EFTA trade agreement, India’s first with Europe, comes into effect

India, on March 10, 2024 signed a trade and investment agreement with the European Free Trade Association (EFTA), comprising Iceland, Liechtenstein, Norway, and Switzerland.

The trade pact between India and the European Free Trade Association (EFTA) has come into effect from October 1 after 15 years of negotiations and more than a year since an agreement was signed.

The pact, known as Trade and Economic Partnership Agreement (TEPA), comes with a rare commitment by the EFTA grouping - Switzerland, Iceland, Norway and Liechtenstein - to invest $100 billion in India over the next 15 years to create potentially one million direct jobs.

Why is Matters?

The TEPA is significant as it is India’s first-ever trade pact with a European grouping. India recently signed a free trade agreement (FTA) with the United Kingdom (UK) which will take about a year to come into effect, while negotiations for a deal with the European Union (EU), comprising of 27 nations, are currently underway with several rounds of discussions.

The India-EFTA trade pact is even more significanct for Indian exporters in light of the Trump administration’s tariff hikes on a range of imports. Duty-free access to affluent European markets such as Switzerland and Norway offer Indian manufacturers and service providers a crucial hedge.

The agreement not only opens up high-value segments in pharmaceuticals, engineering goods, textiles and IT services but also ensures long-term policy stability and investment flows into export-oriented sectors.

Switzerland is India’s largest trading partner within the bloc, while trade volumes with Iceland, Norway, and Liechtenstein are limited as of now.

What’s in it for Indian Consumers?

Under the India-EFTA free-trade agreement, Indian customers will get access to high-quality Swiss products such as watches, chocolates, biscuits, wines, apparel and clocks at lower prices as India will phase out customs duties under the trade pact on these goods over 10 years.

Over time, tariffs will fall on everything from Swiss machinery and medical equipment to fish oils and even smartphones.

India’s offer to EFTA covers 82.7 percent of tariff lines, which are over 95 percent of EFTA exports. Over 80 percent of these imports are gold, where there is no change in effective duty. Sensitive sectors including pharma, medical devices, processed food, dairy, soya, coal, and certain agricultural products have been protected from duty cuts by India.

How do Indian exporters Stand to Gain?

Indian labour-intensive sectors, such as certain agri produce like tea and coffee, fruits, processed, textiles, marine products, leather, sports goods, toys, and gems and jewellery, will get greater market access in the member countries of the EFTA, giving a boost to exports.

Besides, high-tech exports such as medical electronics, diagnostic devices, smart sensors, and EV components could tap into Europe’s high-income markets.

With Switzerland acting as a services hub to the EU, 40 percent of its services exports head there, Indian firms can also use it as a springboard to reach European Union customers, government officials said.

Caveats in the $100 Billion Investment Promise

As per the fineprint of the agreement signed in New Delhi on March 10, "EFTA states shall aim to increase foreign direct investment from investors of the EFTA States into India by $50 billion within 10 years from the entry into force of this Agreement and an additional $50 billion in the succeeding five years."

However, the $100 billion investment promised by EFTA nations will hinge on India maintaining a nominal GDP growth rate of around 9.5 percent in US dollar terms in the next 15 years, which is in line with the South Asian nation's past growth rates, as well as on the anticipated benefits of a full implementation of the agreement.

The investments are expected to flow in from private firms and the commitment is not a governmental guarantee but rather a governmental initiative to nudge businesses towards investing in India.