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Transatlantic Take

The EU-India Partnership: Follow-up, Focus, and Free Trade

February 08, 2021
by
Maurice Fermont
7 min read

This article is a part of Agenda 2021, an edited series where experts provide ideas for strengthening U.S.-India and Europe-India cooperation in five different policy areas. It is part of GMF’s India Trilateral Forum, conducted in partnership with the Swedish Ministry for Foreign Affairs and the Observer Research Foundation.

For almost seven years the EU and India have searched for ways to revive their partnership. After a successful summit in July 2020, progress may finally be on the horizon. The pieces have been there for a long time: shared values, commitment to rules-based multilateralism, and mutual economic opportunities. What has been lacking is a clear understanding of how to put these together to form a coherent picture, and thereby putting ambition into practice. Can the two sides finally see the bigger picture in 2021?

The outcomes of last year’s summit present a real window of opportunity. The creation of a High-Level Dialogue on Trade at ministerial level has been a longstanding European ask to achieve greater coordination and inject political guidance into an at times fraught economic relationship. After years of limited enthusiasm, it seems like India has moved the EU up on its priority list. The EU is its largest trading partner (with 11.1 percent of its total trade in 2019, worth around €80 billion) and its top foreign investor (making up 18 percent of inflows that same year)

The outcomes of last year’s summit present a real window of opportunity. The creation of a High-Level Dialogue on Trade at ministerial level has been a longstanding European ask to achieve greater coordination and inject political guidance into an at times fraught economic relationship.

Still, there are key challenges to overcome in order to develop the strategic partnership in earnest: follow-up, focus, and free trade. There is hope that political guidance from India’s government will help circumvent bureaucratic obstacles hindering closer cooperation with the EU. But the key question for this year is whether India will be able to remain focused on the EU in the busy arena of international diplomacy. It will require more than economic potential to make that happen. And this also depends in part on the extent to which the EU can maintain its relevance for India as a valuable partner. The trend here looks positive. Geopolitical developments in recent years have driven member states closer together and enabled the EU to act more strategically in several policy areas, including its India policy. Another challenge is about India’s economic openness. The mixed messaging from the country in recent years, such as the launch of the Make in India campaign aimed at attracting greater investment, paired with the sudden cancelation of all its bilateral investment treaties with European partners, has sent protectionist signals and begs the question whether the government is truly committed to creating an enabling business environment for trade and investment.

Nevertheless, the economic fallout of the coronavirus pandemic perhaps provides a greater impetus to bringing the EU and India together than any policy dialogue could ever have achieved. India’s economy has been particularly affected, with the IMF estimating that it has shrunk by just over 10 percent in 2020, more than any other large economy. Trade and investment will likely play an important part in the global economic recovery. Rather than leading to de-globalization, the economic impact of the pandemic has driven European firms toward diversification in their search for greater supply-chain resilience. India wants to benefit from this supply-chain restructuring and attract these firms, creating new opportunities for cooperation with the EU.

Although negotiations on the free trade agreement have stalled since 2013, it remains an important vehicle to enable economic gains. Some commentators argue that the EU should abandon its focus on a comprehensive agreement with India and seek instead partial ones in areas of strategic importance. The two are not mutually exclusive, however. A free trade agreement, while comprehensive, would not cover everything and fcooperation in strategic issue areas like technology or connectivity would likely be facilitated through separate agreements. At the same time, the economic potential of a free trade agreement between the EU and India remains huge, with pre-coronavirus estimates indicating a resulting annual GDP increase for India of 1.3 percent.  There is no alternative that can achieve similar results.

Developments within the EU also warrant a fresh look at the opportunity of relaunching negotiations on a free trade agreement. Brexit will alter the EU’s interests in these negotiations, with issues like Mode 4 liberalization of services likely no longer a major sticking point. Second, the EU’s Trade Policy Review in 2021 will likely lead to aligning trade priorities more with the European Commission’s ambition to be more “geopolitical.” With negotiations in limbo, it may be tempting to focus on other priorities, but as the EU-Mercosur free trade agreement—which was concluded 20 years after negotiations began—demonstrates, slow progress does not mean the agreement should be forsaken. 

Whether or not the negotiations can be relaunched in the short term, concluding and ratifying the agreement would likely take a few years. In the meantime, both sides should deliver more on the EU-India Investment Facilitation Facility that was introduced in 2017 as a mechanism to improve the ease of doing business in India and facilitate greater European investment. This is particularly important at a time when India is trying to win over businesses that are restructuring their global supply chains. While India has improved its position in the World Bank’s Ease of Business Index, jumping from 142nd in 2014 to 63rd in 2019, this masks continued difficulty in certain areas. It still ranks 136th in starting a business and 115th in taxation even after the introduction of the Goods and Services Tax, and burdensome licensing requirements are frequently mentioned as top business concerns. By focusing on bringing these areas that are of key importance to business in line with other areas of progress, India would be able to attract greater investment. This is even more important at a time when it has no bilateral investment agreements in place with European countries anymore. 

Beyond trade, the EU and India should prioritize connectivity cooperation this year. India’s infrastructure needs are enormous, and the EU has recently developed its own strategy on EU-Asia connectivity. In implementing this strategy, public-private partnerships and investment guarantees could facilitate European companies to undertake connectivity projects in India. By partnering with India, the EU would demonstrate its value as a key global actor. This could also help India make progress in its climate and sustainable development goals—one of Europe’s top priorities.

Finally, it would be a major win for both sides if first steps could be made in data and technology cooperation. This is especially important as the U.S.-China trade conflict increasingly focuses on technology and the use of export controls is forcing firms to choose which markets they want to operate in. Strong cooperation in telecommunications, artificial intelligence, and common standards that abide by the principles of democratic societies would be highly beneficial for the EU and India as well as check actors who seek to undermine these principles. 

Strong cooperation in telecommunications, artificial intelligence, and common standards that abide by the principles of democratic societies would be highly beneficial for the EU and India as well as check actors who seek to undermine these principles.

Geopolitics is driving the EU and India closer together. It has also led to a flurry of proposals for plurilateral cooperation among democracies in the economic and security realm, such as in the proposed D10 or technology alliances. While these proposals are indicative of the stalemate in global governance, they also indicate a degree of energy and urgency among some countries to defend norms and advance economic rulemaking. Although the business community generally supports ideas that strengthen the global market economy, these ideas are currently are not well developed enough to act as effective fora for EU-India cooperation. If the closely aligned members of the Organization for Economic Co-operation and Development, for example, cannot agree on common rules on digital taxation, then how are new structures meant to deliver concrete outcomes? Consensus takes years to build. The EU and India are better off spending this year breathing life into their strategic partnership by doubling down on follow-up, focus, and free trade. This is what the EU-India Summit in May should be all about.

Maurice Fermont is senior advisor on international trade and investment at BusinessEurope. BusinessEurope is the leading advocate for growth and competitiveness at the European level, standing up for companies across the continent and actively campaigning on the issues that most influence their performance.

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