Free Trade Between India and the European Union-15: A Theoretical and Empirical Analysis

India has a multidimensional relationship with the European Union (EU). EU is our largest trading partner, the biggest source of our foreign direct investment, a major supplier of our developmental aid, an important source of technology, and also home to a large and influential Indian diaspora. Trade is the bedrock of this multidimensional relationship that the subcontinent enjoys with the EU. Therefore, the immediate and direct effect of the enlargement of the EU in May 2004 for India are burgeoning trade prospects, as the enlargement results in making the EU marketplace the biggest in the world accounting for more than one-fifth of global trade and contributing one-fourth of the world's gross domestic product. Given the importance of EU as a trading partner of India, the present paper attempts to explore the potentials of having free trade between India and the EU and aims at identifying the possible gains that would accrue to each of the economies. In particular, a theoretical trade model involving India and the EU-15 is developed that helps to identify the pattern of trade flows between them in a perfectly competitive world characterized by free trade.