Under the GSP, exporters previously enjoyed a “margin of preference”, typically averaging around 20 percent for products such as textiles, clothing and industrial products. For example, clothing subject to an MFN tariff of 12 percent paid only 9.6 percent under GSP. With the benefit removed, exporters now have to absorb the full 12 percent duty, which has a direct impact on prices and margins.
The impact extends to almost all major industrial sectors that support Indian exports to Europe, including minerals, chemicals, plastics, textiles, iron and steel, machinery and electrical products. GSP benefits now only apply to a narrow set of products such as agriculture, leather goods and handicrafts, which together account for less than 13 percent of Indian exports to the EU.
The EU’s decision stems from its “graduation” rules, under which tariff preferences are withdrawn when exports of specific product categories exceed prescribed thresholds for three consecutive years. India was therefore “graduated” for the period 2026-2028 under regulations adopted in September 2025. Although this decision is legally valid, a report by the Global Trade Research Initiative (GTRI) notes that the economic impact is immediate and severe, with most Indian exports losing preferential access overnight.
The timing has compounded the challenge for exporters. Even as negotiations on the India-EU Free Trade Agreement progress, the loss of GSP benefits coincides with the launch of the tax phase of the EU’s Carbon Border Adjustment Mechanism (CBAM) from January 1, 2026. GTRI describes this as a “double whammy”, combining higher tariffs with increased non-tariff costs.
Indian steel and aluminum exporters are already grappling with increased expenses on carbon emissions reporting and compliance, as well as the risk of being charged higher default emissions under CBAM. Together, these pressures are expected to reduce margins and weaken India’s competitiveness compared to its global peers.
In highly price-sensitive sectors, such as clothing, even modest tariff increases could push EU buyers towards duty-free suppliers like Bangladesh and Vietnam. Since implementation of the India-EU FTA is likely to take at least a year, if not more, Indian exporters will have to operate under full MFN tariffs in the meantime.
Amid a fragile global trade environment, GTRI warns that 2026 could be one of the toughest years for Indian exports to Europe in more than a decade, as exporters face higher tariffs, carbon costs and increased competition.
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