India’s landmark Free Trade Agreements with the United Kingdom and the European Union mark a decisive shift in the country’s trade strategy. Signed with the UK in mid-2025 and concluded with the EU in early 2026, these deals promise to reshape India’s trade with two of its largest economic partners. Import tariffs on thousands of goods, ranging from luxury automobiles and premium spirits to industrial machinery and electronics, are set to fall sharply over the coming decade.
On paper, the implications look consumer-friendly. Clearer domestic tax policies could build trust, but beneath the headlines lies a more uncomfortable question. Will Indian consumers genuinely see relief at the checkout counter, or will the government quietly compensate for lost customs revenue by leaning harder on GST, cess, and excise duties? The experience with petroleum pricing suggests the latter is not only possible but also likely.
The Dawn of Mega Trade Deals
The India–UK FTA is the first comprehensive trade agreement India has signed with a significant Western economy in over a decade. Negotiated in the aftermath of Brexit, it offers London a chance to showcase its independent trade credentials and gives India preferential access to a wealthy, consumption-driven market. Nearly 99 per cent of Indian exports to the UK are slated to become duty-free over time, benefiting sectors such as textiles, jewellery, pharmaceuticals, and IT-enabled services.
The agreement with the European Union is even more ambitious. Often described by negotiators as the “mother of all trade deals,” it covers not only goods but also services, investment protection, intellectual property, and sustainability standards.
The stated goal is to double bilateral trade by 2032, a tall order given the EU’s regulatory complexity and India’s historically cautious approach to market access.
The FTAs arrive amid a reshuffling of global supply chains, accelerated by geopolitical tensions, rising US protectionism, and renewed industrial policy in China. For India, these agreements are not just about immediate trade benefits but also about positioning itself as a key player in high-value supply chains. By securing preferential access to Europe and the UK, India aims to attract foreign investment, reduce dependence on any single trade partner, and enhance its strategic role in the evolving global economic landscape.
Spotlight on Luxury Goods and Tariff Slashes
Luxury goods dominate public attention, for good reason. India has long imposed some of the world’s highest import tariffs on premium automobiles, often exceeding 100 percent, effectively walling off the market to protect domestic manufacturers. Under the UK agreement, duties on high-end cars, particularly electric and hybrid models, are set to fall to around 50 per cent under a quota system that allows up to 10,000 vehicles a year to be imported at concessional rates.
The EU deal follows a similar trajectory, though with longer timelines for traditional internal combustion engine vehicles. Premium sedans and SUVs from German manufacturers will see phased reductions, while electric cars will see faster liberalisation. For global automakers, this is a long-awaited opening into a fast-growing but heavily taxed market.
Alcohol and food products tell a similar story. Duties on Scotch whisky, once as high as 150 per cent, will fall in stages. European wines, cheeses, and speciality foods will gain improved access, potentially reshaping consumption patterns in urban India. Industrial goods, including machinery, medical devices, and electronic components, will also benefit, with implications for manufacturing costs across multiple sectors.
Optimists frame this as the “democratisation of luxury.” Social media commentary has already begun to speculate that premium cars will become commonplace and that imported spirits will lose their exclusivity. For India’s expanding upper-middle class, the appeal is obvious.
The Tax Layer That FTAs can’t Touch
But FTAs address only one layer of taxation: customs duties at the border. Once goods enter India, they are subject to the full force of the domestic tax regime. Effective implementation of domestic taxes, such as GST and cess, is crucial to ensure that benefits reach consumers and sectors equitably, fostering a sense of fairness and confidence in the policy framework.
While a reduction in Basic Customs Duty lowers the base on which GST is calculated, the overall impact is muted. Consider a luxury car imported at a CIF value of $200,000. Even if customs duty is halved from 100 per cent to 50 per cent, the vehicle still attracts 28 per cent GST and a hefty cess. The result is an ex-showroom price that remains firmly in premium territory.
Before the FTAs, total tax incidence could exceed 200 per cent. After implementation, it may drop to 100–120 per cent. That is meaningful relief for high-income buyers, but it hardly qualifies as mass affordability. For most Indians, the difference remains academic.
This structure mirrors India’s approach to petroleum pricing. When global oil prices collapsed in the mid-2010s, consumers expected cheaper fuel. Instead, the government raised excise duties, capturing the windfall to shore up revenues. Today, taxes account for more than half the retail price of petrol and diesel, generating trillions of rupees annually. The lesson is clear: when fiscal pressures loom, internal taxes tend to rise, regardless of external cost reductions.
Government’s Revenue Calculus
From the government’s perspective, the arithmetic is unforgiving. While tariff reductions under the FTAs with the UK and EU could cost the exchequer several thousand crore rupees in the first year, the long-term fiscal challenge lies in balancing these losses against rising domestic tax demands. As deficits grow due to increased expenditure on infrastructure, defence, and welfare, reliance on domestic taxes, such as GST and cesses, becomes crucial. Understanding this dynamic is vital for assessing the sustainability of India’s fiscal strategy amid trade liberalisation.
At the same time, fiscal demands are rising. Infrastructure spending, defence modernisation, welfare schemes, and interest payments compete for resources. With deficits already stretched, policymakers have limited room to absorb revenue shocks.
GST collections, now exceeding ₹20 lakh crore annually, provide a reliable fallback. Unlike customs duties, GST and cess are domestic instruments, untouched by international negotiations. Maintaining or even increasing these levies allows the government to offset losses while claiming compliance with trade commitments.
Officials argue that the broader economic benefits justify this approach. Cheaper inputs can reduce production costs, tame inflation, and enhance export competitiveness. Foreign direct investment in sectors such as electric vehicles, semiconductors, and advanced manufacturing could expand the tax base over time, offsetting short-term losses.
Sceptics remain unconvinced. Experience suggests that indirect gains often fail to translate into proportional fiscal relief for consumers.
Who Really Wins? The Uneven Pass-Through
The distributional impact of these FTAs is uneven. Upper-middle-class and wealthy consumers gain the most, particularly in metropolitan areas where demand for imported cars, spirits, and luxury goods is concentrated. A premium sedan becoming 20–30 percent cheaper is a tangible benefit for this group.
For the average consumer, gains are indirect and less visible. Lower tariffs on textiles, machinery, and components may reduce costs for domestic manufacturers, potentially moderating the prices of everyday goods. However, this pass-through is gradual and can be diluted by other factors, including input inflation and currency movements.
Meanwhile, mass-market products see little direct impact. Entry-level cars, two-wheelers, and basic consumer goods are produced mainly domestically and are unaffected by these FTAs. This asymmetry fuels criticism that trade liberalisation disproportionately benefits elites while offering limited relief to the broader population.
Strategic Upsides Beyond Consumer Prices
Yet focusing solely on prices risks overlooking the strategic dimension. These FTAs deepen India’s economic and political ties with key partners amid global uncertainty. Deeper integration with the UK and EU enhances supply chain resilience, particularly for critical technologies such as EV batteries, precision engineering, and advanced materials.
From a geopolitical standpoint, closer alignment with Europe supports India’s efforts to diversify away from overreliance on any single bloc. It also complements broader strategic partnerships in the Indo-Pacific, reinforcing India’s position amid ongoing tensions with China.
Domestically, the agreements align with the government’s push for manufacturing under the Atmanirbhar Bharat banner. By exposing Indian industry to global competition while ensuring access to advanced inputs, policymakers hope to accelerate long-term productivity gains and export growth.
A Delicate Balancing Act
The real test lies in implementation. If the government wants FTAs to be seen as genuinely pro-consumer, it has options. Targeted cess reductions, time-bound rebates, or transparent linking of customs revenue losses to visible public investments could build trust—clear communication about how gains are distributed matters as much as the gains themselves.
Absent such measures, the narrative risks turning sour. The petroleum pricing experience looms large in public memory, reinforcing the belief that external savings are often absorbed internally rather than passed on.
India’s new FTAs are undeniably transformative. They open doors, signal confidence, and embed the country more deeply in the global economy. Whether they deliver broad-based benefits or reinforce existing inequalities depends on choices made at home. Tariff cuts can unlock opportunity, but only domestic tax policy determines who ultimately walks through the doors.