The impact of India-EU FTA for AI and semiconductor tech Today World News

In a milestone, India and the European Union (EU) have hailed the conclusion of the India-EU Free Trade Agreement (FTA) while launching a ‘Comprehensive Strategic Agenda’ for 2030. Among other measures, the pact moves beyond supply chains to operationalise joint R&D in advanced semiconductor “heterogeneous integration” and chip design. It also formally links the European AI Office with India’s National AI Mission to jointly develop safe, human-centric AI and take advantage of what the agreement called India’s vast “multilingual datasets” and Europe’s research infrastructure to secure strategic autonomy in critical technologies.

The three diplomatic phases

The AI and semiconductor aspects represent the maturation of three diplomatic phases. The first phase began with the ‘India-EU Strategic Partnership: A Roadmap to 2025’. At this stage, discussions on “technology” were largely confined to general matters of cybersecurity, 5G networks, and data protection and there was no specific mechanism for a more concrete collaboration between the bloc and India on hardware such as semiconductors, or specific AI model development.

In the second phase, around 2022, Prime Minister Narendra Modi and EU President Ursula von der Leyen launched the India-EU Trade and Technology Council. This body in turn created the Working Group 1 on Strategic Technologies, which moved the relationship from diplomacy to involving technical experts. In fact the new deal has credited this group with managing its “technology and innovation” aspect.

In the third and final phase, in 2023, India and EU signed the Semiconductor Memorandum of Understanding (MoU). This MoU was primarily defensive in the sense that it focused on improving the resilience of supply chains and on providing early warnings of shortages. Between 2023 and the present deal, the MoU evolved into a more ‘offensive’ partnership, so to speak, with a focus on creating new technologies, including through designing and prototyping, in addition to monitoring existing supply chains.

On ‘heterogenous integration’

Perhaps the most significant technical detail in the document is “heterogeneous integration” because it recognises that India is years away from building cutting-edge logic fabrication facilities, for example, those that manufacture chips with nodes of 2-3 nm, and thus pivots to “advanced packaging”. Heterogenous integration involves stacking different types of chips, such as logic, memory, and sensors, into a single package. Such combinations are critical for AI. Contemporary AI accelerators like Nvidia’s Graphics Processing Units (GPUs) bank more on how memory is packaged next to the processor instead of only the raw transistor size. By targetting this, the EU and India are trying to capture the value-added segment of the supply chain that is also less capital-intensive than a fabrication facility but which is just as critical for performance.

The agenda also explicitly connects semiconductor manufacturing to AI utility as the text says the deal will focus “on design and prototyping for AI applications”, thus creating a vertical market. While in 2023 the focus was on “making chips for cars”, following a crisis in their availability, the new goal is to make chips that AI models require.

India possesses roughly 20% of the world’s chip design talent (on the flip side most of them work for U.S.-based firms like Intel and Qualcomm). The EU has the research infrastructure, such as IMEC in Belgium and Fraunhofer-Gessellschaft in Germany, but lacks the design scale. And the deal effectively creates a mechanism to unify India’s designer capital with the EU’s physical capital, to create indigenous AI hardware and reduce their reliance on US intellectual property.

Finally, the operational vehicles for the deal’s semiconductor strategy are the so-called Blue Valleys — a regulatory exclave that aligns Indian with European standards, allowing component manufacturers in India to flow directly into European supply chains without new certification requirements. In other words, the Blue Valleys will effectively extend the EU Single Market technical standards to Indian soil.

A common market for AI

Likewise, the AI section of the new deal also sets up a “common market” for AI where Indian data can flow into European models while having European regulations govern Indian AI companies (this is an example of the Brussels effect, whereby the EU exports its laws outside its borders through market mechanisms instead of direct force).

Previously, if the EU had a technical question about Indian AI policy, it would go through diplomatic channels (specifically, the External Action Service to the Ministry of External Affairs). The deal now indicates a direct line: the European AI Office, which is the EU’s regulator, can interact directly with the IndiaAI Safety Institute, India’s technical auditor. As a result, the technical staff at these agencies could have a formal mandate to coordinate without requiring political permissions for every interaction.

Further, perhaps the most concrete part of the AI section of the deal is the point about “testing and evaluation”. Currently, the world doesn’t have a common definition of what constitutes safe AI. The EU’s priority might be gender bias while India’s might be political neutrality — which means a developer will have to make their model pass two tests ahead of clearance. But now, by collaborating on testing, the two agencies will likely co-author and rationalise the checklists for the models. So if the European AI Office develops a specific mathematical test to measure the rate or scope of hallucinations in a large language model, it can share that test with the IndiaAI Safety Institute for India to adopt. In fact, the point of linking these agencies is to eventually reach a point where one accepts a safety certificate issued by the other. Going ahead this will require the agencies to align their audit procedures and staff training.

For Indians this could be a civil liberties backdoor of sorts. That is, because European audit manuals are strongly rooted in the EU’s Charter of Fundamental Rights, Indian users might unknowingly gain digital protections that the domestic political climate currently sidelines. EU safety benchmarks aggressively penalise algorithmic bias against minorities and restrict invasive biometric surveillance. If Indian developers must clear these hurdles to ensure their models can be exported to Europe, the AI products deployed domestically will be embedded with European regulatory attitudes. Thus Indian users could interact with AI agents that are technically constrained from reinforcing majoritarian narratives or profiling of vulnerable communities.

However, there is also the possibility of this opportunity devolving into a stratified ecosystem akin to India’s pharmaceutical sector, where some manufacturers rigorously adhere to safety protocols for exports to U.S. and European markets while cutting corners for domestic supply. That is, Indian firms might engineer ‘clean’ and more bias-free algorithms specifically for the EU market to secure lucrative contracts while deploying invasive or unrestricted versions at home, where enforcement remains lax.

Financial instruments

In order to fuel all these ambitions, the agenda musters two financial instruments. First, the text requires both sides “explore options for association of India to Horizon Europe”. If this happens, it would elevate India to the highest tier of partnership available to non-EU nations and allow Indian entities to lead consortia and compete directly for grants from the EU’s €95.5-billion research budget (₹10.4 lakh crore). This could be a bonus for the semiconductor sector as it will allow Indian chip startups to bypass the often risk-averse domestic capital markets.

Second, and on a related note, the deal also places the European Innovation Council at the helm of a new startup partnership. The Council specialises in what it calls “patient capital” for high-risk technologies such as quantum computing and novel chip architectures that traditional venture capitalists often avoid. By linking the Council with the Start-up India platform, the agreement creates a dedicated cross-border funding corridor for ‘hard’ technologies and fills a gap left by private investors, and could help ensure the deal’s design ambitions are backed by the necessary funds.

Published – January 27, 2026 10:38 pm IST