India–EU FTA Close, but Carbon Border Tax a Key Risk: Jefferies

India and the European Union may be on the cusp of finalising a long-pending Free Trade Agreement, but non-tariff barriers, especially the EU’s Carbon Border Adjustment Mechanism, could significantly dilute the benefits for Indian exporters, according to a latest report by Jefferies.

As negotiations move toward completion, Jefferies cautioned that while tariff liberalisation may grab attention, the real challenge for India lies in non-tariff barriers, which offer limited scope for relaxation. The brokerage flagged the EU’s upcoming Carbon Border Adjustment Mechanism (CBAM) as a major concern, warning that it could weigh on India’s exports despite the FTA.

“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,” Jefferies said in its report.

CBAM is the European Union’s policy framework aimed at assigning a carbon price to imported goods, ensuring they bear costs comparable to those produced within the EU. The measure is intended to prevent carbon leakage but could raise compliance costs for Indian exporters, particularly in carbon-intensive sectors.

On the negotiating table, India is expected to push strongly for concessions in services trade, including easier market access and smoother mobility and visa norms for its large and young workforce. This includes professionals in technology, healthcare and other skilled sectors. The EU, in turn, is likely to seek greater access to India’s financial, legal and professional services markets, making services a key area to watch as the agreement takes shape.

Jefferies noted that the FTA is close to being finalised, with focus sectors including automobiles, electronics, textiles, pharmaceuticals and chemicals. Similar to India’s recently concluded trade agreement with the UK, politically sensitive areas such as agriculture and dairy are expected to remain largely outside the deal. Progress on services trade will be closely tracked, and a successful agreement could also raise expectations for a potential India–US trade deal in the future.

Negotiations between India and the EU were first launched in 2007 but stalled by 2013 amid growing complexities. Talks regained momentum in 2022, with both sides showing greater willingness to avoid sensitive sectors, an approach that now appears to be paving the way for an agreement in the coming days.

The scale of trade underscores the importance of the deal. India’s annual goods trade with the EU stands at around $130 billion, comparable to its trade volumes with the US and China. Goods exports to the EU are estimated at about $75 billion annually, accounting for roughly 17 per cent of India’s total exports.

Since 2022, India has recorded an annualised goods trade surplus of $10–15 billion with the EU. This has been driven by higher petroleum product exports following the Russia–Ukraine conflict and a sharp rise in electronics shipments, particularly mobile phones.

On the sectoral front, Jefferies sees textiles as a potential beneficiary. The EU imports nearly $125 billion worth of textiles and apparel each year, where India currently holds a 5–6 per cent share, compared to China’s dominant 30 per cent. An FTA could bring India’s textile duties in line with South Asian peers, especially at a time when steep US tariffs of up to 50 per cent have hurt the sector.

In automobiles, the EU is expected to push for lower tariffs to boost car exports to India, where duties can go as high as 100 per cent. Jefferies expects any concessions to be gradual, possibly through phased reductions or quota-based tariff-free imports. However, strong localisation by EU automakers and intense competition in India’s entry-to-mid segments may limit the impact on domestic players.

Other categories such as wines, spirits and light engineering could face higher competition. In pharmaceuticals, while EU tariffs are already close to zero, easing regulatory and compliance requirements could act as a positive catalyst for Indian drugmakers, the report added.

(With inputs from ANI and yMedia)