Economic Survey flags EU’s carbon tax as trade barrier that could hit India's exports

New Delhi: The Economic Survey 2024-25 has raised concerns about the European Union’s Carbon Border Adjustment Mechanism (CBAM), calling it a restrictive trade policy that could threaten India’s exports and widen the current account deficit.

Released by finance minister Nirmala Sitharaman in Parliament on Friday, the survey noted that while the EU has positioned CBAM as an environmental safeguard against carbon leakage, the so-called ‘carbon tax’ posed significant risks to India’s trade prospects.

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The timing of the observation is crucial, as India is engaged in negotiations for a free trade agreement with the EU, one of its key trade partners. The 10th round of talks is expected to begin in March, and the concerns raised in the survey add to the complexity of the negotiations.

Highlighting broader external sector trends, the survey questioned whether India’s sustainable current account deficit might be lower than earlier estimated, which would have implications for capital formation and investment efficiency. While geopolitical tensions have created uncertainties, India’s merchandise trade has remained resilient, it said.

Weak global demand

Goods exports have seen moderate growth due to weak external demand, but strong domestic consumption has driven imports higher. Meanwhile, increased net services receipts and robust remittances have helped offset the impact of the rising trade deficit, it said.

On the capital front, India has witnessed net positive inflows, with gross foreign direct investment (FDI) inflows growing 17.9% to $55.6 billion in the first eight months of FY25 from $47.2 billion in the same period of FY24. However, a surge in repatriation has restrained net FDI growth, while foreign portfolio investment inflows have remained volatile, the survey noted.

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With global trade shifting away from broad-based globalisation towards protectionism, the survey emphasised the need for a new strategic trade roadmap. To stay competitive in international markets, India must focus on reducing trade costs, improving trade facilitation, and enhancing export competitiveness, it said.

Joint effort

The survey called for a joint effort by the government and private sector. While the state must strengthen governance and policy frameworks, industry must continue investing in quality and efficiency. The survey asserted that despite increasing trade barriers, India has the potential to expand its share in global markets, provided it strengthens its trade competitiveness and capital formation. Sustaining higher economic growth, it noted, remains within India’s control, provided it navigates these challenges with a strategic, long-term approach.

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India’s merchandise trade deficit fell to a three-month low of $21.94 billion in December on the back of higher exports, according to commerce ministry data. The cumulative value of merchandise exports for April-December 2024 stood at $321.71 billion, a 1.6% increase from $316.65 billion during the same period in 2023.