Apr. 11--Since 2007, India and the European Union (EU) have been negotiating a free trade agreement (FTA). The negotiations not only cover trade in goods but also services, rules pertaining to intellectual property rights, cross-border investments, competition policy, government procurement and regulatory issues.

The EU as a bloc is India's largest trading partner, accounting for 23 percent of India's total trade in 2007. India contributes only 1.8 percent of the total EU trade and is its 10th largest partner. Services are an emerging area of EU-India trade. The EU is also one of the largest sources of foreign direct investment (FDI) in India, with major investments in energy, telecommunications and transport. Of late, many Indian private companies are also undertaking substantial investments in several European countries.

An FTA with India is a key component of the EU's "Global Europe" policy framework based on several long-term economic and strategic goals. India currently leads the list of Asian countries with 30 FTAs, followed by Singapore with 26, China and Korea with 22 each and Japan with 19. Out of India's 30 FTAs, eight are within Asia. Apart from closer economic ties, India sees potential geopolitical gains in forging FTAs, particularly within Asia.

One of the major underlying themes in the India-EU talks is the liberalisation of trade and investment in financial services. Financial services cover a wide range from banking to insurance to brokerage and asset management. Global trade in financial services has registered rapid growth in the past two decades on account of growing internationalisation of trade and finance. Financial services firms see regulation as the biggest obstacle to their global ambitions.

The liberalisation of trade and investment in financial services is a part of wider financial sector liberalisation that consists of domestic (e.g. interest rate deregulation) as well as external (e.g. capital account liberalisation) reforms.

Bilateral agreements have generally led to increased financial services liberalisation commitments compared with those made under the Gats (General Agreement on Trade in Services) framework of the WTO. For instance, the US-Singapore FTA signed in 2003 led to deeper opening of cross-border trade and investment in financial services in Singapore. More importantly, the FTA incorporates strong discipline on the use of capital controls during a crisis.

With the help of an FTA with India, the EU would like to achieve significant liberalisation of India's banking sector, well beyond what has been achieved under the Gats framework.