March 22, 2016    3 minute read

What’s Stopping an EU-India FTA?

   March 22, 2016    3 minute read

What’s Stopping an EU-India FTA?

The European Union (EU) is India’s largest trading partner. Crucially it is where a significant chunk of Indian goods find a market, boosting Indian exports and keeping the Indian current account deficit in check. For the EU, India (currently the world’s fastest growing economy) remains an emerging untapped market where it can make inroads, unlike other emerging markets in the Americas where the USA  enjoys an advantage due to trade deals such as NAFTA. Both entities enjoy a cordial diplomatic and cultural relationship. So at a time when trade barriers are consistently coming down, the big question on many neutral observers minds is why is an EU-India free trade agreement (FTA), taking so long to implement? Negotiations for the FTA started in 2007 and as they currently stand have been stalled. In the interim, both India and the EU have signed various trade agreements with many other countries.

The benefits of a trade agreement have been highlighted by various studies. India primarily benefits in labour intensive fields such as textiles while European companies can enter India’s underdeveloped services segment ranging from insurance to banking. At first glance, an aging Europe with knowledge and expertise is a perfect companion for young and reforming India.

However, there are several reasons why progress has been slow. Both the EU and India are continents in their own right with highly diversified economies. There are bound to be industry based disagreements ranging from automobile parts to agriculture. However, the elephant in the room has been the pharmaceutical industry. European pharmaceutical majors have demanded that India tighten its intellectual rights regime. Currently Indian companies reverse engineer several generic drugs and sell them in India and the developing world (mostly Africa) at much cheaper rates than their European counterparts. Considering the Indian healthcare sector is mostly private as government spending on healthcare is a measly 1% of GDP, having cheap drugs available over the counter is a necessity for the poor. Naturally any government in India is not going to compromise on this highly politically sensitive issue. It does not help either that the new Indian government (elected in May 2014) first wants to pass reforms on tax, labour and land to make India more competitive globally before signing any comprehensive agreement. Progress on the said reforms has been painfully slow as the government lacks numbers in the upper house. All of the above has resulted in a status quo with both sides making diplomatic statements.

That still does not explain why the European Union has been successful in getting FTA’s signed with other developing and developed countries. Maybe the time has come for the EU to be more flexible when it comes to India. Rather than think about India as a country, the time has come to think about India as a continent. Instead of an EU-India FTA, there could be an FTA between different European nations and India or Indian states. Currently, German and Swiss interests (in automobile manufacturing and pharmaceuticals) on trade with India are a block for a country like the UK which is poised to benefit immensely due to sharing common ground in said legal, banking and insurance sectors. At a time when the UK votes to stay in or out of the European Union, giving it the flexibility when it comes to India to conduct trade deals may just be a vote clincher, especially for the substantial Indian community settled in the UK.

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