India, Germany and the EU: Why a Trade Breakthrough May Finally Be in Sight

German Chancellor Friedrich Merz’s kite-flying diplomacy with Prime Minister Narendra Modi — accompanied by announcements on cooperative defence production and visa-free transit for Indian travellers — has injected fresh momentum into India’s long-stalled trade engagement with Europe. With the India–EU Summit less than two weeks away, expectations are rising that an India–EU free trade agreement (FTA), frozen for over a decade by disputes over labour and environmental standards, may finally be edging toward closure.

Why the India–EU Trade Deal Matters Now

The timing is significant. Global trade is entering a period of heightened uncertainty, driven largely by the disruptive economic and trade policies of US President Donald Trump. As protectionism rises and multilateral trade frameworks weaken, regional trade agreements are becoming critical shock absorbers.

For India, this strategic pivot is already visible. Following the conclusion of the India–UK trade agreement, the EU pact is the next major piece in a broader recalibration of India’s external economic strategy. Europe is not a marginal partner: the EU is India’s fourth-largest export market and a major source of capital, technology and skilled migration opportunities.

The US Growth Puzzle and Its Global Spillovers

At first glance, the US economy appears resilient. Growth touched a robust 4.3 per cent in the third quarter of 2025, largely fuelled by consumer spending. But beneath the surface, the structure of growth looks increasingly fragile.

Investment growth is narrowly concentrated in artificial intelligence infrastructure, a trend that may not be durable. Corporate hiring has stalled, AI-linked stocks show inflated valuations, and it remains unclear how strong final demand for AI-enabled outputs will be. Moreover, AI expansion is energy-intensive — a challenge that will grow as capacity shifts to developing economies.

Trump’s proposed tax cuts further complicate the picture. If funded by higher tariffs, they may temporarily boost revenues but eventually stoke inflation, dampen consumption and shrink tariff inflows. If debt-financed, they risk pushing US public finances onto an unsustainable trajectory, raising interest rates and squeezing both consumption and investment.

China’s Slowing Economy and the Limits of Export Diversion

China’s outlook is even more sobering. After decades of 8–10 per cent growth, the economy has slowed to around 5 per cent in 2024–25 and is trending toward 4 per cent or lower. A prolonged real estate crisis, ageing demographics and weak domestic consumption continue to weigh on demand.

Recent export surges offer limited comfort. Much of the growth reflects diversion away from the US toward developing countries — many of which are now responding with higher tariffs and non-tariff barriers. Another channel, tariff arbitrage via countries such as Mexico and Vietnam, is also narrowing as the US moves to block indirect routes. Mexico’s recent tariff hikes underscore how quickly these pathways can close.

Why Trade Diversion Makes the EU Crucial for India

Against this backdrop, India’s global trade prospects in 2026 appear constrained. Services exports — closely tied to the US economy — may remain relatively resilient. But merchandise trade growth will depend largely on trade diversion away from the US.

This is where the EU and UK FTAs become pivotal. Amid the noise around Washington, Europe’s strategic importance is often underestimated. The EU is not only a major market but also a technology and investment powerhouse, with cumulative FDI in India touching roughly $120 billion by 2024.

Germany’s Strategic Role in Unlocking the Deal

Germany’s dominance within EU trade structures gives Berlin disproportionate influence in shaping the contours of any India–EU agreement. The recent India–Germany initiatives — spanning defence manufacturing, skilled mobility and technology cooperation — may therefore serve as a template for a wider European framework.

Germany’s Skilled Immigration Act already earmarks quotas for Indian professionals. This opens a potentially transformative negotiating space: the inclusion of skilled labour mobility, or “Mode 4” in World Trade Organization parlance, within a trade agreement. For the first time, India may find services mobility emerging as a serious bargaining chip in talks with the EU.

Beyond Goods: Services, Investment and Technology

An India–EU FTA is unlikely to be confined to tariff reductions on goods. A meaningful agreement would likely include:

• A services pact incorporating skilled mobility provisions.
• An investment agreement to facilitate technology inflows.
• Cooperation in sectors such as electronics, green technologies and infrastructure.

This aligns closely with India’s development priorities. Empirical evidence suggests that trade and foreign direct investment are complementary — and that FDI remains the most reliable long-term channel for technology transfer. Germany’s leadership in advanced manufacturing and industrial technology makes it a natural anchor for this effort.

A New Trade Strategy Taking Shape

India’s recent rush to conclude FTAs has often been questioned. But seen against the backdrop of weakening global demand, rising protectionism and shifting geopolitical alignments, the logic becomes clearer. The challenge now is delivery — translating agreements into tangible economic gains.

If the current momentum with Germany broadens into a comprehensive India–EU trade deal — one that foregrounds services mobility, investment and technology — it could mark more than a diplomatic success. It could signal a strategic reorientation of India’s trade policy toward resilience, diversification and long-term capability building. That, indeed, would make for a promising new beginning.