India eyes quick interim deal with European Union

European Commission President Ursula von der Leyen and Prime Minister Narendra Modi

The government is looking to expedite an early-harvest deal with the European Union (EU), a person aware of the developments said.

A section of exporters has also urged the government to expedite the first tranche of the deal with the EU. However, concluding an early-harvest deal by July-end remains tricky, given that several issues between the bloc and India remain unresolved.

The Indian government may also want to take a call on the contours of the deal after monitoring the progress of the trade agreement between the US and EU.

“The EU-US deal is being aimed for this month-end. If EU and US go on a warpath, and talks fail then we can replace some of the US’s exports to the European countries. India may wait for their deal to happen,” a  source said.

An early harvest deal is an agreement between countries or regions that allows removal of trade barriers on certain goods or services, while leaving other items to be liberalised later.

In February, India and EU agreed to ramp up talks for the proposed FTA and close it by the end of 2025 to tide over impending troubles from volatile trade policies but then decided to reach an interim deal first by July-end.

“If not July-end, surely we should have a deal with the EU by the end of the year,” the sources added.

India-EU trade relationship

India and the EU held another round of trade talks in May.

The EU is India's largest trading partner, accounting for 12.2 percent of its trade, ahead of the US (10.8 percent) and China (10.5 percent). The 27-country bloc is the second-largest destination for Indian exports after the United States.

India is EU’s ninth-largest trading partner, accounting for 2.2 percent of its total trade in goods in 2023, well behind the US, China and the UK.

Carbon & cars

India and the EU would have to address both tariff and non-tariff barriers to reach an agreement.

While India wants a three-year moratorium on EU’s Carbon Border Adjustment Mechanism (CBAM) for its Micro Small and Medium Enterprises (MSMEs), the European bloc is pushing for greater access for its whisky, wine and cars, the person cited above said.

EU’s CBAM, a measure approved in 2023 and expected to be implemented from January 2026, seeks to impose tariffs on imports of high-carbon goods, including steel, cement and aluminium, aiming to reach net-zero emissions by 2050.

Commerce minister Piyush Goyal has on a number of occasions highlighted issues surrounding EU’s carbon tax and deforestation initiatives, which are expected to increase the cost of Indian exports.

On May 6, Goyal said India would retaliate and would introduce similar norms against the UK in case it introduces such trade barriers.

New Delhi is keen on using the deal with United Kingdom as a template to offer limited cuts on European cars and alcohol but the European bloc wants more, a second person said.

“The UK can serve as a template for tariff cuts on automobile and whisky and wine but the EU may want a better offer,” this person said.

In its FTA with UK, India has agreed to halve tariffs on whisky from 150 percent to 75 percent once the agreement comes into force and reduce the levy to 40 percent in 10 years.

In a move that is seen benefiting high-end British cars, India slashed tariffs on automobiles to 10 percent under a quota.

These concessions were extended based on engine capacity for Internal Combustion Engines (ICE), officials said. For electric vehicles, the concession is linked to price bands.

Calls for better access to Indian markets come at a time when the EU has seen a drop in automobile exports. In 2024, the bloc exported 5.4 million cars, a drop of 13.2 percent from 2019.

The bloc exported €29.8-billion worth of alcoholic beverages in 2024, 10.9 percent more than in 2019, with wine dominating shipments.

At present, EU cars in India face a basic customs duty of up to 125 percent along with additional taxes, while European wine and whisky are subject to levies of over 150 percent.