This article is part of the Global Policy-ORF publication — A 2030 Vision for India’s Economic Diplomacy.
India’s partnership with the European Union (EU) has come a long way since the signing of the strategic partnership in 2004 that led both partners to intensify and deepen their cooperation through summits, dialogues and high-level working groups. Their economic relation has emerged to be a cornerstone of their partnership and has evolved from that of development aid to development partnership.
Snapshot of India-EU economic ties
India and the European Economic Community established diplomatic relations in the 1960s, cementing it in 1983 with the establishment of the Delegation of the European Commission to New Delhi. The 1994 Cooperation Agreement between India and the EU opened the door for larger political and diplomatic interactions. The recognition of each other’s potential led to the signing of the strategic partnership in 2004 with emphasis on developing international cooperation to address issues related to multilateralism, intensification of economic interactions and furthering sustainable development. The signing of the strategic partnership led to the release of the first joint action plan (JAP) in 2005, which defined mutually agreed objectives and proposed a range of activities in the areas of economic, political and development cooperation. The high-level trade group established under the JAP recommended the initiation of negotiation of a free trade agreement (FTA); with negotiations beginning in 2007 focused one limiting up to 90 percent of tariffs and the liberalisation of services and market access.
While India’s bilateral relations with EU member states — like Germany, France and the UK — developed substantially, it did not lead to the expected intensification of ties with the grouping.
Despite a robust start in the 2000s, the India-EU partnership lost much of its momentum over the next decade. While India’s bilateral relations with EU member states — like Germany, France and the United Kingdom (UK) — developed substantially, it did not lead to the expected intensification of ties with the grouping. India and EU’s pre-occupation with their neighbourhoods contributed to the relations taking a backseat. This was further affected by the lack of progress in the FTA and the 2012 arrest of Italian marines, which not only affected ties between Italy and India but also led to increased tensions with the EU<1>
. During this period, the EU largely turned its attention to China as a key partner and larger market in Asia.
However, the global geopolitical scenario has changed over the past few years. The uncertain US policy outlook under former President Donald Trump, the upending of the liberal multilateral order and the rise of an assertive China has led both India and EU to realise that a substantive engagement was imperative. Moreover, given India’s growing regional and international relevance, it is crucial for the EU to renew its focus on developing the economic, political and defence partnership. Also, since 2016, both India and the EU, through their various joint statements and initiatives, have intensified their partnership in crucial strategic areas, including climate change, sustainable development and military-to-military dialogue.
Given India’s growing regional and international relevance, it is crucial for the EU to renew its focus on developing the economic, political and defence partnership.
Trade and economics remain at the core of the India-EU partnership. Since the 1970s, India has been a beneficiary of preferential tariffs for its exports under the EU’s generalised system of preferences, which reduces import duties for almost 66 percent of product tariff lines with an aim to support various industrial sectors in the developing countries. In 2019-20, India’s trade with the EU stood at US$ 104.93 billion (INR 767,143 crore), comprising of US$ 53.73 billion (INR 392,820 crore) worth Indian exports and US$ 1.2 billion (INR 374,323 crore) of imports<2>
. Over the April 2000-March 2020 period, foreign direct investment inflows from the EU to India were valued at US$ 109.55 billion (INR 800,920 crore)<3>
. Additionally, over 6,000 EU companies are said to operate in India, providing direct and indirect employment to over six million people<4>
. With the establishment of an investment facilitation mechanism for EU investments in India in 2017, there is a renewed focus on facilitating ease of doing business norms for EU investors in India. This mechanism allows for close coordination between the Indian government and the EU to formulate solutions to the issues and problems faced by EU investors in operating in India<5>
Strategically, the EU is placing renewed attention on India, which is visible through various policy documents it has published in the past few years. In the Global Strategy released in 2016, the EU highlighted that “In light of the economic weight that Asia represents for the EU — and vice versa … the EU will deepen its economic diplomacy in the region, working towards ambitious free trade agreements with strategic partners such as Japan and India”<6>
. In its 2018 Strategy on India document, the EU further acknowledged its interest in promoting India’s advancement and treating India on an equal footing — “A strong modernisation partnership between the EU and India should also support the EU’s job creation, growth and investment objectives, and help promote sustainable connectivity for Europe and Asia”<7>
. In 2019-20, the EU accounted for only 11 percent of India’s total trade, while India accounted for only 1.9 percent of the EU’s trade<8>
, illustrating the huge untapped potential in India’s economic ties with the EU given the size of their respective economies.
With the establishment of an investment facilitation mechanism for EU investments in India in 2017, there is a renewed focus on facilitating ease of doing business norms for EU investors in India.
Emerging development partnership
In recent decades, India has shifted from being a net recipient country to a provider of development cooperation under the aegis of South-South cooperation. For this, India has adopted a multi-pronged outlook that includes trade, investments and cooperation agreements, leading to increased bilateral visibility and capabilities. Its development compact includes “capacity-building and skills transfer, concessional finance (further divided into grants and lines of credit), preferential trade, investment, and technical cooperation”<9>
. Between 2008 and 2020, India disbursed approximately INR 61,067.58 crore (US$ 8.35 billion) as grants and loans under various development compacts<10>
India-EU development cooperation spans several decades and encompasses issues like health, education, poverty reduction, water and sanitation. The 2005 JAP highlighted that since 1976, the European Commission has committed 2 billion euro (US$ 2.4 billion) in development cooperation to India and recognised that “India is itself becoming an increasingly active player in evolving development policy”<11>
, reflecting the altered European view of India as an emerging economic powerhouse. Also, the Indian government’s decision to limit the number of international donors marked a concrete step towards changing the dynamics of development cooperation with the EU. In 2014, the EU ended its Development Cooperation Instrument (DCI) with India; between 2007 and 2013, the total EU assistance to India through the DCI was 450 million euro (US$ 545 million).
The Indian government’s decision to limit the number of international donors marked a concrete step towards changing the dynamics of development cooperation with the EU.
Since 2014, the India–EU partnership has changed from the donor-recipient paradigm to that of cooperation through several instruments.
The first is the combining of loans from international financial institutions and EU grants for developmental needs with the combined DCI and Asian Investment Facility portfolio of 180 million euros (US$ 218 million) in commitments over 2014-2020<12> for investment in the health sector, smart cities initiative, sustainable urban development and mobility<13>.
The second key development cooperation instrument is the European Investment Bank (EIB), which has provided loans for three different metro projects in India — 450 million euro (US$ 545 million) for the Lucknow metro, 600 million euro (US$ 727 million) to support two metro lines in Pune, and 500 million euro (US$ 606 million) for Bengaluru<14>. With the signing of 2019-20 JAP, the EU and India also decided to step up their cooperation in the “development of smart and sustainable urbanisation,” complimenting the ‘Make in India’ plan that “presupposes quality and resilient infrastructural development”<15>.
Third, the education and science and technology sectors have emerged as key areas of development cooperation. India is the largest recipient of Erasmus Mundus funding for higher education<16>. Moreover, both sides have committed themselves to cooperate further through initiatives like the Global Initiative of Academic Networks and Erasmus+. India and the EU have also partnered on various projects related to climate change, resource efficiency, renewable energy and digital cooperation<17>, with the statements released after the conclusion of the 2017 and 2020 summits setting a strong mandate for further development cooperation in these areas<18><19>.
India and the EU have also committed to enhance their collaboration in other countries; Roadmap 2025 lays emphasis on “launch concrete trilateral/cooperation projects in pilot partner countries…and to establish an India–EU Annual Review on Development partnership in third countries”<20>. They can also create a toolbox of partnership that can include information sharing, regular dialogues and financial assistance to enhance their developmental partnership, and can further their dialogue platforms by identifying new areas (geographical and issue-based), leveraging respective knowledge and resources and mobilising multiple actors (governmental and civil society).
The development partnership provides India and the EU a platform to formulate a comprehensive approach and policy framework towards various global challenges.
Another key area of development cooperation is the 2030 Agenda for Sustainable Development. India and the EU are working closely on several fronts that cover the Sustainable Development Goals (SDGs) — such as the smart cities initiative (SDG 11), clean water and sanitation (SDG 6) and climate action (SDG 13). The two have become key stakeholders in global efforts to combat climate change through the framework of Clean Energy and Climate Change Partnership, 2017<21>.
Overall, the development partnership provides opportunities to India and the EU to collaborate on the bilateral issues and gives them a platform to formulate a comprehensive approach and policy framework towards various global challenges.
Elusive FTA: Roadblocks in negotiations
Negotiations for the India-EU comprehensive FTA — the Broad-based Trade and Investment Agreement (BTIA) — were initiated with the establishment of the high-level trade group during the 2006 summit. But the BTIA is nowhere near finalisation despite 16 rounds of discussions due to several contentious issues, including the trade in services and goods, intellectual property rights (IPR) and data security.
While India has demanded greater access to the European market under Mode 1 and 4, the EU has demanded increased access to the Indian economy under Mode 3.
In trade in services, the areas of disagreement are in Mode 1, 3 and 4, as defined under the General Agreement on Trade and Services (GATS; see Table 1 for definitions of the three modes). Mode 1 and 4 are the areas where India has asked for greater access. In 2015, the total outsourcing opportunity from Europe was worth about US$ 52 billion (INR 380,172 crore)<22>. Given the economic slowdown in many of the European countries, it remains highly unlikely that the EU will outsource services to India or provide Indian professionals with preferential access to the larger European market. While India has demanded greater access to the European market under Mode 1 and 4, the EU has demanded increased access to the Indian economy under Mode 3. The EU is a major proponent of liberalising under Mode 3 in major markets like India and in sectors like banking, retail and insurance. But India has opposed such access to its financial sector due to domestic opposition and the lack of political consensus. Crucially, “India’s demand for greater market access in Mode 1 and 4 remains dependent on its ability to meet the EU’s demands in Mode 3”<23>.
Table 1: Mode 1, 3 and 4 of General Agreement on Trade and Services
|Mode 1: Cross-border
||A user in a country receives services from abroad through its telecommunications or postal infrastructure. Such supplies may include consultancy or market research reports, tele-medical advice, distance training, etc.
|Mode 3: Commercial presence
||The service is provided within a country by a locally-established affiliate, subsidiary, or representative office of a foreign-owned and — controlled company.
|Mode 4: Movement of persons
||A foreign national provides a service within a country as an independent supplier (e.g., consultant, health worker) or employee of a service supplier (e.g. consultancy firm, hospital, construction company).
Source: WTO <24>
The second area of divergence is trade in goods. The EU has demanded the lowering of tariffs on wines, spirits, dairy and automobiles, but India has raised concerns that this could result in European imports flooding the market without any reciprocal access to the European market. Similarly, India has demanded the lowering of non-tariff barriers in the sanitary and phyto-sanitary sectors, and technical barriers imposed by the EU. The strict labelling and trademarking norm imposed by the EU has led to the reduction of Indian exports to the European market<25>.
The EU expects India to strengthen its IPR regime, which may have a critical impact on India’s vast pharmaceutical and generic drug sector.
India and the EU have also been unable to reach an agreement on IPR. The EU expects India to strengthen its IPR regime, which may have a critical impact on India’s vast pharmaceutical and generic drug sector. Moreover, Indian legislation bans both “ever-greening of patents (extending the time coverage of patents just before they expire, through minor changes to the product) and the exclusivity of test data (protection of clinical trial data), saying they jeopardise the sale of low-priced generic drugs and chemicals”<26>. Also, the EU’s demand of ‘data exclusivity’ will lead to the nullifying of previously existing data on the safety and effectiveness of the generic drug, forcing pharma companies to seek fresh approvals from the national health authorities and conducting expensive clinical trials before producing the medicines. All this would negatively impact India’s vast and lucrative pharma sector<27>.
Another major concern for India is to get recognised as a data-secure country by the EU. Without this, the flow of sensitive data can be hindered, increasing operating costs for Indian businesses in the EU. However, given EU concerns over its regulatory norms and data-privacy standards, it remains highly unlikely that the grouping will agree to this demand.
Other areas of concerns for the Indian side are legally binding clauses on human rights, and social and environmental and labour standards. The EU also appears uneasy about India’s termination in 2016 of existing bilateral investment treaties (BIT)<28>, with countries like France and the UK to renegotiate older pacts on the basis of a new model of the BIT approved in 2015. Another contentious aspect is the Investor-State Dispute Settlement mechanism in which EU wants detailed provisions while India is reluctant to accept this provision.
The EU’s demand of ‘data exclusivity’ will lead to the nullifying of previously existing data on the safety and effectiveness of the generic drug, forcing pharma companies to seek fresh approvals from the national health authorities and conducting expensive clinical trials before producing the medicines.
At the 2020 India-EU summit, both sides “reaffirmed their commitment to work towards a balanced, ambitious and mutually beneficial trade and investment agreements”<29> and established a new mechanism of a ministerial level dialogue to “provide political guidance to the bilateral trade and investment relation and continue the dialogue on a regular basis”<30>. However, the resumption of negotiations largely went unaddressed.
Three issues and the way forward
India and the EU have emerged as important stakeholders in the multilateral global system. Economic cooperation between the two sides has been grown despite the stalled FTA negotiations. Although India and the EU have not been able to tap into each other’s strengths, there is tremendous opportunity to overcome long-standing differences in trade relations. Three issues will likely define their future economic trajectory — Brexit, FTA negotiations and post-COVID-19 economic recovery.
Since 2019, India and the UK have been the top five investors in each other’s economies. The UK’s exit from the EU will not only have an economic implication for the grouping but for the larger world economy, and India is not immune to this phenomenon. India considers the UK as a gateway to continental Europe<31> and with it exiting the EU, Indian firms will lose this advantage. Additionally, Indian firms with EU-wide operations and headquarters in the UK will likely be impacted due to the border restrictions. However, in a survey of 45 firms conducted in the immediate aftermath of the Brexit referendum in 2016, about half of the respondents said they “do not intend to set-up separate operations in any other EU country in the near term following Brexit”<32>. Also, about 63 percent of the companies surveyed said that signing a “comprehensive FTA with the UK on goods, services and investments may help mitigate any negative impact of Brexit on India”<33>. Brexit could provide India the opportunity to reset its trade and economic ties with the UK and the EU<34><35>. India and the UK must consider launching their own trade deal negotiations and build on the already robust bilateral economic ties.
Brexit could provide India the opportunity to reset its trade and economic ties with the UK and the EU.
On the other hand, India and the EU have already showcased their readiness to address the sticky points in BTIA negotiations. An assessment on the potential impact of the FTA found that the likely gain from the pact will be between 8 billion euro (US$ 9.7 billion) and 8.5 billion euro (US$ 10.3 billion), and that exports to India from the EU countries will increase by 52 percent to 56 percent, while imports from India will increase by between 33 percent and 35 percent<36>. The BTIA is crucial because both India and the EU are large markets and India’s demographic dividend can help the EU with the movement of skilled labour and professionals. Also, the increased market access will further integrate the services sector, increasing the scope for cooperation and joint ventures.
Negotiators from both sides must look beyond the multiple differences to focus on the complementarities. Given the reluctance to agree to the other’s demands, India and the EU should begin by negotiating less difficult sectors and aim for greater cooperation in new areas like green technology and artificial intelligence, which could lead to a more balanced outcome in the talks. They need to find a middle ground to address the core issues. The conclusion of the BTIA will not only strengthen India and the EU’s global standing but can also provide an opportunity to further integrate their partnership on various shared goals like green economy, sustainable development and resource efficiency.
The priority area for India and the EU remains the post-COVID-19 economic recovery.
The priority area for India and the EU remains the post-COVID-19 economic recovery. Over the past few months, the pandemic has expanded into an economic crisis, a geopolitical shock and a social challenge. Tackling its impacts requires multilateralism, cooperation and solidarity. This is where India’s partnership with the EU can shine.
While the euro area economy is expected to contract by 7.8 percent<37> in 2020, the Indian economy is expected to contract by 10.3 percent<38>. The pandemic has exposed the weaknesses in the global economic system and the overdependence on the China-dominated international supply chains. This has led many countries to re-evaluate their economic policies and push for self-reliance. India and the EU are not immune to these debates. India is keen to promote itself as an alternative manufacturing hub and an innovation destination to become the “nerve centre of global supply chains”<39>. This is also the vision of the Atmanirbhar Bharat policy, which aims to merge domestic production and consumption with the global supply chains. In the post COVID-19 world, India-EU economic relations will not be defined just by BTIA negotiations but also on efforts to become part of reliable supply chain networks.
The linking of research efforts can help India and the EU leverage their capacities to find innovative solutions for healthcare.
There are on-going debates in the EU over the need to diversify supply chains to reduce reliance on other countries for crucial products like pharmaceuticals<40>. This could be one area for developmental cooperation between India and the EU. India’s medical diplomacy during the pandemic (distribution of the anti-malarial drug hydroxychloroquine) and the release of vaccines has drawn it plaudits<41><42>. India’s pharmaceutical manufacturing capabilities coupled with access to European healthcare technologies can provide new avenues for enhancing partnerships and promoting innovation between the partners<43>. The two sides can explore collaboration between their hospitals and research centres for the exchange of information and best practices on scientific developments and to conduct joint research. The linking of research efforts can help India and the EU leverage their capacities to find innovative solutions for healthcare. Overall, this will also present new opportunities for joint ventures and enhanced trade between the two sides. Multilaterally, India and the EU can work to strengthen the World Health Organisation and bring together various stakeholders, health experts and global economic institutions to prepare a coordinated approach to handle the current and any future health crisis.
Intensified dialogue and deliberations, a realignment of trade policies and emerging prospects of collaboration in the post-pandemic world provide India and the EU an opportunity to transform their economic ties into a robust strategic partnership.
<1> Douglas Busvine, “EU-India summit off as Italian marines case rankles,” Reuters, 16 March 2015.
<2> Ministry of Commerce and Industry, Foreign Trade (Europe), Government of India, 30 December 2020.
<3> Ministry of Commerce and Industry, Foreign Trade (Europe)
<4> European Union, EU-India Fact Sheet, European Union, 2018.
<5> “European Union & India establish an Investment Facilitation Mechanism,” EEAS, 17 July 2017.
<6> European Union, Shared Vision, Common Action: A Stronger Europe - A Global Strategy for the European Union’s Foreign and Security Policy, European Union, June 2016.
<7> Joint Communication to the European Parliament and the Council, Elements for an EU strategy on India, Brussels, European Commission, 20 November 2018.
<8> European Parliamentary Research Service, EU-India: Trade Prospects, EU Parliament, 2020.
<9> Sachin Chaturvedi and S.K. Mohanty, “Indian Development Cooperation: A Theoretical and Institutional Framework,” FIDC Policy Brief, No. 7 (2016).
<10> Ministry of External Affairs, Performance Smart Board: Grants and Loans, Government of India, 2020.
<11> India-EU Strategic Partnership, Joint Action Plan, New Delhi, European External Action Service, 7 September 2005.
<12> International Cooperation and Development, “India,” European Commission.
<13> European Commission, 2017-18 Operational Report – IFCA, AIF and IFP, European Commission, 2019.
<14> European Investment Bank, EIB in Asia and the Pacific, EIB, 16 May 2019.
<15> “EU India to intensify cooperation on smart and sustainable urbanization,” EEAS, 19 September 2019.
<16> “India largest recipient of Erasmus funding: EU Ambassador,” The Hindu BusinessLine, 8 December 2018.
<17> European Commission, Partnership instrument for cooperation with third countries (PI), European Commission.
<18> Ministry of External Affairs, Joint Statement, 14th India-EU Summit, New Delhi, Government of India, 6 October 2017.
<19> European Council, Joint Statement - 15th EU-India Summit, European Commission, 15 July 2020.
<20> European Council, EU-India Strategic Partnership: A Roadmap to 2025, European Council, 15 July 2020.
<21> European Council, EU-India Joint Statement on Clean Energy and Climate Change, European Council, 6 October 2017.
<22> “International Equity Research: IT Services Sector Conquering Europe 2.0 – Peer Pressure to Drive Outsourcing,” Phillip Capital, 2015.
<23> Bhaswati Mukherjee, India and EU: An Insider’s View, (India: Vij Books, 2018).
<24> World Trade Organisation, “Definition of Services Trade and Modes of Supply,” WTO.
<25> Confederation of Indian Industry, CII Report: Towards a New India-EU Economic Agreement – Identifying India’s Export Potential to Select EU Economies, New Delhi, CII, 2020.
<26> European Parliament, Briefing: India and prospects for closer EU ties, European Parliament, September 2017.
<27> Mukherjee, India and EU
<28> Subhayan Chakraborty, “EU asks India not to scrap bilateral investment treaties with member states,” Business Standard, 28 November 2016.
<29> European Council, Joint Statement - 15th EU-India Summit, European Council, 15 July 2020.
<30> European Council, EU-India Strategic Partnership
<31> “India sees UK as its gateway to Europe: Modi,” The Hindu BusinessLine, 12 November 2015.
<32> FICCI, BREXIT – Views and Suggestions from India Inc., New Delhi, FICCI, July 2016.
<33> FICCI, BREXIT – Views and Suggestions from India Inc.
<34> Rashmi Banga, Brexit: Opportunities for India, Emerging Issues Briefing Paper (7), The Commonwealth, September 2016.
<35> Sangeeta Khorana, “Does Brexit Work In India’s Favour?” Qrius, 3 February 2020.
<36> European Parliament, Assessing the potential impact of an EU-India trade agreement, by Cecilia Navarra, European Parliament, June 2020.
<37> European Commission, Autumn 2020 Economic Forecast: Rebound interrupted as resurgence of pandemic deepens uncertainty, Brussels, European Commission, 5 November 2020.
<38> “Transcript of October 2020 World Economic Outlook Press Briefing,” IMF, 13 October 2020.
<39> Prime Minister Narendra Modi, “Life in the era of COVID-19,” LinkedIn, 19 April 2020.
<40> Archana Chaudhary, “EU to Focus on Diversifying Crucial Supply Chains, Says Borrell,” Bloomberg, 15 July 2020.
<41> Dipanjan Roy Chaudhury, “Covid diplomacy establishes India as a reliable and responsible global power,” The Economic Times, 10 April 2020.
<42> “COVID-19 | India's vaccine diplomacy helping other countries overcome pandemic challenge, received global praise,” Money Control, 17 February 2021.
<43> Ankita Dutta, “Assessment of 15th India-EU Summit Issue Brief,” Indian Council of World Affairs (New Delhi), 10 August 2020.
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