Noble Laureate Abhijit V Banerjee.
Credit: PTI Photo
Kolkata: Nobel laureate economist Abhijit Banerjee said the India-EU free trade agreement was "a strategic alignment", and a signal to Washington that "we don't need the US as much as America thinks we do", amid the high tariffs imposed by the Donald Trump administration.
He, however, cautioned that the much-touted pact, described as the "mother of all deals", would not automatically translate into broad-based gains unless India dramatically improves efficiency and logistics.
In an interview with PTI, Banerjee said India was yet to fully understand the nature of American resistance under President Donald Trump's leadership, noting that the US had shown "limited interest" in bargaining with India despite repeated US claims of imminent agreements during the period of heightened trade tensions.
"It is certainly a strategic alignment. It sends a signal to the US- from Europe and from India - that we don't need the US as much as the US thinks we do. That can be useful if the idea is to bring the US to the bargaining table," he said, while expressing scepticism about how much leverage it would actually create.
Speaking on the just-concluded India-EU free trade agreement (FTA) - a landmark free trade agreement to create a market of two billion people - Banerjee said trade deals were only an initial step.
"Trade agreements are just a starting point. You still need to have products to sell, and the market needs to want those products," underscoring that competitiveness today goes well beyond tariffs.
The agreement, which will account for almost a quarter of global GDP, will reduce tariffs on 99 per cent of Indian exports to the EU and cut duties on over 97 per cent of the EU's exports to India, according to officials.
Indian sectors such as textiles, apparel, leather goods, handicrafts, footwear and marine products are set to gain from the FTA, while Europe is expected to benefit in areas such as wine, automobiles, chemicals and pharmaceuticals.
India, Banerjee noted, has been emphasising sectors such as textiles, leather and jewellery, where outcomes are likely to vary sharply.
"We are certainly competitive in jewellery and leather, and maybe less so in textiles, though that depends on which kind of textiles," the economist said, pointing out that rivals such as Vietnam and Bangladesh "are also competitive and they have had some lead over us".
The real constraint, he argued, lies in delivery speed and supply-chain efficiency.
"When I talk to retailers in the US, they say Indians are slow. Our transportation system isn't efficient, ports are slow -all of these things matter," said Banerjee, who was here for a discussion on his book "Poor Economics" at the Exide Kolkata Literary Meet.
In the 2024-25 financial year, India's total trade in goods with the EU stood at about USD 136 billion, with exports of around USD 76 billion and imports of USD 60 billion.
Drawing a comparison with China, Banerjee said suppliers there had "extraordinarily quick turnaround", often trumping price advantages elsewhere.
"If one country offers the same price but delivers faster, buyers will go with that country," he said, adding that India must "get the efficiency to the Chinese level" to extract gains from trade pacts.
"So, we need to catch up in efficiency. If we reach Chinese levels of efficiency, then I am sure we can translate these agreements into gains. But it's not automatic," he said.
The imposition of high tariffs by the US has disrupted global trade flows. India is facing steep tariffs of up to 50 per cent, including 25 per cent linked to its purchases of Russian oil.
India has described the US action as "unfair, unjustified and unreasonable", while maintaining that its energy policy is guided by national interest.
The EU is also facing the threat of high US tariffs, and it is widely believed that the frosty ties both India and Europe experienced with the Trump administration created fresh urgency to conclude the FTA.
Banerjee said India had yet to fully grasp the nature of US resistance under President Donald Trump.
"We haven't understood why Trump has been so anti-India. The US hasn't really been very interested in bargaining with us," he said, noting that claims of imminent agreements were often publicly denied.
"US President Trump sometimes claims he spoke to Prime Minister Modi and they will have an agreement, but it's unclear whether that's true, as it is later denied. So, I don't think we fully understand the problem with the US, or how much this affects bargaining," he said.
The 64-year-old economist also questioned whether India could substitute the US market with Europe.
"India is a big market, but the US is a gigantic market," Banerjee said, observing that Europe's strength lies in luxury goods and machinery, while America remains unmatched in scale.
"Europe produces a lot of luxury goods and machinery, but the US is a gigantic market. India is a big market, but not comparable. So, how much geopolitical advantage this gives us is unclear. Right now, both Europe and India are somewhat on the sidelines, trying to do something and see what happens," he said.
Asked whether the FTA could cushion India amid global instability, supply-chain disruptions and US tariffs, Banerjee said, "That depends entirely on how much India can take advantage of it", and added, "Tariffs are just one component of price. Reliability of supply chains, transportation efficiency, and delivery timelines- all of these matter. So again, it's not automatic."