At Khan Market in New Delhi, Atul Mehra was optimistic that a deal between the European Union, the world's single largest market, and India, the world's fastest growing major economy, will revive his gems and jewelry business. He lost a quarter of his earnings last year, after US President Donald Trump imposed 50% tariffs on his country. 

"We have suffered massive losses since the tariffs, people in the US were our major clients," he told DW. "And we hope that a deal with the Europeans will help us, and everybody." 

Vishnu Gupta, a garment shop owner on the same street who has business all over India, said the deal would allow him to expand his trade and find new markets.

While the US has said the high tariffs are meant to dissuade India from buying Russian crude oil, it appears the EU has adopted a different approach to lure India away from Moscow's orbit — more trade and stronger defense ties. 

At a high stakes summit in New Delhi this week, the EU and India are expected to finalize a free trade agreement and sign a new security and defense partnership, the third such agreement between the EU and an Asian country after Japan and South Korea. 

"Despite longstanding arguments in favor of a closer partnership, including shared competition with China and trade incentives for both parties, it was Russia's invasion of Ukraine and Trump's punitive tariffs that have brought momentum to the relationship," said Praveen Donthi, a senior analyst at the International Crisis Group based in Delhi.

EU, India carve ambitious path 

Before the summit, European Commission President Ursula von der Leyen and European Council President Antonio Costa will be the chief guests at India's Republic Day celebrations on Monday, when diverse floats from all over country will be on display alongside parading tanks and soldiers. They are the first top EU officials to be invited to take part in the event.

On Tuesday, officials are set to conclude talks on the trade agreement that would create a market for nearly 2 billion people who account for a quarter of the world's GDP. Von der Leyen and Indian Prime Minister Narendra Modi will also attend the first EU–India Business Forum, alongside more than two dozen major industrialists from both sides. 

The EU and India are also expected to launch a new cooperation framework on labor mobility, under which the EU hopes to attract high-skilled and seasonal workers from India. "Of course, in line with what the labor market in the European Union needs," an EU official said, on condition of anonymity to speak freely.

In addition, the EU hopes to explore a potential role for India in the EU's flagship research and innovation program, Horizon. 

"Leaders will also touch on connectivity," the official added. "We are particularly focused on the India-Middle East-Europe Economic Corridor, IMEC, which would create new transport, digital and energy connections between India and Europe" via Arab countries and Israel. 

What do EU, India hope to gain? 

"Europe wants to do business with the growth centers of today and the economic powerhouses of this century," von der Leyen said Wednesday at the World Economic Forum in Davos, calling the trade agreement with India "the mother of all deals."

According to EU data, the EU is India's largest trading partner; trade in goods reached worth €120 billion in 2024, 11.5% of India's total trade. By 2030, India is projected to be the world's third-biggest economy after China and the US.

The EU is hoping India will drop its famously high tariffs on imported vehicles, currently more than 100%, and boost the European car industry in the face of competition from China. And, as Indians move up the ladder in economic mobility, the European alcohol industry stands ready to quench their thirst for fine wines and spirits. Under the trade deal, India is expected to scrap its staggeringly high tariffs on alcohol — as high as 150% on imported wines. 

Last year, under its free trade agreement with the United Kingdom, India agreed to drop tariffs on both cars and alcohol but in phases — to reduce the impact on domestic manufacturers.

For its part, India has demanded easier standards for its pharmaceutical exports, and the same duty-free access for textiles that the EU gives to Asian neighbors like Pakistan and Bangladesh. Delhi hopes this will offset the impact of the US tariffs, which have been especially damaging for India's garment sector. 

India is also hoping to send more professionals to the EU for employment opportunities, and is looking for commitments on joint production in the defense industry.

Lisa Musiol, head of EU affairs at the International Crisis Group in Brussels, said India is the first country with close political and military ties to Moscow to strike a key defense partnership with the EU. 

"Over time, this partnership could open the door for New Delhi to tap parts of the EU's SAFE loan facility for common defense procurement," she said, in reference to a €150 billion EU financial instrument called Security Action for Europe, or SAFE, that offers low-interest loans to obtain defense equipment and strengthen EU's defense industry.

Experts told DW that while India is still largely dependent on Russia for its military equipment, that dependence is gradually reducing as New Delhi diversifies its suppliers. France has emerged as a key partner, and India has stepped up talks with Germany on contracts for military transport aircraft and submarines. For its part, India hopes to supply the EU with ammunition, much needed in Ukraine, and could potentially free up European supplies to send across to Kyiv.

Overall, India aims to increase its exports to the bloc, which currently account for just 2.5% of the EU's total imports, and enhance its supply chain integration.

What are the sticking issues? 

While there is a lot on the table, negotiations are expected to go down to the wire as several sticking points persist. 

As with the recent EU-Mercosur trade deal, agriculture has emerged as a top concern. Nearly half of India's workforce is employed in agriculture, and India is worried that European agricultural products might replace Indian products and threaten the livelihood of millions of people. That had made Delhi reluctant to grant the EU the kind of market access it seeks. 

The topic is also highly politically sensitive for New Delhi. In 2021, when massive farmer protests forced Prime Minister Modi to withdraw a series of agricultural reforms, it was seen as a rare and public political retreat for the powerful leader.

But the EU, battered with its own farmers' protests against the Mercosur deal with South America, is under immense pressure to seek new markets for Europe's agricultural produce.

Brussels is equally hesitant to grant certain Indian agricultural exports unimpeded access to EU markets. Last month, the bloc reportedly decided to limit rice imports from India and other Asian countries to protect domestic rice growers and millers. 

Steel is another major bone of contention, especially since the EU doubled tariffs on foreign steel in October and slashed the quota for duty free imports in half. The spike in tariffs was introduced on top of a new carbon tax that will make Indian steel exports less competitive.

The EU claims its carbon tax is intended to reduce its global carbon footprint, but Indian diplomatic sources say both measures are protectionist.

And yet, both sides agree the only way is forward. 

"We don't see eye and eye on everything, but we do share a set of core interests, " the EU official said. "Like stable international order, reduced [trade] dependencies, and diversified supply chains." 

Edited by: Martin Kuebler