced safety, convenience and comfort systems are the other factors driving the growth of semiconductor content in automobiles. The three fastest-growing applications are telematics and infotainment, powertrain, and safety.

Potential EU tariff duty savings from an EU-India FTA based on India’s tariff schedule:

Major Sector	Pre-FTA EffectiveTariff Rate (%)	Post FTA EffectiveTariff Rate (%)	Tariff Gains(Million USD)
Precision Instruments	5.65 %	0.13%	USD 170.30
Vehicles/Aircraft	8.71 %	5.35%	USD 143.46

 
 

Conclusion

The recent developments, as mentioned above, are quite indicative of a positive outcome with respect to the upcoming India-EU FTA negotiations. However, it is to be noted that a comprehensive trade and investment deal may need to address the roadblocks that occurred during previous negotiations between India and the EU, especially on digital trade and student and workers visas. Given the undeniable difficulties of such comprehensive negotiations, a way to continue to build momentum without the risk of an abrupt end to the negotiations would be to start with a more limited proposal focused on reducing barriers to investment in manufacturing. This would have to cover investment protection at the EU level but also improve the level playing field.