India Turns to EU and US Trade Deals to Build a Stronger Manufacturing Economy

Two trade breakthroughs put India's factories in focus

India enters February 7, 2026, with two major trade breakthroughs and a manufacturing sector that still accounts for just 14% of its economy. An agreement concluded with the European Union in early 2026 promises wider access for Indian goods, while a deal announced by US President Donald Trump reduces American tariffs on Indian exports from 25% to 18% and removes additional punitive levies.

The world's fifth-largest economy is trying to turn those openings into factory production, employment and stronger supply chains. India accounts for only 1.8% of global merchandise exports, compared with China's 14%. Manufacturing's share of Indian gross domestic product, or GDP, has fallen from more than 15% five years ago, leaving it far below the government's target of 25% by 2025.

Exports have nevertheless grown. Since 2020, India's total exports increased at an annual rate of 9.4%, reaching a record $825.3 billion in the financial year ending March 2025. Policymakers now want more of that growth to come from physical goods, creating factory jobs for workers with some technical training alongside the software and business services that employ engineering graduates.

India's Economic Survey 2025-26, tabled in Parliament earlier this year, places manufacturing at the centre of economic resilience. Its argument is that services helped build prosperity, but factories can push governments to improve infrastructure, skills, logistics and regulation. For a country that needs millions of jobs annually for its youthful population, the trade agreements are part of a larger effort to change how the economy works.

India's reputation for tariffs and complicated import procedures makes the change striking. Whether this becomes a lasting move toward openness or an adjustment to international pressure will depend on what happens beyond the negotiating table.

Why the Economic Survey puts manufacturing first

The Economic Survey describes a weakness in India's reliance on software and business process outsourcing. Globally competitive technology centres have grown alongside agricultural stagnation and disappointing industrial performance, producing an economy with very different levels of opportunity.

The Survey argues that services firms can work around weak institutions or move elsewhere more easily than manufacturers. Explaining why services growth puts less pressure on government to improve its capabilities, it says such businesses:

do not systematically compel broad upgrades in state capacity

Factories need land, dependable electricity, transport connections, trained workers and predictable rules in the places where they operate. Those needs create pressure for better public administration. Manufacturing is therefore presented as a way to build the government's ability to deliver, as well as to produce goods and generate employment.

The Survey also warns that gaining access to overseas customers is only part of the task. On the relationship between trade agreements and domestic production, it states:

realising the potential of trade agreements requires that we can produce competitively.

India's ambition is to reach $2 trillion in total exports by 2030. Getting there requires attention to the cost of making goods, not simply the tariffs charged when those goods arrive abroad. Manufacturers buying expensive steel, aluminium or electronic parts may struggle to compete even when their finished products qualify for lower import duties overseas.

The Survey makes that point about protection for industries supplying other manufacturers. Its warning is that tariffs supporting an upstream producer can become a tax on businesses further along the production chain. On choosing where protection should stop, it says:

decisions about what not to protect can be as important as decisions about what to support.

What the European agreement changes

The Comprehensive Free Trade Agreement with the European Union was concluded in early 2026 after nearly two decades of negotiations. It brings together two major economic blocs covering nearly two billion people, giving India an alternative market as tariff disputes and geopolitical rivalry make international commerce less predictable.

European Commission President Ursula von der Leyen described the agreement with a phrase reflecting its scale:

mother of all deals

The pact eliminates tariffs on more than 90% of Indian goods immediately, with coverage rising to 93% within seven years. Textiles, pharmaceuticals, leather and engineering goods are among the sectors expected to benefit, alongside gems and jewellery exporters.

European machinery and components also matter to Indian producers. Imported components of high value account for 35% to 40% of electronics production costs, with some facing duties of 40% or more. The agreement cuts duties on European precision components, testing equipment and lithography tools, which are used in semiconductor production.

Pankaj Rana, chief executive of Hisense India, argues that cheaper and better inputs may be as consequential as access to export customers. He described the anticipated changes in equipment costs and certification:

The underappreciated input-side shift is massive. Precision components, testing gear, lithography tools currently face 40 percent-plus import duties from European suppliers, now dropping significantly, enabling unprecedented cost reductions while elevating quality via mutual certifications and faster EU compliance.

Lower duties could allow manufacturers to buy equipment more cheaply, while mutual certification and faster compliance procedures could reduce the work needed to meet European requirements. These changes offer a route to improving product quality as well as lowering costs.

Von der Leyen also placed the agreement in the context of growing political pressure on trade. Explaining the strategic purpose of closer cooperation, she said:

By combining our strengths, we reduce strategic dependencies at a time when trade is increasingly weaponised.

India and Europe are seeking greater protection from Washington's unpredictability as Trump imposes disruptive tariffs and questions traditional alliances. For New Delhi, European access also offers another outlet while the United States applies pressure over India's relationship with Moscow and its trade surplus with America.

The US deal and the sequence of decisions

Less than a week after the EU agreement, India secured the US breakthrough. Trump announced a reduction in tariffs on Indian exports to 18% from 25%, together with the removal of extra punitive levies imposed over India's purchases of Russian oil.

India committed to purchasing $500 billion in American goods, including energy, coal and agricultural products. It also reportedly pledged to curb Russian oil imports. The rapid announcement surprised observers and suggested that New Delhi's pursuit of relationships with competing powers was helping it negotiate better access to important markets.

The two agreements position India as a bridge between competing blocs, with preferential access to Western markets while seeking to preserve its freedom to make independent strategic decisions. The sequence connects several years of industrial policy with the latest trade negotiations:

• 2020: India launched its Production Linked Incentive scheme across 14 sectors.
• Late 2024: Production under the scheme had reached 14 trillion rupees against a target of 15.52 trillion rupees.
• March 2025: The financial year ended with total exports of $825.3 billion.
• Early 2026: India and the European Union concluded their trade agreement after nearly two decades of negotiations.
• Less than a week later: Trump announced the US agreement, including the tariff reduction to 18%.

The trade announcements give manufacturers a larger potential customer base. Turning that access into sustained orders requires competitive prices, reliable delivery and enough domestic capacity to produce the goods buyers need.

Factory incentives deliver uneven results

India launched the Production Linked Incentive scheme, known as PLI, in 2020 with an allocation of 1.97 trillion rupees, or $23 billion, covering 14 sectors. The scheme was intended to encourage manufacturing by linking support to production.

Manufacturing's share of GDP nevertheless fell from more than 15% at the scheme's launch to 14% in the financial year 2024-25. Production reached 14 trillion rupees by late 2024, below the target of 15.52 trillion rupees. Those results have prompted speculation that the government may allow the programme to lapse; its future has not been decided.

Smartphone assembly has been the clearest success. Exports rose 42% in the financial year 2024, and Apple now manufactures 20% to 25% of its iPhones in India. Foxconn, Pegatron and other major suppliers have built substantial operations, helping India overtake China as the largest smartphone exporter to the United States in 2025.

Assembly means putting components together into a finished product. A broader manufacturing network also makes those components, develops production equipment and supplies the technical knowledge needed to keep factories running. India's success in the final stage has outpaced its progress in those other activities.

Nearly 40% of India's electronic component imports still come from China, as do 70% of its active pharmaceutical ingredients. Those ingredients are the substances that give medicines their treatment effect. Dependence on foreign supplies leaves factories exposed to disruptions even as finished goods exports increase.

The uneven results show why financial incentives alone have struggled to deliver the intended industrial expansion. Factories also need workable land arrangements, reliable power, affordable transport and people with the right skills. A subsidy can help a business invest, but production still depends on those everyday conditions.

Transport, power and skills keep costs high

India's logistics costs consume approximately 14% of GDP, compared with 8% to 10% in China. Port clearance takes an average of six to eight days, against one to two days in Singapore. Longer waits and higher transport costs add to the expense of reaching customers and obtaining supplies.

Manufacturing wages in India are about $2 an hour, less than half China's $5.58, according to figures attributed to JLL. India's labour productivity is substantially lower, however. Lower wages help only to the extent that factories can produce goods efficiently and consistently.

Rigid labour laws have historically discouraged the creation of large manufacturing workforces by making hiring and dismissal difficult. Recent reforms have begun addressing those constraints, while land acquisition delays and high industrial electricity tariffs continue to complicate investment.

Around 80% of Indian employers report difficulty finding skilled workers. Shortages are acute in robotics, the industrial Internet of Things and computer numerical control operations. The industrial Internet of Things connects factory equipment through digital systems; computer numerical control uses programmed instructions to operate machinery.

Only 11.7% of manufacturing workers hold regular employee status. Most work in informal arrangements that limit productivity and the adoption of technology. Building more sophisticated production networks therefore requires better employment conditions and training alongside investment in machinery.

NITI Aayog, the government's principal policy think tank, identifies three binding constraints: land availability and acquisition delays, high industrial electricity tariffs, and gaps in education and skills. Industrial power charges can exceed production costs, placing another burden on factories trying to compete internationally.

State governments hold much of the authority over these issues, while the central government controls trade policy. Proposed remedies include digital land records, shorter acquisition timelines, more rational electricity tariffs and a manufacturing performance index to compare states. Coordination matters because states have historically competed rather than cooperated on industrial policy.

Without progress in these areas, India risks repeating a pattern in which ambitious central policies lose momentum during implementation at state level. Weakening global demand adds another constraint to the effort to turn negotiated access into industrial growth.

China supplies much of what Indian industry needs

India's trade relationship with China remains sharply unequal. Its deficit expanded between 2014 and 2024, and in the financial year 2025 imports reached $113.5 billion against exports of $14.3 billion. Those figures leave a gap of $99.2 billion.

Nearly 90% of India's purchases from China fall into categories using low or medium levels of technology, goods India could potentially produce with suitable policies. China nevertheless supplies 57% of India's telecom and electronics imports and 44% of its machinery imports, giving Chinese producers a large role in industrial operations.

China has restricted exports of gallium, germanium and graphite, materials needed in electronics, defence manufacturing and electric vehicles. Chinese authorities have also blocked essential machinery exports to India on national security grounds, with the restrictions coinciding with the final stages of India's US trade negotiations.

Chinese battery company CATL recently instructed Foxconn to withdraw all Chinese engineers from its Chennai plant. Industry observers interpreted the move as economic pressure intended to discourage India from accepting provisions in the US deal that could restrict components originating in China.

Ajay Srivastava, founder of the Global Trade Research Initiative and a former trade official, warned that dependence extends beyond imported goods to technical expertise:

China is sending an unmistakable message. India's industrial growth is heavily exposed to Chinese raw materials, technology, and engineers. These dependencies can be weaponised anytime.

The same vulnerabilities are driving the China Plus One strategy, in which manufacturers retain Chinese operations while adding production elsewhere. Indonesia attracted $28.7 billion in manufacturing investment last year, while Vietnam's manufacturing foreign direct investment rose more than 30% to $23.5 billion.

India has secured part of this shift, particularly in electronics assembly, but trails smaller competitors in building deeper supplier networks. Its task is to turn assembly plants into industrial ecosystems that also design, engineer and source components locally.

Textiles and medicines offer routes to expansion

Textiles and apparel could gain substantially from access without duties to the EU textile market, valued at $750 billion. India currently holds only 5% to 6% of that market, compared with Bangladesh's 21% to 22% and China's 28% to 30%. Tariffs have been a major disadvantage for Indian products.

Projections put Indian textile exports to the EU at $15 billion within five years, up from $7 billion, with the potential to create more than seven million additional jobs. The opportunity comes as political instability in Bangladesh brings shutdown threats and policy uncertainty for textile mills following the change of government in 2026.

Pharmaceuticals offer gains on both sides of the trade relationship. The EU agreement eliminates tariffs of 11% on European drug imports, including cancer treatments and biologics, medicines made using biological processes. It also simplifies regulatory compliance for Indian pharmaceutical exports to Europe.

Industry projections put India's domestic pharmaceutical market at $45.7 billion by 2035, compared with $31.2 billion in 2025. The agreement also encourages domestic production of active pharmaceutical ingredients, offering a way to reduce the 70% dependence on Chinese supplies.

The budget allocates 100 billion rupees, or $1 billion, to establishing India as a biopharma hub. Similar allocations support semiconductor manufacturing and container production. These investments seek to expand the industrial base behind finished products, rather than concentrating only on their final assembly.

Electronics, vehicles and regional supply chains

India's rapid expansion in iPhone production contrasts with its lack of domestic capacity for semiconductor fabrication and advanced component manufacturing. Lower tariffs on European precision testing equipment and lithography tools could reduce production costs by double digits, helping firms move into more demanding stages of manufacturing.

Electric vehicles face a related challenge because India's producers struggle with battery supplies. Chinese manufacturer BYD has invested $500 million in a Thai facility capable of making 150,000 vehicles annually, illustrating the scale of manufacturing investment going to competing locations.

The latest Indian budget prioritises expansion in seven strategic sectors, including biopharma, semiconductors, electronics components and rare earth magnets. Three dedicated chemical production parks are planned to reduce dependence on imports. Together, these measures address some of the materials and parts needed beneath the visible layer of finished products.

South Asian trade offers another possible route to scale. Trade within the region accounts for only 5% of its total trade, compared with 25% in ASEAN and 60% in the EU. Moving a container from Mumbai to Dhaka costs $538, roughly five times the $108 cost of shipping from China to Vietnam, because of trade barriers and inefficient border crossings.

Proposals for economic zones crossing national borders would connect India with Bangladesh in textiles and electronics, Nepal in food processing, and Sri Lanka in automotive components and pharmaceuticals. The aim is a regional production network comparable to the supply chains China developed with Vietnam and Thailand.

Such integration could help regional trade move toward $2 trillion over the next decade and a half. It would also give manufacturers access to nearby suppliers and markets, complementing the more distant opportunities opened by agreements with Europe and the United States.

India's trade strategy now combines wider market access, cheaper imported inputs and support for strategic industries. Its manufacturing ambitions depend on connecting those measures with practical improvements in transport, power, land, skills and supplier networks. Factories must be able to deliver competitively for the new agreements to translate into lasting production and jobs.

Key Points

• The EU agreement removes tariffs on more than 90% of Indian goods immediately, rising to 93% within seven years.
• The US deal announced by Trump cuts tariffs on Indian exports from 25% to 18% and removes additional levies linked to Russian oil purchases.
• India committed to buying $500 billion in American goods and reportedly pledged to curb Russian oil imports.
• Total Indian exports reached $825.3 billion in the financial year ending March 2025, but manufacturing contributes only 14% of GDP.
• Smartphone assembly has expanded rapidly, while reliance on Chinese components, pharmaceutical ingredients, machinery and expertise remains substantial.
• Textiles, pharmaceuticals and electronics could benefit from better market access and cheaper production inputs.
• Land, electricity, logistics, skills and regional trade remain central to India's ambition of reaching $2 trillion in total exports by 2030.