Potential impact of the proposed India-EU FTA on India’s food processing sector

The proposed India-EU Free Trade Agreement (FTA) is expected to have a positive impact on the Indian agri and food processing sector. Indian exporters face a plethora of challenges, despite the EU’s imports of several items in considerable quantum from India. Most notable among these are the non-tariff barriers such as strict EU residue levels of pesticides, maximum residue limits (MRLs), sanitary & phytosanitary standards, traceability, hygiene, etc. India has requested the EU to reduce the stringency of MRLs for several items, such as rice, spices, peanuts, chillies, tea, grapes, vegetables and seafood which are regarded by India as trade-restrictive. Other issues, such as limited acceptance/ recognition of the Indian certification bodies, add to the cost and burden of compliance affecting the overall competitiveness of exporters.

If negotiated well, an FTA could bring multiple upside gains:

• Tariff reductions/elimination for exports: Lower or zero tariffs on processed foods from India entering the EU will improve price competitiveness. The proposed FTA may open up new market opportunities in the EU for India’s value-added food items which currently suffer due to tariff and non-tariff barriers.
• Reduced costs for imported inputs: If under the FTA, tariffs on machinery, packaging materials, and inputs (where the EU has strength) are lowered, processing costs for Indian firms may decrease. This could reduce the cost of compliance (e.g. importing high-spec packaging, refrigeration equipment).
• Export diversification and value chain upgradation: Indian processors could move more into premium or niche segments (organic, health foods, additives, functional foods) which have higher margins. This would help boosting to the exports in the food processing sector. Better branding, Geographical Indications (GIs), traceability, sustainability credentials could become distinguishing factors.
• Regulatory certainty and improved compliance and standards: If the FTA includes provisions for recognition of Indian labs, control bodies, certification authorities, there will be more predictability over regulatory changes (e.g. pesticide residue limits and hygiene standards) which will reduce risk and cost for exporters. This will lead to adoption of Good Manufacturing Practices (GMP), Hazard Analysis Critical Control Point and ISO certifications, boosting quality across industry.
• Scale, investment and technology transfer: The FTA may attract EU investment into Indian food processing sectors (equipment, cold chain, packaging, research). Joint ventures, contract manufacturing, transfer of advanced technologies (e.g. in preservation, packaging and quality control) may become more viable.
• Employment and MSME growth: The food processing sector is labour-intensive. Improved export prospects can stimulate growth of processing units, especially in semi-urban and rural areas. MSMEs can gain from being part of export value chains if regulatory burdens and access costs are lowered.

For the Indian food processing sector to fully leverage an FTA with the EU, several policy, institutional, and industry actions are crucial.

The FTA may need to include strong provisions for recognition/equivalence of Indian certifying bodies, labs, traceability and regulatory systems, along with articulation of a phased implementation of the new standards to give exporters time for upgrading.

Harmonisation of Indian regulations with international norms (Codex, international SPS agreements) may be needed. Moreover, a mechanism needs to be set up for early warning on EU regulatory changes. Most importantly, strengthening the capacity of regulatory authorities (APEDA, FSSAI) in India for testing, and enforcement has to be of utmost priority.

The government needs to continue its focus on investment in cold chain, storage, packaging, transport to reduce spoilage and maintain quality. Public-private partnership (PPP) models may be encouraged to improve processing infrastructure, especially in rural/semi-urban areas. Given a large segment of this sector belongs to MSMEs with limited formal training, more programmes on awareness sessions on GMP, trainings on food safety, export-oriented product development, sustainability, environmental compliance, etc. would be required.

Encouraging development of niche/high-margin segments such as organic, health foods, ethnic foods and ready meals can help tap the growing demand in these segments. Given the rich diversity in production, GIs may be leveraged and marketed better. Augmenting funds towards R&D, product & packaging innovation, and activities towards post-harvest management will not only improve efficiency but also make the sector globally competitive.

While the FTA apparently has quite a few upsides, it needs to be ensured that the domestic industry is protected via safeguard mechanisms, if import surge threatens domestic processors. Insurance/ trade risk coverage for exporters may be explored.

Setting up institutional mechanisms within the FTA would be instrumental in handling trade disputes, SPS disagreements, non-tariff barrier issues. Clear rules of origin and customs facilitation would help reduce delays and avoid cost escalation.

This article is authored by Soumyak Biswas, partner, food and agribusiness, Management Consulting, BDO India.