India and EU formally began negotiations on the Bilateral Trade and Investment Agreement (BTIA) in Brussels, Belgium on 28th June 2007. Through this India and EU expect to remove barriers to trade in goods, services and investment across all sectors of the economies. Precisely, EU would want India to reduce tariffs in goods and remove FDI restrictions in key services such as retail and legal. India, on the other hand, would want EU to remove Non-Tariff Barriers (NTBs) in goods and increase market access for professional services. Over the decade, EU has emerged as India’s largest trading partner in goods, accounting for 20 per cent of India’s goods trade. Services trade between the two has also grown. Reciprocity of flows of FDI has been witnessed between the two sides and EU has interestingly, emerged as the main destination for Indian companies in 2005-06. Approximately 50 per cent of total mergers and acquisition by Indian companies are in EU. Some examples are the Tata Group, which holds 18 companies in the UK alone and Godrej Consumer Products, which acquired Keyline Brands of Britain in 2006. EU is one of largest source of FDI to India, mainly in sectors like power/energy, telecommunications & transportation. Within EU, a large proportion of FDI flows to India are from U.K., Netherlands, Germany, France, Italy and Sweden However, India receives only a miniscule one percent of EU’s outward FDI flows and ranks far behind other Asian countries like Japan, China, Indonesia, South Korea and Taiwan.
The FDI flows from EU to India depict a fluctuating trend. There has been a sudden surge in FDI flows into India during 2000-01, as a result of India’s liberalization policy. During 2002-2006, the FDI inflows declined, due to diversion of EU’s investments into the new EU member countries during this period. During this period, intra- EU FDI flows increased, while, EU’s outward FDI flows reduced. Later in 2006, FDI flow from EU picked up in response to the Strategic Partnership Joint Action Plan adopted for economic cooperation, establishment of High Level Trade Group and a positive investment climate in India. This reversal of trend was mainly on account of massive inflow of investment from the UK in 2006, wherein Cairn Energy stood out as single largest investor with Rs 6,663.23 crore of investment. This is heartening for a growing economy like India, where large scale investments are crucial, especially in the infrastructure sectors like power and transport. Hence the importance of EU as provider of capital cannot be ignored, but there exists a large untapped potential. India can gain tremendously by improving the investment conditions in India and that can act as a motivation for negotiating a new bilateral trade and investment agreement between India and EU.