Explained: India-EU FTA and Europe’s economic crossroads. What’s at stake for both sides

The European Union’s economic momentum has slowed amid global trade uncertainty, geopolitical tensions, and uneven recovery across member states, even as the bloc intensifies efforts to expand its global trade footprint. With growth moderating and traditional export markets facing new tariff pressures, the proposed India-EU Free Trade Agreement (FTA) is increasingly being seen as a strategic lever to revitalise trade, diversify supply chains, and support long-term economic resilience.  

The analysis is based on data and insights from Rubix Country Insights – European Union (January 2026).

The EU, comprising 27 countries, remains the world’s second-largest economic bloc with an estimated GDP of $21.1 trillion in 2025. However, real GDP growth stood at a modest 1.4% during the year, reflecting subdued performance in major economies such as Germany, France, and Italy, even as smaller nations like Denmark, Luxembourg, and Sweden posted stronger expansions.  

Trade strength masks structural challenges  

Despite slowing growth, the EU continues to dominate global trade. According to the report, total goods trade reached $5.4 trillion in calendar year 2024, growing at a compound annual rate of 7.2% since 2020 and generating a goods trade surplus of around $0.2 trillion. Machinery, vehicles, chemicals, and high-value manufactured products anchor EU exports, while imports remain heavily skewed towards energy, intermediate goods, and other manufactured inputs.  

Germany, France, Italy, and the Netherlands together account for nearly 60% of the EU’s exports and imports, underlining the bloc’s reliance on a small set of core economies. The United States and China remain the EU’s two largest trading partners, together accounting for roughly one-third of its total goods trade.  

However, recent developments in transatlantic trade have added pressure. The re-imposition of US tariffs — set at a 15% baseline, with the threat of higher duties on select EU members — has raised concerns over competitiveness and export volumes. While earlier negotiations had temporarily eased tensions, renewed geopolitical disputes have injected uncertainty into EU-US trade relations.  

India’s Rising but limited presence  

Against this backdrop, India’s role in EU trade has improved but remains modest. India climbed from the EU’s 11th-largest import source in 2021 to seventh position in 2024, yet its share of EU imports rose only marginally from 2.2% to 2.9%. On the export side, India continues to account for less than 2% of EU exports, reflecting untapped potential despite growing engagement.  

For India, however, the EU has become its largest bilateral goods trading partner. Bilateral trade stood at $136.5 billion in FY2025, marginally surpassing India-US trade. India maintained a trade surplus of $15.2 billion with the EU, although the balance briefly slipped into deficit in early FY2026 due to import pressures and export stagnation, as per the Rubix Country Insights report.  

Trade between the two sides has plateaued since FY2023, after a sharp post-pandemic rebound. Exports from India have remained stuck around $75-76 billion for three consecutive years, highlighting structural constraints related to tariffs, market access, and competitiveness.  

India-EU FTA: A high-stakes deal  

The proposed India-EU FTA, negotiated intermittently since 2007, is now expected to be finalised by late January 2026. Once concluded, it would become India’s largest and most comprehensive trade agreement, covering goods, services, investment, and regulatory cooperation across the EU’s 27-member customs union.  

The agreement carries heightened significance after the EU withdrew Generalised System of Preferences (GSP) benefits for India in 2023, leaving Indian exporters exposed to average tariffs of 3.8%, and over 10% in labour-intensive sectors such as textiles and apparel. Tariff reductions under the FTA could sharply improve India’s competitiveness, particularly in textiles, pharmaceuticals, machinery, steel, petroleum products, and electrical equipment.  

For the EU, the deal offers reciprocal benefits. European exporters currently face a weighted average tariff of about 9.3% in India. Liberalisation would open opportunities in automobiles, aircraft, chemicals, and high-end machinery, while deeper commitments in services and investment could strengthen long-term economic integration.  

Investment & strategic realignment  

The EU is already a major source of foreign direct investment in India, accounting for 16.5% of cumulative FDI inflows — around $119.2 billion — between April 2000 and December 2024. Key recipient sectors include services, software, automobiles, chemicals, and renewable energy, with Maharashtra, Karnataka, and Tamil Nadu emerging as top destinations.  

From a strategic standpoint, closer trade ties with India align with the EU’s broader objective of supply-chain diversification amid geopolitical fragmentation, climate-linked trade policies such as the Carbon Border Adjustment Mechanism, and efforts to reduce dependence on traditional partners.  

Looking ahead, the EU’s economy is expected to grow moderately at around 1.40-1.6% through 2027, supported largely by domestic consumption and investment rather than exports, as per the Rubix Country Insights report. Elevated global tariffs and geopolitical risks continue to cloud the external outlook, making diversification imperative. In this context, the India-EU FTA stands out as a future-defining pact — linking two economies with a combined GDP exceeding $25 trillion and a population of nearly two billion.