FTA with European Union to help India diversify trade relations, provide greater market to exporters: Moody's

New Delhi: The trade agreement with the European Union (EU) will help India diversify its trade relationships and provide greater market access to its exporters amid growing uncertainty due to high US tariffs, Moody's Ratings has said.

The free trade agreement (FTA) between India and the EU was announced on January 27. It is likely to be signed and implemented this year only.

"For India, the deal reflects its continued efforts to selectively diversify trade relationships while hedging against trade volatility arising from recent US tariff actions," Moody's said.

It said that for the EU, the deal strengthens economic security by widening access to a fast-growing India while reducing vulnerability to disruptions in more concentrated trade relationships.

"Although we expect limited near-term credit effects for India, the EU and individual member states, once ratified and implemented the FTA will be credit positive for both sides in raising trade volumes, enhancing the diversification of trade flows, and providing greater and more stable market access," it added.

European sectors such as automotive (vehicles and parts), machinery and equipment, and aircraft are more likely to benefit over the longer term, given the sharp reduction in tariffs and increased demand from India, although the short-term impact is likely to be modest.

On the other hand, it said, the agreement will strengthen India's access to the EU market in sectors such as textiles, leather, marine products, and gems and jewellery.

"Preferential access to a high-value market will also deepen India's participation in global value chains, benefiting micro, small and medium-sized enterprises and generating additional employment," it said.

Moody's added that cheaper imports of European machinery and components will also reduce input costs for Indian manufacturers, supporting production expansion and enabling more competitively priced outputs.

"Moreover, easier access to the world's third-largest car market will allow European automakers to tap into India's growth potential by launching newer models," it said.

It also said that competitive pressures will rise in sectors exposed to European imports, including high-end machinery, potentially weighing on domestic producers' profitability.

"Moreover, the broader benefits of the FTA will hinge on India's progress in complementary areas such as improving business friendliness and streamlining regulations," it said.