Opinion How a trade deal with the EU and the US can trigger a manufacturing revolution in India. india news

Last updated:February 19, 2026, 16:31 IST

The European Union and the United States together represent a $50+ trillion opportunity for India with vast investment potential.

This month The Economist magazine featured a very interesting article written by Arvind Subramanian, former Chief Economic Advisor to the Government of India (2014-2018), predicting how the recently concluded trade arrangements with the United States and the European Union could ultimately unlock the country’s potential as a manufacturing power. The article also mentions how this makes India one of the most open economies in the world, a sharp break from its protectionist stance under the current government.

There is no scope for disagreement with Subramaniam here. The prediction that India could eventually become the world’s manufacturing hub would also be in line with many other analysts. Similarly, he is not wrong in calling the present system protectionist. There have been more trade arrangements in the last four years than in the first seven years of the Modi government. However, all these facts tell the story not of an inward-looking India but of an India that was breaking new ground before re-engaging with the global economy once again. Thus, India turned inward, if only for a short period, but its intention was always to participate in global trade only after undergoing a domestic reset.

In 2014, when Narendra Modi came to power with a promise to implement a Gujarat-style development model even at the national level, India was already part of several trade arrangements, prominent among which were its FTAs ​​with East and Southeast Asia, including Japan, South Korea, and ASEAN countries. It was also aligned with former Prime Minister Manmohan Singh’s theory of interdependence, where he argued that good political relations with neighbors like China would automatically follow if there was co-dependence in areas such as economy and trade.

As a result, China, which stood as a minor trading partner until 2004, caused India a growing trade deficit by 2014. Thus, thoughtless trade liberalization without keeping in mind the interests of domestic manufacturers had created a major issue in the form of Indian markets being flooded with cheap imports, a problem that the Modi government sadly inherited.

Not surprisingly, one of the first steps taken was to set up an independent working group under CEA Arvind Subramaniam to review the impact of India’s current trade regime. This was driven by a feeling that India had given up too much in trade negotiations while getting little concrete gains in return. This was followed by a seven-year moratorium on trade talks by India, which ended in 2021 when it signed an FTA with Mauritius.

In fact, the period between 2014 and 2021 was marked by a phase of temporary protectionism by India, where it spent a lot of energy imposing tariffs on products in many sectors to protect its domestic manufacturing. From 13 percent in 2014, India’s average applied tariff increased to 18 percent in early 2020 to provide a level playing field to Indian manufacturers. It also includes China-focused tariffs on steel, electronics, toys and auto parts, in addition to several other anti-dumping duties.

This certainly earned India the title of ‘protectionist country’, especially in 2019 when it withdrew from the China-led Regional Comprehensive Economic Partnership. Despite so much criticism, the country knew what it was doing. While barriers were being erected on the foreign front, internally the government was removing existing barriers to its manufacturing industry in the form of a complex taxation regime and replacing it with a much simpler General Goods and Services Tax (GST).

This also led to the Make in India initiative, as part of which the government began offering production-linked incentives to reward domestic and foreign manufacturers for manufacturing manufactured goods based in India. Over the past few years, the PLI scheme has performed well in increasing production and exports in many sectors, including electronics and pharmaceuticals.

While the Modi government was investing in building a nascent manufacturing ecosystem in the country, which could help it replace imports from trading economies like China and also increase India’s own share in global exports, supportive tailwinds came as the Covid-19 crisis and the world came to a brutal realization of the fact that dependence on China for manufacturing is a very risky gamble for supply chain resilience.

Thus the ‘China+1’ strategy was born, where global capital started looking at options beyond China to establish its manufacturing base. This was a boon for India as soon many companies like Apple, one of the world’s most sought-after smartphone manufacturers, opened their manufacturing facilities in India, sending a strong message about the country’s potential to replace China.

Thus, the last decade was marked by a reorientation in India’s approach towards global trade integration, where it has shifted attention from its neighbors in East and Southeast Asia who considered India a one-way market for its cheap imports to the advanced markets of Europe and the United States. There is a great deal of complementarity in India’s equation with them as they are advanced economies with high value opportunities, while India can leverage low-cost manufacturing models to serve their huge domestic markets. Everything was going well until the Trump administration imposed 50 percent tariffs on Indian products, making them completely uncompetitive compared to other low-cost alternatives.

However, this month many new developments have emerged in India’s favor, as Arvind Subramanian has also written in his article. First, the interim trade arrangement agreed between India and the United States has reduced the effective tariff rates from a stringent 50 per cent to 18 per cent. This provides a significant edge to Indian products compared to many low-cost competitors such as Vietnam, Thailand and Bangladesh. The element of complementarity here is very high as the main items of import from the US will be technologically advanced and high-value products, while India’s emerging manufacturing industry will export low-cost, labour-intensive products where it has a comparative advantage.

The same is true of India’s trade agreement with the EU, where the country’s low-cost and labour-intensive manufacturing industry will get access to the collective European market of $20+ trillion, while its imports will include high-value sophisticated machinery and transportation equipment needed as intermediate goods in the country’s factories.

The matter is that the tariff on European luxury cars has been reduced by India from 110 per cent to only 10 per cent. This will lead to a change in the India strategy of these automobile majors who will now be committed to deeper localization in the country, thus boosting the Make in India initiative. Similarly, the volume of India’s aircraft imports from the United States will increase as part of the interim arrangement, but at the same time zero-duty access to Indian components has brought the country at par with other suppliers to the United States such as Europe, Japan and South Korea. Boeing has already shown interest in developing India as its largest foreign component supplier.

The European Union and the United States together represent a $50+ trillion opportunity for India with vast investment potential. After taking a break from trade talks for almost a decade, a reformed India is now back in the game. On the surface, the FTA that is now being signed looks very promising with the potential to transform the economic fortunes of the country.

Currently, India’s share in global manufacturing exports is only 2 per cent compared to other top economies including China, the US, Germany and even Japan. The year 2047, when PM Modi has promised a ‘developed India’, is now only two decades away. In this context, the trade agreements with the US and EU are a welcome step and one can only hope that this historic opening up of India’s economy for the first time will translate into resounding success.

(The author is a New Delhi-based commentator on geopolitics and foreign policy. She has a PhD from the Department of International Relations, South Asian University. She tweets at @TrulyMonica. The views expressed in the above excerpt are personal and solely those of the author. They do not necessarily reflect the views of News18)

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