The past few months will be remembered as a turning point in India’s economic trajectory. The country has secured trade agreements with both the EU and the United States – with further US trade talks on hold until implications of the US Supreme Court ruling on global tariffs become clearer. Either way, these two deals with the world’s largest economic blocs are unprecedented in their speed and scale for an economy that has long favoured protectionism.
Beyond the technical details, the significance here lies in what these agreements force into motion for the Indian economy. Together, they accelerate long-deferred reform, expose domestic industry to global competition, and materially improve the outlook for both productivity and currency stability.
For investors, these shifts improve the underlying conditions shaping India’s markets, with positive implications over time.
Accelerated reform
India’s agreement with the EU establishes the largest free trade zone in the world, covering close to a quarter of global GDP.
It lowers barriers on most traded goods and builds on an existing trading relationship worth around €180bn annually. Once legal reviews are completed, trade volumes are expected to rise meaningfully over the coming decade.
The US agreement, meanwhile, is more limited in scope at this stage but equally significant in what it signals. The current framework removes punitive tariffs imposed last year and restores greater predictability to bilateral trade.
There has been considerable debate around why these agreements were signed so quickly. The most plausible explanation is the increasingly aggressive stance taken by the US on global trade, including punitive tariffs on Indian exports.
These measures appear to have sharpened Indian policymakers’ focus on the vulnerabilities of an economy dependent on imported oil and external funding to meet its structurally high demand for gold.
Regardless, the implications of the two agreements are far-reaching.
They expand India’s export opportunities and, just as importantly, increase competitive pressure on the domestic economy from international producers. Over time, this exposure is likely to have a meaningful impact on productivity.
India has long been criticised for maintaining high import tariffs, particularly in sectors such as automobiles. And this has had real consequences – Tesla, for example, spent years negotiating with Indian policymakers over market access and domestic production requirements before ultimately deciding that the regulatory burden was too high to justify entry.
Comprehensive free trade agreements change this dynamic.
Lower barriers increase the likelihood of foreign direct investment in manufacturing by reducing friction around both imports and exports. This matters because net foreign direct investment into India over the past 12 months has been broadly flat, suggesting regulatory complexity and market access have become binding constraints.
Opening up India
From an export perspective, the opportunity here is significant.
According to public comments by Commerce minister Piyush Goyal, textile exports to Europe Europe could increase from around $7bn to as much as $30–40bn if tariff equalisation is achieved with competitors such as Bangladesh.
The broader macroeconomic implications are also substantial.
India currently imports approximately $70bn of electronic goods each year, while its current account deficit is less than $30bn on a trailing basis.
If India can produce more of these goods domestically and eventually become a net exporter, a move toward current account balance – or even surplus – becomes conceivable.
Bigger picture, India has consistently underperformed in manufacturing.
Despite various incentive schemes, the most significant obstacle has been reluctance to open domestic markets to foreign competition. These new trade agreements materially increase the likelihood that multinational companies will consider establishing production facilities in India.
Before “Liberation Day” in 2024, markets assumed that China’s loss of manufacturing share would naturally benefit India. In practice, the transition has been slow. China still accounts for roughly 30% of global manufacturing exports, compared with less than 3% for India per the World Bank.
While India’s labour costs are significantly lower, this advantage could not be fully realised without policy changes that allow for more frictionless trade. Following the conclusion of the EU and US agreements, India will be meaningfully closer to that outcome than it was two years ago.
Foundations for a stronger rupee
Improvements in India’s external balance would also feed naturally into currency dynamics.
Persistent current account deficits have been a long-term headwind for the rupee, and currency depreciation dampened investor returns last year despite strong local-currency equity performance.
A more balanced trade position reduces that pressure.
While currency outcomes should not be overstated, a more stable outlook improves visibility for investors and supports capital inflows. Some estimates suggest the US agreement alone could add 30–40 basis points to GDP growth, with broader gains accruing as manufacturing activity and productivity increase.
After a difficult 15-month period for Indian equities, recent developments may contribute to an improved economic backdrop rather than a short-term catalyst.
A structural shift
Taken together, the recent free trade agreements mark a structural shift in India’s economic trajectory. While external pressure may have accelerated the process, the resulting reforms address long-standing constraints on manufacturing, productivity, and external balance.
The true significance of these deals lies in the competitive forces they unleash – and in the more resilient growth model that may emerge as a result.
By Andy Draycott, Portfolio Manager of the Chikara Indian Subcontinent Fund
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