India's export sector is bracing for significant challenges as the European Union has suspended Generalised Scheme of Preferences (GSP) benefits for a substantial 87% of Indian goods, effective from January 1, 2026. This pivotal development, highlighted in a recent report by the trade policy think tank Global Trade Research Initiative (GTRI), means that a large majority of Indian exports will now be subject to full Most Favoured Nation (MFN) tariffs, marking the end of years of preferential access under the EU's unilateral trade arrangement designed for developing countries.
Understanding the GSP Withdrawal and Its Immediate Impact
Under the GSP framework, Indian exporters previously enjoyed a margin of preference (MoP), which translated to an average reduction of around 20% on MFN tariffs for key sectors such as textiles, garments, and various industrial products. With this suspension now in effect, that preferential treatment has come to an abrupt halt. For instance, an apparel item that previously attracted a 12% MFN tariff but paid only 9.6% under GSP will now be subject to the full 12% duty, directly squeezing exporter margins and affecting profitability.
GTRI emphasizes that this change is particularly consequential for price-sensitive sectors like garments, where even minor tariff increases can significantly influence sourcing decisions. This shift may push EU buyers towards alternative duty-free suppliers, such as Bangladesh and Vietnam, potentially eroding India's competitive edge in these markets.
Broad Impact Across Core Industrial Sectors
The suspension of GSP benefits applies to nearly all major industrial categories that form the backbone of India's exports to Europe. These include:
- Minerals and chemicals
- Plastics and rubber products
- Textiles and garments
- Stone and ceramics
- Precious metals
- Iron, steel, and base metals
- Machinery and electrical goods
- Transport equipment
GSP preferences will now remain available only for a limited set of products, including agriculture and food items, leather goods, wood and paper products, footwear, optical and medical instruments, and handicrafts. However, these categories together account for less than 13% of India's total exports to the EU, highlighting the widespread nature of the tariff impact.
FTA Optimism Tempered by Timing Challenges
While negotiations on the India-EU Free Trade Agreement are reportedly close to conclusion, the agreement is expected to take at least a year to come into force after finalization. This timing gap means that exporters will have to operate under full MFN tariffs in the interim, raising costs and squeezing margins during a critical period. The near-term challenges are compounded by already fragile global trade conditions, requiring Indian businesses to adjust swiftly to higher duties.
CBAM Adds Another Layer of Cost Pressure
Compounding the impact of GSP withdrawal, the tax phase of the EU's Carbon Border Adjustment Mechanism (CBAM) is also set to commence from January 1, 2026. Indian exporters in sectors like steel and aluminium are facing rising carbon reporting and compliance requirements, along with the risk of being charged default emissions values, which increases non-tariff costs. GTRI describes the combined effect of higher tariffs and CBAM compliance as a double pressure on exporters, creating a multifaceted challenge for India's trade with Europe.
Why the EU Withdrew GSP Benefits
The EU's GSP system allows developing countries to export at reduced tariffs but includes graduation rules, under which preferences are withdrawn once exports in a product group cross a specified threshold for three consecutive years. India has been graduated for the 2026–2028 period under Commission Implementing Regulation (EU) 2025/1909, adopted in September 2025. While this decision follows established EU rules, the report notes that the economic impact is immediate, with most Indian exports losing preferential access simultaneously.
With higher tariffs, rising compliance costs, and delayed FTA relief, 2026 is shaping up as a particularly testing year for Indian exports to Europe, according to GTRI. Ajay Srivastava noted that until the India-EU FTA is implemented, exporters will need to navigate a period of reduced competitiveness, especially in sectors exposed to both tariff and climate-related trade measures.
