FTA with EU tests India’s compliance

To access full benefits, India must accelerate its sustainability push and protect MSMEs from regulatory costs

Earlier this month, an 11-member European parliament delegation was in India for consultations with Indian parliamentarians and government officials. A key discussion point during the three-day visit was the early implementation of the Free Trade Agreement (FTA) between India and the European Union (EU).

Negotiations for the joint India-EU FTA concluded and were formally announced in late January 2026 during the 16th India-EU Summit. As a comprehensive partnership encompassing goods, services, investments, and intellectual property, the FTA aims to significantly boost bilateral trade by eliminating or reducing over 90 per cent of tariffs and deepening market access. At a time when supply chain security is increasingly important, it promises to bolster supply chain resilience by diversifying sourcing dependency. Currently in the ratification phase, the FTA is expected to come into force by early 2027.

While the opportunity is huge, harnessing it requires thorough preparation. The FTA has a dedicated chapter on ‘Trade and Sustainable Development,’ and commitments made therein are legally binding. These primarily relate to implementing the Multilateral Environmental Agreements (MEAs), safeguarding workers’ rights in line with the core International Labour Organisation (ILO) principles, and furthering women’s economic empowerment and gender equality. Compliance with international regulations is, therefore, a clear prerequisite for leveraging the deal.

The EU has a strong, rapidly evolving regulatory framework: recent regulations include the 2023 Deforestation Regulation (EUDR) that aims to reduce greenhouse gas emissions and biodiversity loss by boosting the consumption of ‘deforestation-free’ products.

Though India has mandated Environmental, Social, and Governance (ESG) disclosure for its top 1,000 listed companies, it needs to integrate ESG principles more firmly (and at a large scale) into core operations, aligning responsible sourcing and production with gender equality and labour rights. More enterprises need to embed global sustainability standards into their functioning and embrace circular economy models. They must also prioritise emissions accounting and clean technology adoption. Importantly, India needs to expedite these measures to enter the FTA implementation phase well-prepared.

But perhaps the most concerning area in the context of this economic partnership is the EU’s Carbon Border Adjustment Mechanism (CBAM). There are still no concessions for India under the FTA regarding CBAM. As a mechanism to encourage alignment with the EU’s climate standards, CBAM can impose tangible costs on Indian exporters, especially the micro, small, and medium enterprises (MSMEs) whose capacity to measure, report, and reduce embedded emissions is limited. Although India has a ‘most-favoured nation’ assurance, exporters may face immediate losses from carbon levies, while reduced import duties on European goods increase competitive pressure on domestic industries.

Safeguards for MSMEs

Furthermore, the EU's Industrial Accelerator Act mandates that products like steel, batteries, and electric vehicles must have a substantial portion of their parts (or value) manufactured inside the EU to qualify for EU government contracts, subsidies, tax breaks, and, crucially, low-carbon labels. For Indian MSMEs, meeting these requirements implies costly operations such as relocating factories or partnering with EU firms. This can hurt export competitiveness and offset the tariff benefits promised under the FTA, tipping the balance in the EU’s favour.

However, it also creates an opportunity to strengthen production-linked incentive (PLI) schemes and green steel taxonomy for boosting domestic manufacturing and supporting MSMEs.

India has implemented the Carbon Credit Trading Scheme, which will eventually reduce the CBAM payments it owes the EU. Additionally, the Ministry of Steel is pushing for standardisation of green steel and expediting decarbonisation of the steel industry, which will ease compliance with the EU CBAM. But policies for protecting MSMEs from CBAM’s impact are largely missing. Given that MSMEs account for 30 per cent of the GDP, 46 per cent of exports, and employ 24.4 crore people, safeguarding their interests is crucial.

This requires comprehensive domestic policy support, including concessional credit lines, credit guarantees, or interest subvention schemes to help firms and investments in cleaner technologies, energy efficiency, and emissions monitoring systems. Assuring technical assistance to build robust emissions measurement, reporting, and verification frameworks is also required, along with targeted incentives to support low-carbon and circular-production businesses.

Parallelly, India and the EU should foster technology access, capacity-building, and regulatory coordination, such as harmonisation of carbon accounting methodologies and sustainability certifications. Moreover, India should seek the EU’s cooperation on phased implementation timelines, giving firms time to adapt, reduce compliance costs, and remain competitive.

While discussions on fast-tracking the FTA abound, accelerating preparedness is more important. India must proceed at full throttle to ready itself for the ‘mother of all deals’ so that the partnership is a win-win for both nations.

(Pooja is an analyst in the sustainability group, and Krithika is a senior associate in the climate change mitigation group at the Centre for Study of Science, Technology and Policy [CSTEP], a research-based think tank)

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)