📰Europe and India Become Friendlier

Three stories on Indian markets that you can't miss.

March 03, 2025

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Good evening, 

Welcome to the best way to stay up-to-date on India’s financial markets. Here’s what’s in today’s newsletter:

  • EU chief Ursula von der Leyen meets Modi to deepen relations,

  • Adani Green gets a $1.1 billion loan to expand climate technology,

  • and March’s hot temperatures could force the government to cut import duties on wheat.

Then, we close with Gupshup, a round-up of the most important headlines.

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—Shreyas, [email protected]

Market Update.

EU-India Deepen Relations

The recent visit of EU President Ursula von der Leyen and her fellow commissioners to India marked a significant moment in EU-India relations. At the heart of this renewed engagement is a commitment to a free trade agreement, targeted for completion by 2026. This push signals Europe’s intention to deepen economic ties with India, a country that represents a growing industrial and manufacturing base. With transatlantic tensions rising and China’s economic influence remaining unparalleled, the bloc is diversifying its trade and security partnerships.

AP News

Additionally, the emphasis on a defense partnership with India, similar to agreements with Japan and South Korea, reflects the EU’s need to bolster its security arrangements in a world where reliance on traditional allies is becoming less certain.  

What’s changed? Three years ago, India’s neutral stance on the Russian invasion of Ukraine was a sore point for EU policymakers. However, the recent diplomatic outreach suggests that Europe has recalibrated expectations—or is left with few other options. Instead of insisting on ideological alignment, European leaders are now prioritizing pragmatic engagement. This shift is driven by Europe’s growing realization that it cannot afford to be isolated in an increasingly multipolar world.

India emerges as a crucial, imperfect alternative. While its economic footprint remains modest — accounting for just 2 percent of global trade — it is still the EU’s largest trading partner in South Asia. More importantly, India possesses an industrial base that could support strategic interests in defense production.  

Growing defense capability: One of the more intriguing aspects of the EU’s outreach is its focus on India’s defense manufacturing capabilities. While India is not yet a major global arms supplier, its ability to scale basic manufacturing has caught attention. Companies like Bharat Forge have demonstrated impressive production capacities, as seen in their recent exports of over 100 155-mm artillery systems and their historical output of 100,000 artillery shells in a month during past conflicts.  

With European countries dramatically increasing defense budgets amid rising security threats from Russia, Indian manufacturers could help meet urgent demands. India’s interest in joining EU defense projects under the Permanent Structured Cooperation (PESCO) program further reinforces the potential for deeper security cooperation. India is still far from South Korea’s defense supply capabilities and China’s industrial might, thus this new partnership depends on whether European funding and incentives can accelerate India’s defense production capabilities to meet global demand.  

Other manufacturing is harder. While defense collaboration appears promising, Europe’s hopes of making India a China substitute face significant obstacles. China remains indispensable to global trade, with it contributing over 15 percent of the world’s trade. Despite efforts to reduce dependence on Chinese manufacturing, Europe cannot expect India to fill the void overnight. Structural issues like infrastructure constraints, labor market inefficiencies, and regulatory hurdles continue to hinder India’s competitiveness. Moreover, India’s own trade focus remains stronger on the Gulf and ASEAN than on Europe.  

PFC Furthers Green Energy, Starting with Adani Green.

Power Finance Corporation (PFC) has refinanced a $1.1 billion (₹92.6 billion) construction-linked loan for Adani Green. This validates Adani’s domestic strategy and highlights its commitment to green expansion.  

A safe, long partnership: The 19-year fixed-rate loan will be held by PFC until maturity, marking a long-term financial commitment by the state-owned entity (SoE). This structure provides Adani Green with financial predictability since interest rate risk on long-duration infra projects is eliminated. 

The AA+ rating and stable outlook assigned to this facility by three rating agencies further indicate confidence in Adani Green’s ability to service its debt over the long term. This rating is crucial in ensuring continued investor interest in renewables.

International scrutiny: This refinancing comes at a time when the Adani Group is facing increasing scrutiny from foreign investors, particularly following the DoJ’s probe into its financial dealings. This has led to domestic financing becoming vital since there are offshore fundraising challenges for the conglomerate.

By securing financing from an SoE, Adani Green ensures the continuity of its projects while mitigating concerns over external capital flight. This move could set a precedent for other large renewable companies, signaling a shift toward greater reliance on domestic financial institutions for funding.  

PFC’s Decision Making: PFC’s aggressive push into renewable financing aligns with India’s ambitious goal of achieving net zero emissions by 2070. The country, currently the third-largest carbon emitter, requires an estimated $12.4 trillion (₹1.1 quadrillion) in investment to meet its long-term sustainability targets.  

Earlier this year, PFC executed a major green financing agreement with the Japan Bank for International Cooperation for $747 million (₹65 billion). There are now more international financing avenues for renewables. The Adani deal builds upon this momentum, reinforcing PFC’s position as a key player in India’s transition to clean energy.

Another Hot March Could Lead to Wheat Duty Cuts.

India’s wheat millers are pressing the government to lower or eliminate the 40 percent import duty on wheat as the country grapples with low stockpiles and high prices. With retail wheat prices up 8 percent y-o-y and domestic reserves at 16-year lows, the pressure to secure alternative sources of supply is mounting.  

Why push now? The Rollers Flour Millers’ Federation argues that reducing or eliminating the import duty is essential to ensure market stability. However, they propose that the cut should take effect in June after the domestic harvest is sold to protect local farmers from sudden price fluctuations. A key concern is weather volatility: India is bracing for hotter temperatures in the coming months which could hurt domestic harvests leading to high import duties exacerbating shortages.  

Regional disparities cause South India to benefit if import duties are slashed. Millers in the south often face high transport costs when sourcing wheat from north and central India, where most of the country’s production is concentrated. 2 to 3 million tons of wheat imports could become viable for the southern market if the government lowers the duty, making imports cheaper than domestic transport.  

The government’s issue. On one hand, protecting domestic wheat farmers is a priority, especially with the 2024-25 harvest expected to rise to 110 million tons, up from 106 million tons the previous year. On the other hand, controlling food inflation and ensuring adequate reserves are equally critical. Policymakers must weigh the trade-off between import flexibility and farmer welfare, especially given India’s reliance on the public distribution system to provide affordable wheat to millions of low-income households.  

The millers’ association is also advocating for unrestricted wheat product exports. While this could boost the wheat-processing industry, domestic shortages could arise unless production remains robust. The government has previously imposed export restrictions on wheat products to curb inflation and maintain buffer stocks, making it unlikely that they will loosen export rules without significant stockpile recovery.  

A pragmatic fix is implementing gradual import duty reductions in the 10 percent range; time-bound import relaxations to balance farmer and supply needs; and strategic buffer stocks with government procurement.

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Gupshup.

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Written by Yash Tibrewal. Edited by Shreyas Sinha.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.