Automobile & agricultural items remain sticky points in India-EU FTA talks

Introduction

Negotiations between India and the European Union over a Free Trade Agreement have, for some years, aimed at boosting bilateral commerce by lowering trade barriers, aligning regulatory regimes, and improving access in goods, services, investment, and more. While both sides have expressed commitment to concluding an agreement (with ambitious timelines), certain sectors have proved especially difficult to reconcile. Among these, automobiles and agriculture remain especially sensitive. This report examines why these sectors are problematic, what the current state of play is, and how the impasse might be addressed.

Why Automobiles and Agriculture Are Sensitive

1. Domestic Interests and Political Sensitivity
   • Agriculture and dairy in India are key to rural livelihoods, involving millions of small farmers. Any lowering of tariffs or opening of import competition (especially for dairy products, certain grains, etc.) risks adverse effects on these constituencies. India is cautious about protecting food security and the income stability of its farmers.
   • Automobiles is an important industrial sector in India. It contributes substantially to manufacturing GDP, employment (both directly and via spinoff/supply-chains), local investment, and technological upgradation. Very high tariffs on fully built units (CBUs) protect domestic assemblers, local parts suppliers, and ensure incentives for local manufacturing.
2. Tariff Levels and Protection
   • The current import duties on fully built cars in India are very high (often in the 100–125% range for luxury vehicles). The EU is pressing for large reductions here, but India is unwilling to accept terms that would undercut its auto sector.
   • In agriculture, the EU seeks lower duties especially on dairy products (cheese, skimmed milk powder etc.) and wine, among others. India, however, uses tariffs (or even non-tariff barriers) to shield its farmers and domestic produce. Tariff reductions in these items are politically contentious.
3. Regulatory, Standards, Non-Tariff Barriers
   • For agriculture, Sanitary and Phytosanitary (SPS) measures are major obstacles. Differences in food safety standards, pesticide usage, quality norms, testing, certification etc. complicate access.
   • In automobiles, apart from tariffs, issues like rules of origin, technical barriers to trade (TBT), duplicate testing, and regulatory standards are sticking points. The EU wants to avoid duplication of testing etc., for example. India is cautious in harmonizing or accepting standards that may force domestic manufacturers to incur high costs or reduce their competitive edge.
4. Reciprocity and “Offensive vs Defensive” Interests
   • Both sides have “offensive” sectors (those they want access in), and “defensive” sectors (those they want to protect). Agriculture and autos are highly defensive for India; the EU sees them as offensive sectors: access to Indian markets is very attractive for EU producers of dairy, luxury cars, etc.
   • India seeks to ensure that gains are not one-sided, and is wary of large scale import competition without adequate phasing, safeguards, or compensation.

What Has Been Achieved So Far

Although full agreement in the automobile and agricultural sectors remains elusive, the negotiations have made partial progress:

• There has been clarification of each side’s “offensive” and “defensive” interests in market access for goods, across industrial and agricultural sectors. The exchanges of market access offers (notably in July) have helped.
• On the regulatory front, there is some agreement or advancement in rules of origin, SPS measures, and investment. Also, technical sessions have been held to examine automobile and car parts annexes. Some progress on avoiding duplication of testing (for automotive standards) has been reported.
• Discussions have closed certain open provisions in the “goods” chapter, and progress has been made in technical chapters (though not enough to “close chapters” fully) in recent rounds.

What Still Remains Unresolved

Despite the advances, substantial gaps persist, particularly in the following aspects:

1. Tariff Reduction / Elimination
   • India has not agreed to reduce tariffs on fully built European cars from high levels to those acceptable to the EU (e.g. 10-20%). The EU sees this as essential but India fears job losses, loss of investment incentives for domestic production, and negative impact on its existing auto ecosystem.
   • On agriculture, dairy in particular remains highly protected. India remains reluctant to open up trade in dairy and sensitive farm products. Also, wine and alcoholic beverages are problematic due to high duties.
2. Regulatory Harmonization and Non-Tariff Barriers
   • Rules of origin: both sides have not agreed on product-specific rules, especially in sectors like automobiles, car parts, steel etc. This creates uncertainty about what qualifies for preferential treatment.
   • Quality control orders, test duplication, technical barriers, SPS norms: even where agreement is possible in principle, implementation is challenging. For example, aligning standards, ensuring traceability, labelling, etc., in agriculture; in autos, aligning safety, environmental (emissions etc.), testing protocols.
3. Phasing, Safeguards, and Transitional Measures
   • India is demanding that any opening be phased in with safeguards to protect local industry, employment, and investments. The EU wants more immediate access, or at least predictable reduction schedules. Agreement on transition periods is yet to be finalized.
   • Moreover, there is concern about “rule changes” during the transition (e.g. future standards, environmental or sustainability norms) which might add compliance burdens.
4. Political & Institutional Constraints
   • Domestic political pressure from farmer lobbies, auto industry associations in India is strong. Changes that might seem “good for trade” can be unpopular domestically if perceived to threaten jobs or incomes.
   • The EU too has its own constraints: member states with strong agricultural sectors or auto industries (Germany, France, etc.) will demand protection unless satisfactory access and reciprocity are ensured.
5. Timeline Pressure
   • There is political pressure to conclude the deal by end of 2025. But these sectors’ sensitivities may make that timeline difficult unless major bridging compromises are made.

Implications of the Impasse

• Without resolution on autos and agriculture, the FTA will be less economically meaningful, as these are among the sectors with the highest trade potential (for Europe: luxury cars, dairy, agri-food; for India: some processed agricultural goods, auto parts, etc.).
• Failure to resolve could lead to lesser benefits for both sides, or even public backlash if certain domestic sectors feel exposed without sufficient protections.
• Delay in the FTA may also mean loss of competitive advantage: other trade agreements (India with other partners, EU with other trade partners) may move faster, shaping rules and market access in ways that India-EU later would have to accommodate.

Possible Ways Forward: Bridging the Gaps

To unlock resolution on these sticky points, several approaches may help:

1. Phased liberalization with robust safeguards
   • India could accept lowering some tariffs over time (say, over 5-10 years) rather than immediately.
   • Conditional clauses or trigger-based reductions: reductions triggered by certain performance metrics (e.g. local value addition, employment, environmental standards) to protect vulnerable sectors.
2. Differentiated treatment for sensitive goods
   • Some agricultural products (dairy, sugar, etc.) or some types of vehicles (luxury vs. mass market) could be treated differently, with longer transition or even exclusions.
   • Special quotas or tariff rate quotas (allowing limited imports at lower rates) could be used.
3. Regulatory cooperation and standard harmonization
   • Joint mechanisms to recognize conformity assessments, reduce duplicate testing, align SPS standards, improve labelling and traceability for agricultural goods.
   • For autos, agreeing on safety, emission, environmental, and technical standards acceptable to both, and agreeing on mutual recognition or certification to reduce compliance costs.
4. Support measures for domestic sectors
   • For agriculture: support in terms of skill building, better production standards, value addition, supply chain infrastructure so that Indian producers are competitive in quality as well as price.
   • For automobile sector: incentives for local manufacturing, technology transfer, R&D in green vehicles, EVs, etc. that align with environmental regulations.
5. High-level political engagement and negotiation of trade-offs
   • As reports indicate, high-level interventions are necessary: both sides need to understand the political constraints and be willing to make trade-offs in return for access elsewhere.
   • Trade-offs could involve services, investment protection, or regulatory cooperation in exchange for more favorable terms in autos/agriculture.
6. Transparency and confidence building
   • Sharing clear data on how many jobs, how much production would be affected by tariff reduction, and using modelling to show impacts could help both sides judge how much is acceptable.
   • Establishing joint monitoring frameworks post-agreement to handle grievances or unintended effects.

Conclusion

The India-EU FTA holds considerable promise: stronger trade flows, investment, regulatory cooperation, and economic growth for both sides. But unless the agreement addresses the deeply sensitive sectors of automobiles and agriculture in a way that protects domestic interests, ensures regulatory clarity, and offers fair market access, the deal risks being watered down or delayed.

Resolving these sticking points will likely require flexibility, phased measures, and political courage. If both sides can find a middle ground — for example, through limited tariff reductions, mutual recognition of standards, safeguards, and transitional arrangements — then a meaningful agreement is possible. Otherwise, the impasse may persist, undermining the overall goal of enabling a mutually beneficial trade architecture between India and the EU.