With a renewed push and a target of finalizing a deal by the end of 2025, the long-awaited Free Trade Agreement (FTA) between the European Union and India is generating a lot of excitement, particularly within the textile and apparel (T&A) sector. This landmark deal, touted as "the largest deal of this kind anywhere in the world" by European Commission President Ursula von der Leyen, promises to reshape trade dynamics and unlock substantial growth potential for both regions.

After years of stalled negotiations, primarily due to disagreements over agriculture, pharmaceuticals, and automobiles, the renewed momentum reflects a shared desire to counter rising global protectionism and strengthen strategic partnerships. As highlighted by von der Leyen during her recent visit to India, "We both stand to lose from a world of spheres of influence and isolationism. And we both stand to gain from a world of cooperation and working together."

A game-changer for textiles and apparel

The EU is already India's largest trading partner, with trade in goods reaching €124 billion in 2023. However, the T&A sector, while significant has room for considerable expansion. In fact, for India's textile and apparel industry, the FTA is a golden opportunity to boost its competitiveness in the lucrative European market. Currently, India faces tariffs on its T&A exports to the EU, hindering its ability to compete with countries enjoying preferential access. The elimination or significant reduction of these tariffs would provide a substantial boost to Indian exporters, leading to increased market share and revenue.

Conversely, the EU, a major source of high-quality textiles and technical fabrics, would gain easier access to India's vast and growing market. The potential for increased trade in both directions is immense, promising to create new jobs and stimulate economic growth in both regions.

Table: India's textile and apparel exports and imports to the EU (in € mn)

Key considerations

While the FTA holds immense promise, several challenges need to be addressed. India seeks greater market access for its textiles and apparel, including lower tariffs and streamlined customs procedures. The EU, on the other hand, is likely to emphasize sustainability and labor standards, requiring Indian manufacturers to adhere to stringent environmental and social regulations. However, India's concerns regarding the EU's proposed Carbon Border Adjustment Mechanism (CBAM) will need to be addressed to ensure a level playing field for Indian exporters.

However, the FTA is expected to significantly boost India's competitiveness in many ways. Most importantly, elimination or reduction of tariffs will level the playing field, making Indian apparel exports more price-competitive. Easier access to the EU market will create new opportunities for Indian manufacturers. The FTA will incentivize investments in modernizing manufacturing facilities and improving efficiency. It can drive diversification of India's apparel export basket, moving towards higher-value products.

Competitive landscape and post FTA business scenario

India's business scenario post-FTA needs to be seen within the competitive landscape of China, Bangladesh, and Vietnam.

China: Dominates global apparel exports due to its vast manufacturing capacity, integrated supply chains, and economies of scale. However, rising labor costs and a shift towards higher-value manufacturing are impacting its competitiveness in low-cost apparel. The FTA will accelerate the shift in China's role, with India gaining a larger share of low-cost apparel exports. But China will continue to focus on higher-value manufacturing and technology-driven industries.

Bangladesh: Benefits from preferential trade agreements (like the EU's Everything But Arms initiative), providing duty-free access to major markets.

Known for its low labor costs and large-scale garment manufacturing now faces challenges due to worker safety, environmental sustainability, and diversification. With FTA, India's increased competitiveness could pose a significant challenge to Bangladesh, particularly in basic apparel categories. However, Bangladesh's established infrastructure and low labor costs will remain key advantages.

Vietnam: Has capitalized on FTAs and investments in modern manufacturing, becoming a strong competitor in apparel exports. Known for its efficient production and focus on quality also faces challenges due to rising labor costs and supply chain sustainability. Post-EUFTA India will become a stronger competitor to Vietnam in mid-range and high-value apparel segments. But Vietnam's focus on quality and efficiency will continue to be its strengths.

India: Possesses a large domestic market, abundant raw materials (cotton, etc.), and a skilled workforce. However, it faces challenges due to fragmented supply chains, infrastructure bottlenecks, and higher tariffs compared to its competitors. Also, it does not have too many FTA's that competitors posses and that is a drawback for T&A sector.

Thus the successful conclusion of the EU-India FTA by 2025 would mark a watershed moment for the T&A industry. By fostering closer collaboration and eliminating trade barriers, the agreement has the potential to create a win-win situation for both, driving economic growth and strengthening strategic partnerships.