The India-EU free trade agreement: State that stands to gain the most

The India-EU Free Trade Agreement heralds a major reset in India’s trade playbook with one of its most valuable markets. With bilateral merchandise trade at USD 136.54 billion in FY25 and exports of USD 75.85 billion, yielding a USD 15.29 bn surplus, the agreement comes as the EU withdraws GSP preferences, exposing 87 per cent of India’s exports to tariffs. These withdrawals have been sharp in labour-intensive sectors such as textiles, apparel and leather. By eliminating duties on over 99 per cent of India’s export value, the FTA replaces uncertainty with predictable market access.

This stability matters as India’s exports to the EU have grown 16.4 per cent annually since 2020-21, driven by labour-intensive and engineering sectors. Preferential access under the FTA helps offset competitive disadvantages vis-à-vis rivals such as Bangladesh, Turkey and Pakistan in textiles and apparel-a European market of USD 263.5 billion where tariff asymmetries have constrained India’s share, as competitors have enjoyed lower tariffs on key apparel lines, eroding India’s price competitiveness despite comparable product quality. The EU will remove duties on nearly

97 per cent of tariff lines, covering over 99 per cent of trade value, with most labour-intensive exports gaining immediate relief. Few of

India’s existing trade agreements deliver this level of coverage, underlining the deal’s strategic depth.

For India’s states, however, the real dividends of this expanded market access will depend on export capacity on the ground-few states are as consequential to this equation as Uttar Pradesh.

Uttar Pradesh at the heart of India’s EU Trade opportunity

The European Union has emerged as a critical export destination for Uttar Pradesh, placing the state firmly within India’s evolving trade engagement with Europe. Of India’s total exports to the EU, Uttar Pradesh contributed nearly USD 6.3 billion-around 8.3  per cent of the national total. After decades of trailing coastal states, Uttar Pradesh’s rise signals a quiet rebalancing in India’s export geography and its growing integration into EU-facing trade.

Over the past decade, exports to the EU have grown at a CAGR of 8.44  per cent, signalling sustained engagement rather than a recent spike. This growth suggests that European demand for Uttar Pradesh’s products is already established; the FTA simply removes tariff frictions that have constrained scale. In that sense, the agreement magnifies an existing edge, making Uttar Pradesh a rare case of a state entering an FTA with an established foothold in the

partner market.

Nearly 80  per cent of Uttar Pradesh’s EU-bound shipments are absorbed by six economies-Germany, Austria, France, the Netherlands, Spain and Italy. For a state exporting into such mature and regulation-heavy economies, stable and predictable market access is a prerequisite for long-term competitiveness.

Sectorally, the case sharpens: electrical machinery accounts for nearly 50  per cent of Uttar Pradesh’s EU-bound exports, followed by apparel, leather and footwear, and carpets-together forming 75  per cent of the basket worth USD 4.7 billion. These labour-intensive, MSME-dominated sectors are rooted in regional clusters such as the carpet belt of Mirzapur and the leather hubs of Kanpur and Agra, already integrated with European value chains. For Uttar Pradesh, therefore, the India-EU FTA is not merely about expanding trade volumes; it is about safeguarding employment, enabling small firms to scale, and anchoring the state’s manufacturing transition within global value chains.

Market access is not market entry! The India-EU FTA’s impact will unfold not in negotiations, but on factory floors. Even as tariff barriers fall, Indian exporters, particularly MSMEs, will continue to confront some of the European Union’s most exacting regulatory regimes. The Carbon Border Adjustment Mechanism (CBAM) marks a decisive shift in market access, extending compliance beyond product quality to carbon accounting and sustainability disclosure. Compliance audits and emissions reporting will raise costs, hitting smaller firms hardest. For sectors such as electrical machinery, ceramics and certain metal products, where Uttar Pradesh has a growing footprint, carbon intensity will increasingly determine who can export competitively-not just who can produce cheaply.

To compete in the EU market, exporters must also meet strict regulatory standards on chemicals, product safety and manufacturing quality-requirements that demand testing, traceability and continuous upgrades. With 97  per cent of India’s MSMEs classified as micro enterprises, compliance costs could constrain export growth. Existing support schemes remain too limited for this transition.

This is where the promise of the FTA intersects with the urgency of domestic reform. Without a sharper domestic regulatory and industrial policy push, preferential access to the EU will accrue to a narrow pool of firms already equipped to bear compliance costs. With the right state-level push, however, the India-EU FTA can do far more-forcing MSME upgrading, formalising supply chains, and positioning states like Uttar Pradesh as serious players in high-value global markets. This includes testing facilities, financing for cleaner technologies, and support for carbon accounting in export clusters. The agreement is signed; what remains is the harder task of making it count, especially for states like Uttar Pradesh that already have a foothold in Europe but now need to climb the quality and sustainability ladder.

The authors are a Research Associate and a Research Assistant, respectively, at Pahle India Foundation; views are personal