Not yet done deal

The recently concluded free trade agreement between India and the European Union, described by both sides as historic, promises a dramatic reduction in tariffs on nearly 90 per cent of European goods entering the Indian market. On paper, this should translate into significantly cheaper imports – from machinery and automobiles to consumer goods, food products and specialised equipment. Actually, following the historic conclusion of the India-EU Free Trade Agreement (FTA) on January 27, 2026, the Modi government’s power to impose additional taxes is strictly limited by the new treaty rules.Under this “Mother of All Deals,” India and the EU have moved from “discretionary power” to a “rules-based framework.” In economic theory, tariff reductions lower the landed cost of imports, increase competition, reduce prices, and improve consumer choice. In practice, however, India’s tax architecture is far more complex. Tariffs are only one component of final prices. Imported goods also attract GST, cesses, surcharges, compliance costs and high logistics expenses. If the government chooses to raise or recalibrate these indirect taxes, much of the tariff relief can be clawed back without formally reneging on the trade agreement.The Modi government faces a difficult balancing act. Customs duties have historically been an important source of revenue, particularly on high-value imports. A sharp reduction in tariffs risks widening the fiscal deficit at a time when public expenditure commitments are high. The political temptation, therefore, will be to compensate for lost tariff revenue by increasing GST on select categories, imposing special cesses on luxury imports, or introducing new regulatory charges. These measures are less visible than headline tariff hikes, yet equally effective in maintaining government revenues. There is also the question of domestic industry protection. While Indian exporters gain improved access to European markets under the agreement, several domestic sectors- notably automobiles, electronics, machinery and high-end manufacturing – face intensified competition from efficient European producers. This suggests that India is not opening the floodgates overnight, but managing exposure in a controlled and politically calibrated manner. Some of the items that will become cheaper and some over which no tariff is levied, will drive the market crazy. Luxury Cars110%10% (within a 250k unit quota)Wines & Spirits 150%20% – 40% Machinery & Chemicals Up to 44%0% (for most items)Processed Foods Up to 50%0%. From a political standpoint, the government cannot afford a perception that the deal benefits only European exporters and large Indian importers while ordinary citizens see little relief. Visible price reductions in certain categories will be necessary to justify the agreement domestically. Strategically, the trade agreement fits into India’s broader ambition of integrating with global supply chains, attracting investment, and upgrading domestic manufacturing through access to advanced technology and cheaper capital goods. Lower-cost imports of machinery and specialised equipment could improve productivity for Indian firms, even if retail price benefits are uneven. The real long-term gains lie in competitiveness, export growth and job creation rather than immediate consumer discounts. The most likely outcome, therefore, is not a dramatic fall in prices across the board, but a mixed and measured approach. Some tariff benefits will reach consumers and producers, particularly where competition intensifies and margins are forced down. At the same time, the government will almost certainly use indirect taxes, phased implementation and regulatory tools to protect revenues and shield vulnerable domestic sectors. Ultimately, the success of this agreement will not be judged by how cheap European goods become in Indian shops, but by whether India uses this opening to strengthen its own industrial base, improve efficiency, and expand exports.