Merkel dials Modi to rekindle hopes of India-EU FTA

Fresh after an investment deal for EU with China, German chancellor Angela Merkel wants to press ahead with another deal that is close to her heart, the long-pending FTA with India.

German chancellor Angela Merkel held a video teleconference with India’s Prime Minister Narendra Modi on January 6 where the two leaders discussed key issues of mutual importance including the response to the COVID-19 pandemic, bilateral ties, regional and global issues, particularly India-EU relations.

The meeting came fresh on the heels of a comprehensive investment agreement with China in the closing hours of the last decade and while other topics were discussed the focus was on the long in the making Indo-EU FTA. With Merkel slated to hang up her boots later this year, such a deal will add to her already enormous legacy.

Pushing the India-EU FTA forward

To recap, a free trade agreement for India with EU, which already is its largest trading block with total bilateral trade of over $ 91.4 billion in 2019 accounting for over 11 per cent of India’s overall trade, has been hanging in the air for well over a decade now. Germany is India’s biggest trade partner within EU. Negotiations for the FTA were first initiated in 2007, but after 16 rounds of talks, a deadlock in 2013 saw both parties move away from the table. Merkel has been one of the biggest advocates of this deal and has tried to kickstart negotiations on multiple occasions. In May 2017, she had made a pitch for the FTA while hosting Modi but it had again fizzled out in a few months.

Then in 2019, while on a state visit to India, she again made a pitch for a trade deal. An extensive discussion on it with Modi has ensued then.

“We need a new attempt for an EU-Indian FTA. We were already close once,” she had then said. “With the new EU-commission there will be a new attempt.”

Covid disruptions

Had the pandemic not distracted the world, there would have surely been some progress. With the global economy overwhelmed in the first half of 2020, the priorities lay elsewhere and multilateral agreements took a backseat. But with Brexit out of the way and as the deal with China signifies, EU is eager to get back to the negotiating table.

On its part, India has always been supportive towards FTAs. Having backed out of the RCEP, it is imperative for the country to strike an agreement with the US and EU to ensure it is not isolated in the realignment of global supply chain that is currently underway. In the India-EU summit held virtually in July 2020–the physical summit in March could not be held due to the pandemic, India had reiterated its desire to form an alliance with the EU.

“After COVID-19, new economic problems emerged globally. For this, we feel the need for more cooperation among democratic nations. Today, both the health and prosperity of our citizens are facing challenges. There are different types of pressures on the rules-based international order. Thus, the India-EU partnership can play an important role in economic reconstruction, and in building human-centric globalisation,” Modi had said at the virtual summit.

“We must adopt a long-term strategic perspective. An action-oriented agenda should be created, which can be implemented within the stipulated time frame. India and the EU are natural partners. Our partnership is also useful for peace and stability in the world. This reality has become even more evident in today’s global situation,” he had added.

Benefits of an India EU-FTA

According to estimates by the European Parliament, an India-EU FTA can help expand EU’s GDP by 0.14 per cent and India’s GDP by 1.3 per cent a year. A trade sustainability impact assessment of the FTA done back in 2009 had said India was expected to gain $ 5.6 bn in the short run and $ 20.23 bn in the long run, while the EU was expected to gain $ 5.03 bn in the short run and $ 1.83 bn in the long run. Bilateral trade could potentially treble in a decade from the commencement of the FTA.

There are a number of thorny issues that have held back the FTA. India seeks improved market access for IT professionals, removal of non tariff barriers for goods and for EU to recognise India as a data secure country. EU wants India to lower tariff on wines and spirits, dairy products and automobiles, further liberalize FDI in multi brand retail and insurance and open up accountancy and legal services for foreign players.

There are lobbies on both sides that are opposed on each of these topics. Yet, in the post pandemic era, the world has changed and Modi and Merkel are fully aware of the realities. For both sides, holding back on the trade deal is no longer an option.