India-EU FTA may face hurdles from non-tariff barriers like CBAM: Jefferies

NEW DELHI: While India and the European Union move closer to finalising a long-pending Free Trade Agreement (FTA), concerns remain for India on non-tariff barriers, particularly the upcoming Carbon Border Adjustment Mechanism (CBAM), highlighted Jefferies in its latest report on the India-EU trade deal.

The report said that a key concern for India is the presence of multiple non-tariff barriers for its exports to the EU, with limited scope for relaxation. It specifically pointed to CBAM as a major challenge, noting that this mechanism could impact Indian exports going forward.

Jefferies stated “Key concern for India is the many non-tariff barriers such as the upcoming CBAM mechanism for its exports. We see limited scope of relaxation here”. The Carbon Border Adjustment Mechanism (CBAM) is the EU’s policy to put a fair price on carbon emissions from imported goods, making them cost the same as domestically produced goods, thus preventing “carbon leakage”.

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According to Jefferies, India is likely to push for easing services exports and smoother movement and visa access for its large and young workforce, including professionals in technology and medical fields. On the other hand, the EU may seek greater access to India’s financial, legal and other services sectors, making services trade an important area to watch under the FTA.

Jefferies noted that India and the European Union are close to finalising the FTA, with key sectors in focus including autos, electronics, textiles, pharmaceuticals and chemicals.

Similar to the recently signed FTA with the UK, the politically sensitive agriculture and dairy sectors are expected to be largely kept out of the deal. Progress on services trade will be closely tracked, and the agreement could also raise hopes for a potential India-US trade deal.

The report pointed out that FTA negotiations between India and the EU began in 2007, but cooled off by 2013 due to complexities. Renewed momentum since 2022 and broad agreement on avoiding sensitive sectors such as agriculture on both sides now appears to be culminating in an agreement in the coming days.

In terms of trade size, India’s annual goods trade with the EU stands at around $130 billion, comparable to trade with the US and China. India’s goods exports to the EU are annualised at about $75 billion, accounting for 17 per cent of total exports and around 80 per cent of exports to the US.

Since 2022, India has recorded an annualised goods trade surplus of $10-15 billion with the EU, driven by higher petroleum product exports after the Russia-Ukraine conflict and a surge in electronics exports, particularly mobile phones.

On sectoral impact, Jefferies said the textiles sector could see a key positive. The EU imports around $125 billion of textiles and apparel, where India currently holds a 5-6 per cent share, compared to China’s 30 per cent. An FTA could bring Indian textile duties on par with its South Asian peers, especially at a time when US tariff imposition of 50 per cent has significantly impacted the sector.

In autos, the EU is expected to seek lower tariffs to boost car exports to India, where duties go as high as 100 per cent. Jefferies said a gradual tariff reduction or quotas for tariff-free imports are possible, though existing localisation by EU automakers and strong competition in India’s entry-to-mid segments may limit the impact on domestic players.

Other categories that could face higher competition include wines, spirits and light engineering. In pharmaceuticals, while the EU already imposes near-zero tariffs, easing additional compliance requirements could act as a positive catalyst for Indian pharma companies, the report added. (ANI)