The India–European Union Free Trade Agreement, under negotiation for nearly two decades, appears to be entering its decisive phase. Renewed momentum since 2022 has brought both sides closer to a deal, with negotiators narrowing differences across goods and services. Yet, even as optimism builds around a potential signing, key concerns remain unresolved-particularly from India’s perspective on non-tariff barriers and future compliance costs for exporters.

According to a recent report by Jefferies, the most significant challenge for India lies not in headline tariff cuts but in the European Union’s regulatory framework governing imports. The brokerage highlights that while traditional tariff negotiations are advancing, there is limited scope for easing non-tariff barriers that could materially affect India’s export competitiveness over time.

At the centre of this concern is the EU’s Carbon Border Adjustment Mechanism (CBAM)-a policy designed to impose a carbon price on certain imported goods to align them with the cost borne by domestic European producers. CBAM aims to prevent “carbon leakage,” where production shifts to countries with less stringent climate regulations. For Indian exporters, especially in carbon-intensive sectors, this could translate into higher compliance costs and margin pressure, even under an FTA framework.

Jefferies notes that India has limited leverage to dilute such mechanisms, as CBAM is rooted in the EU’s broader climate strategy rather than trade policy alone. This distinction matters. While tariffs can be negotiated bilaterally, climate-linked regulations are likely to remain non-negotiable, raising questions about how much incremental benefit Indian exporters can extract from preferential market access.

Beyond goods, services trade is shaping up as the other major battleground. India is expected to push hard for easier access for its services exports, particularly in information technology, healthcare, and other professional services. Smoother movement of skilled workers and improved visa access for India’s young workforce are likely to be central demands. From New Delhi’s standpoint, gains in services could offset some of the constraints faced in goods trade due to regulatory barriers like CBAM.

The EU, however, is expected to seek reciprocal access to India’s services ecosystem. According to the report, European negotiators may push for greater entry into India’s financial, legal, and other high-value services sectors. This sets up a delicate balance: India’s strength in exporting talent versus the EU’s interest in penetrating India’s domestic services markets.

Sectorally, the agreement has asymmetric implications. Jefferies identifies textiles as a potential beneficiary. The EU imports roughly USD 125 billion worth of textiles and apparel annually, yet India’s market share remains modest at 5–6 percent, compared with China’s roughly 30 percent. An FTA could help Indian exporters by aligning tariff treatment with South Asian peers, especially at a time when steep U.S. tariffs have disrupted traditional export channels. However, even here, compliance with environmental and labour standards will remain critical.

In automobiles, the dynamics are more nuanced. The EU is likely to seek lower tariffs on car exports to India, where duties can reach as high as 100 percent. Jefferies suggests that any liberalisation is likely to be gradual-either through phased tariff reductions or quota-based duty-free imports. Importantly, the report cautions that the impact on Indian auto players may be limited, given existing localisation by European manufacturers and intense competition in the entry-to-mid segments of the domestic market.

Other sectors flagged for increased competition include wines, spirits, and light engineering goods. In pharmaceuticals, tariffs are already close to zero, but the EU’s complex compliance and regulatory requirements remain a hurdle. Any easing on this front could act as a meaningful positive for Indian pharma exporters, though such changes would need to be explicitly built into the agreement.

From a macro perspective, the stakes are high. India’s annual goods trade with the EU is estimated at around USD 130 billion, broadly comparable to its trade with the U.S. and China. Exports to the EU, at roughly USD 75 billion annually, account for about 17 percent of India’s total goods exports. Since 2022, India has also enjoyed a goods trade surplus of USD 10–15 billion with the EU, supported by petroleum product shipments following the Russia–Ukraine conflict and a sharp rise in electronics exports, particularly mobile phones.

Negotiations between India and the EU first began in 2007 but stalled by 2013 due to complexity and political sensitivity, especially around agriculture and dairy. Consistent with recent trade agreements, these sectors are expected to remain largely excluded this time as well, reducing political friction but also limiting the breadth of the deal.

Market and policy watchers now see the India–EU FTA as a strategically important but structurally constrained agreement. While it could improve predictability and market access in select sectors, regulatory challenges-especially climate-linked measures-are likely to shape real-world outcomes long after the signing ceremony.