India’s free trade agreement (FTA) with the European Union, concluded on Tuesday in New Delhi, could pose additional challenges for Nepal—particularly as the nation prepares to graduate from its least developed country (LDC) status—according to the Garment Association of Nepal.

FTA is an agreement between countries or regional blocs to reduce or eliminate trade barriers through mutual negotiations with the aim of boosting trade.

Speaking at a policy dialogue titled “Apparel Export: Competitiveness, Critical Challenges and the Way Forward”, organised by the South Asia Watch on Trade, Economics and Environment (SAWTEE) in Kathmandu on Wednesday, the association said the India-EU deal could further trim Nepal’s ready-made garment exports to European markets, which have already been on a declining trend.

The India–EU FTA—described as the “mother of all deals”—was concluded on January 27 after years of negotiations aimed at substantially lowering tariffs on goods and services traded between India and the EU.

According to media reports, the European Commission will eliminate tariffs on most exports of chemicals, machinery and electrical equipment, as well as aircraft and spacecraft, following phased reductions. Duties on motor vehicles—currently as high as 110 percent—will be slashed to 10 percent under a quota of 250,000 vehicles, a volume six times the 37,000-unit quota India granted the United Kingdom under a deal signed last July.

India will also cut tariffs on wine, beer and olive oil from the EU. Brussels said the agreement would support investment flows, improve access to European markets and deepen supply-chain integration.

New Delhi said nearly all of its exports would receive “preferential access” to the EU, with textiles, leather, marine products, handicrafts, gems and jewellery set to see reduced or eliminated tariffs. While commodities such as tea, coffee, spices and processed foods are expected to benefit, India has “prudently safeguarded sensitive sectors, including dairy, cereals, poultry, soy meal, and certain fruits and vegetables, balancing export growth with domestic priorities,” the report said.

“India’s FTA with the EU could pose additional challenges for Nepal, particularly in the context of the country’s impending graduation from LDC status,” said Pashupati Dev Pandey, president of the Garment Association of Nepal.

“Even before the FTA, trade between India and European countries was already huge. With the agreement in place, it will increase exponentially, making it difficult for Nepali ready-made garments to compete in those markets,” he said.

According to the association, Nepal currently exports nearly Rs6 billion worth of ready-made garments annually to European countries, a figure expected to decline in the coming years.

With the FTA, India’s trade with the EU is likely to surge, market observers in Nepal said. Nepal, they added, could request the EU to continue providing trade facilities currently available to LDCs even after graduation in November this year. Given the anticipated rise in demand for Indian goods, Nepal could also seek India’s support in supplying and processing plant-based fibres such as allo (stinging nettle), banana and bamboo.

The ready-made garment industry urged the government to prioritise the garment and apparel sector, stressing the need for close coordination among labour groups, producers and policymakers.

Rabi Shanker Sainju, vice-chair of SAWTEE, said trade negotiations are a continuous process rather than a one-off event. Referring to the India–EU FTA, he noted that while such agreements result from long and structured negotiations, Nepal still lacks even a standard operating procedure for conducting FTAs.

According to the Trade and Export Promotion Centre, Nepal exported ready-made garments worth Rs8.75 billion in the last fiscal year.

Prakash Sharma, national project coordinator of the LDC Graduation Project at the International Labour Organisation Nepal, said the garment and textile sector is expected to be among the hardest hit by LDC graduation, including through potential job losses.

“The United Nations’ assessment of Nepal’s LDC graduation readiness has revealed significant apprehension within the private sector. While deferral remains an option, it would require consideration of the perspectives of key partners such as the EU and the United States,” Sharma said, according to a statement issued by SAWTEE. He also highlighted Nepal’s lack of a clear strategy to utilise a deferral, if granted.

Paras Kharel, executive director of SAWTEE, said that if critical constraints are addressed, firms expect exports to increase by an average of 87.4 percent compared to a business-as-usual scenario. He suggested exploring alternative markets through more effective use of existing trade agreements, negotiating new trade arrangements and economic partnership agreements, and strengthening economic diplomacy.