India–EU FTA credit positive for India, says Moody’s Ratings

The India–European Union Free Trade Agreement (FTA) will be credit positive for India, as lower tariffs and improved market access are expected to attract foreign investment, support manufacturing and enhance export competitiveness, particularly in labour-intensive sectors, Moody’s Ratings said on Wednesday. 

India and the EU earlier this week announced the conclusion of negotiations for the long-awaited trade pact, often described as the “mother of all deals”, under which 93% of Indian exports will receive duty-free access to the 27-nation bloc. At the same time, imports of luxury cars, wines and select food products from the EU are set to become cheaper in India. 

The agreement, finalised after nearly two decades of negotiations, brings together India, the world’s fourth-largest economy, and the EU, the second-largest economic bloc, creating a combined market of nearly two billion people. 

Strategy to selectively diversify trade relationships

In a commentary, Moody’s said the deal reflects India’s strategy to selectively diversify its trade relationships. “When in effect, the FTA will be credit positive, with lower tariffs and better market access supporting India’s ambition to develop its manufacturing sector, attract foreign investment, and strengthen the export competitiveness of its labour-intensive goods,” the ratings agency said. 

The pact is expected to be formally signed and implemented this year. Moody’s noted that lower tariffs on EU imports could also help ease costs for Indian buyers, although such imports currently account for a relatively small share of India’s total import bill. 

European carmakers, the agency said, would gain easier access to the world’s third-largest car market, allowing them to introduce more premium models under a calibrated liberalisation framework. While this creates opportunities for EU brands, it is also expected to increase competition for Indian manufacturers. 

Broader benefits of the deal

Moody’s cautioned that the broader benefits of the agreement would depend on progress in complementary reforms, including improvements in business friendliness and regulatory streamlining. 

Once implemented, over 93% of Indian goods, excluding autos and steel, will enjoy zero-duty access to the EU. For the remaining exports, Indian producers will receive tariff reductions and quota-based concessions, particularly in sectors such as automobiles. Average EU tariffs on Indian goods, currently around 3.8%, will fall to 0.1% under the agreement. 

Several Indian sectors currently face high EU tariffs, including marine products, chemicals, plastics and rubber, leather and footwear, textiles and apparel, gems and jewellery, railway components, aircraft parts, furniture, toys and sports goods. Duties on these products will be eliminated under the FTA. 

Duty-free access

In return, the EU will gain duty-free access for over 90% of its goods in India over a 10-year period. India will remove duties on about 30% of European goods on the first day of implementation. Key EU products set to receive tariff concessions include automobiles, wines, spirits, beer, olive oil, fruits, fruit juices, processed foods, chocolates, pet food and meat products, which currently attract duties ranging from 33% to 150%. 

Prices of imported European cars are widely expected to decline, with India agreeing to gradually reduce import duties to 10% from 110% for up to 2.5 lakh vehicles annually—more than six times the quota offered under its trade agreement with the UK.