 "FTA, Free Trade Agreement, Trade Ties, Deals, Partnership")
We are in a pivotal year for the India-Europe relationship. Both regions are bracing for elections that will define their political trajectory for the next five years. Will right-wing populism dominate in both India and Europe? Will Bharat overshadow India? The outcome of these elections will dictate whether populism continues to rise or if there will be an opportunity for more traditional centrist parties to regain influence.
More mundanely, both will need to decide what kind of political and economic relationship they want to pursue, if any, in the face of what they rightly or wrongly perceive as an increasingly aggressive China, and a recalcitrant USA.
Two years ago, Indian and EU leaders agreed to launch wide-ranging negotiations on trade, investment and technology. This was a leap of faith given the failure of Free Trade Agreement (FTA) negotiations ten years earlier following PM Modi’s assumption of power and an Indian reassessment of its priorities. What changed meanwhile? On the EU side, Covid and the economic recession. The two led to a realisation that Europe must not put all its eggs in one basket, but diversify its markets and supply sources. Second, Europe saw India as a massive market for European goods and services – highly protected yet experiencing growth at a rate of 6-7 per cent per year.
Cross-border trade in goods between India and the European Union (EU) reached a total value of €115.3 billion in 2022 (€47.6 billion in exports and €67.6 billion in imports). Meanwhile, the trade relationship between the EU and India has been asymmetrical. The EU is India’s second-largest trading partner in goods, representing 10.8 per cent of its trade, which is nearly equal to the United States (11.1 per cent) and surpassing China (9.9 per cent).
On the other hand, India is ranked only as the European Union’s 10th largest trading partner, contributing 2.1 per cent to the EU’s overall trade in goods in 2022. And India’s trade volume is significantly lower compared to China (16.2 per cent), the United States (14.7 per cent), and the United Kingdom (10 per cent).
The liberalisation of trade and investment will create substantial growth prospects, particularly in sectors beyond the trade of goods, such as services, digital trade, intellectual property, and public procurement for both parties. So Europe concluded it should be the first in. And given a potentially aggressive China, Europe also sought to strengthen ties (naively?) with superficially like-minded countries such as India, in the Indo-Pacific – a region that has never been defined other than by its exclusion of China. So, notwithstanding officials’ advice that an FTA might not work, politicians as is their prerogative decided to relaunch the trade negotiations.
A bridge too far for India?
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On India’s side, the motives were somewhat different. Firstly, it was felt that such an agreement would enhance FDI inflows in the country and strengthen Prime Minister Narendra Modi’s ‘Make in India’ program and his aspiration to position India as a regional leader and a worldwide manufacturing hub. Secondly, Indian companies would benefit from technology transfers from European companies that will bring in greater efficiency. Most importantly, the FTA might enhance the prospects of the micro, small and medium enterprises (MSMEs), which form the backbone of the Indian economy, by granting them entry into untapped markets, stimulating innovation and competitiveness, and bolstering job creation and economic expansion at the grass-root level.
However, negotiations have not gone too well due to divergent ambitions on each side. For the first year nothing happened as each side blamed the other for not appointing negotiators. Now that negotiations are underway – seven rounds held so far – it has become clear that the EU’s high ambitions in the FTA are unrealistic from an Indian perspective.
In addition to the traditional efforts to remove tariff and non-tariff barriers to goods, open public procurement in India to EU companies, ease foreign direct investment (FDI), and mandate the granting of business visas to Indian entrepreneurs and service providers, the EU has sought to include in the FTA binding and potentially ‘sanctionable commitments’ on environment, climate change, human rights and sustainability into the Free Trade Agreement (FTA).
This is a bridge too far for India which may share the same goals in say a UN or G20 context, but is not prepared, as a matter of sovereignty, to be taken to dispute settlement or face trade sanctions for lack of compliance with Paris CoP 21 or ILO or environmental standards. Particularly in an election year, for India to be seen to be dancing to a European human rights agenda would be damaging.
India seeks to champion what it regards as the priority of the ‘global south’ against traditional North Atlantic domination. It was telling that at the recent WTO ministerial meeting in Abu Dhabi India’s Commerce Minister Piyush Goyal fired a shot across Europe’s bows by rejecting bringing environmental issues into the WTO rule-making agenda, and in the FTA context India has been equally clear.
EU’s moment of truth
So, the EU faces a moment of truth. The high ambition agreement just struck with New Zealand – a so-called gold standard in terms of binding human rights, climate and environmental commitments – will not wash in South Asia. Europe’s Trade Commissioner Valdis Dombrovskis has to his credit recognised this, saying just some weeks ago that the EU needs to fundamentally review (read: downgrade) its sustainability ambitions if it wants a deal with ‘India rising’, a country that – let’s face it – along with China was the dominant economy in the world till the 19th century.
Europe, as such, faces a choice now – a modest agreement with India in terms of both trade access and sustainability commitments (lots of cooperation but no sanctions?), or no agreement at all – which would damage Europe’s aims to strengthen relations with Asia’s second most important player, and remove in one fell swoop a platform for long term, non-confrontational cooperation on sustainability and even the soft internationalisation of elements of Europe’s climate green deal.
Sure pragmatism will ultimately prevail and Europe will lower its sights to secure a geopolitically useful agreement; but the selling job will be hard thereafter in the European institutions – not least due to the erroneous view that the EU-New Zealand FTA is now the ratchet for all future agreements.
Europe’s management of this difficult relationship will, in part, depend on India’s political behaviour in the coming months. Of late, there have been allegations about the democratic backsliding in India. In light of the latest ranking of India in various democracy indices by EIU, Freedom House and V-Dem, Europe is finding it more and more difficult to maintain the pretence that India is a vibrant democracy, let alone “the mother of democracies”.
‘India needs no EU approval’
However, the Indian government has accused the rankings of hypocrisy and called them “self-appointed custodians of the world who find it very difficult to stomach that somebody in India is not looking for their approval”. Further, it has raised concerns about interference with India’s sovereignty, taking into consideration some of the undue references made by some countries on internal issues like Article 370, the Citizenship Amendment Act and the recent Delhi Chief Minister Arvind Kejriwal’s arrest.
Europe suspended FTA negotiations with Thailand and the Philippines some years ago due to their human rights failings. Will it do the same with India?
Probably not. First, because allegations of India’s shrinking of its democratic space are fewer and it is being more carefully and slowly portioned out.
Two, because the EU considers that it needs India, needs its alluring market, needs this ersatz friend in the region as a counterweight to China (and India knows it).
Three, because Europe itself is less and less a poster child for democracy given the spread of far-right populism, anti-democratic behaviour and asphyxiation of judicial independence witnessed in some of its Member States, the pot can hardly call the kettle black.
And last, because the EU harbours still an unrealistic view that India can be cajoled into the anti-Russia, pro-Ukraine camp, and that an FTA can be a catalyst.
So realpolitik is likely to prevail but it may not make for a good trade agreement and it will not furnish the ideal platform for the two regions’ long term relations. There is a dire need for the EU to try to see the world from the global south perspective and reflect urgently on a more realistic agenda. Taking into consideration the after effects of the Covid-19 pandemic and the current complicated geopolitical situation, closing this deal with some compromise from both sides is the need of the hour, for Europe and India alike.
Rajdeep Singh is an Assistant Professor at the Department of Commerce, Delhi School of Economics, University of Delhi. John Clarke is Former Director of International Affairs at the European Commission
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
