India-EU free trade deal to support manufacturing and exports: Moody’s

The India-EU free trade agreement will be credit positive for India as lower tariffs and improved market access are expected to help attract foreign investment, boost manufacturing and strengthen the export competitiveness of labour-intensive sectors, Moody’s Ratings said.

India and the European Union on Wednesday announced the conclusion of negotiations for the Free Trade Agreement (FTA), described as the “mother of all deals”. Under the pact, 93 per cent of Indian shipments will receive duty-free access to the 27-nation EU bloc, while imports of luxury cars and wines from the EU will become less expensive.

The agreement, concluded after negotiations spanning about two decades, will create a market of around 2 billion people across India, the world’s fourth-largest economy, and the European Union, the second-largest economic bloc.

In a commentary, Moody’s Ratings said India’s conclusion of its trade negotiations with the EU reflects continued efforts 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,” Moody’s said on Wednesday.

The free trade pact is expected to be formally signed and implemented this year.

Moody’s Ratings said lower tariffs on EU imports may also help ease costs, although such imports currently account for a smaller share of India’s overall import bill.

“European carmakers would gain easier access to the world’s third-largest car market, allowing them to introduce more premium models under a calibrated liberalisation framework—an opportunity for EU brands but adding competition for Indian manufacturers,” the ratings agency said.

Moody’s added that the broader benefits of the FTA will depend on progress in complementary areas such as improving business friendliness and streamlining regulations.

Once implemented, excluding auto and steel, almost all Indian goods — over 93 per cent — will receive zero-duty access in the European Union. Of the remaining over 6 per cent, Indian exporters will receive tariff reductions and quota-based duty concessions for products such as automobiles.

Average EU tariffs on Indian goods are already low at around 3.8 per cent and will be reduced to 0.1 per cent under the agreement. However, duties remain high in several sectors, including marine products at 0–26 per cent; chemicals up to 12.8 per cent; plastics and rubber up to 6.5 per cent; leather and footwear up to 17 per cent; textiles, apparel and clothing up to 12 per cent; gems and jewellery up to 4 per cent; railway components, aircraft parts, ships and boats up to 7.7 per cent; furniture and light consumer goods up to 10.5 per cent; toys up to 4.7 per cent; and sports goods up to 4.7 per cent.

The European Union will eliminate duties on all these items for India.

In return, the EU will receive duty-free access for over 90 per cent of its goods over a ten-year period in India. India will remove duties on only 30 per cent of European goods on the first day of implementation of the pact.

Key EU products that will receive duty concessions include automobiles, wines, spirits, beer, olive oil, kiwis and pears, fruit juices, and processed foods such as breads, pastries, biscuits, pasta, chocolate, pet food, sheep meat, sausages and other meat preparations.

These products currently attract duties ranging from 33 per cent to 150 per cent.

Prices of imported cars from Europe are widely expected to fall after India agreed to gradually cut import duties to 10 per cent from 110 per cent for 2.5 lakh vehicles a year under the FTA, more than six times the quota offered to the UK.