Trade tailwinds: Indian farmers and SMEs need support for success in European export markets

The EU, through its Green Deal and subsequent directives such as those on deforestation (EUDR) and Corporate Sustainability Due Diligence (EUCS3D), has implemented stiff regulations covering food safety, soil health and environmental and labour standards, including rules on greenhouse gas emissions and the wages, health, gender balance, age adequacy and work conditions of workers.

These issues are covered under different chapters of the India-EU trade deal. In the chapter on Trade and Sustainable Development, for example, both sides commit to environment protection, labour standards and sustainable production across the agricultural value chain.

The EU is among India’s top agri-export markets, accounting for over 10% ($5.25 billion) of our exports in 2024-25. While the FTA will help reduce tariffs and enhance the export prospects of marine products, grapes and other items, some of our core export items like rice and tobacco do not get any tariff reduction.

In 2024-25, unmanufactured tobacco was India’s third-largest agri-export to the EU, accounting for 9.7% of such exports ($511.8 million) while basmati rice ranked eighth with a share of 4.5% ($236.9 million). Securing export markets for such products is a necessity and requires meeting EU standards.

Indian rice exporters have been under the EU’s scanner for food safety, stubble burning and child labour. Between 2020 and 2025, 136 notifications were issued to the EU’s Rapid Alert System for Food and Feed on Indian rice exports, of which 77 were due to tricyclazole, a pesticide banned in the EU since 2016.

In the case of tobacco, excessive use of inorganic fertilizers, mono-cropping and poor quality of irrigation water have been degrading soil fertility. Curing tobacco leaves in wood-fired barns leads to significant greenhouse gas emissions. Labour related issues like lower wages for women and migrant workers and occupational hazards such as green tobacco sickness have been cited by multiple studies. If we don’t address them, we may lose the EU market to our competitors.

Most Indian farmers and small-and-medium-enterprise (SME) exporters lack knowledge about the EU’s requirements and don’t have funds for investment in technology and processes. They often go for the cheapest option rather than the best. Foreign direct investment (FDI) is not allowed in many agricultural fields, making it difficult for EU importers and manufacturers to work with supply chain partners here. In fact, many of them are unable to connect beyond Tier 1 suppliers. There is an urgent need for supply chain traceability.

India’s Tobacco Board assigns origin codes to bales of Flue-cured Virginia tobacco, but there is no farm traceability for Burley. There is hardly any traceability to the field for rice—most sourcing is done from mandis.

Our survey of EU importers found that from a distance, they are unable to manoeuvre through our fragmented supply chain. Indian farmers and SMEs are often not told that their products are for export, so that they don’t demand higher prices. This leads to a situation where they get low prices while their cost of production must rise to meet sustainability requirements. Lack of awareness about carbon credits keeps them from claiming these.

Government agencies like the Tobacco Board and National Institute for Research in Chemical Agriculture have identified key risks and set targets to reduce the use of fertilizers by 20% and of pesticides by 50% within a stipulated period. They have also identified technologies to help meet EU requirements, but implementation requires funding. Our survey found that while some Indian companies are working with farmers, these efforts need to scale up quickly.

There are many complexities. As part of India-EU talks on an investment agreement, some stakeholders want FDI restrictions to protect certain agricultural fields. Policies on direct sourcing from farmers vary across states. The Centre had tried to let the private sector source directly from farmers through its farm bills, but these were withdrawn in the face of opposition. FDI is prohibited in tobacco manufacturing and EU companies don’t know how they can invest in SMEs, as suggested in the EUCS3D.

Meanwhile, some of our competitor countries have allowed FDI in support of exports. Brazil and Indonesia allow FDI in tobacco and so their firms can easily join the supply chains of EU companies. In China, the entire supply chain is state-owned, but the government is investing heavily to meet export requirements.

India should review its FDI restrictions and think of smart options for exports that could be made part of an India-EU investment agreement. A well-designed, export-oriented investment strategy that is grounded in sector-specific requirements is essential for export success. This will require fine-tuning domestic policies so that local producers can meet global standards. Indian export agencies should work with EU companies to identify their requirements and with New Delhi to address them.

India has recently eased FDI from China. Perhaps it’s time for New Delhi to rethink its position on joining the Investment Facilitation for Development group at the WTO.

The authors are, respectively, professor and research assistant, Indian Council for Research on International Economic Relations.