The European Union and India could sign a landmark free trade agreement by the end of January, German Chancellor Friedrich Merz said Monday after meeting with Prime Minister Narendra Modi in western Gujarat state, a development that would reshape trade ties between two of the world's largest economies.

"In any case, they will take another major step forward to ensure that this free trade agreement comes into being," Merz said at a press conference in Ahmedabad, adding that European Commission President Ursula von der Leyen and European Council President Antonio Costa could travel to India "towards the end of this month" to seal the deal.

The visit marked Merz's first trip to Asia since taking office in May, and he was accompanied by a delegation of 23 senior German business leaders. The two countries signed several agreements on critical minerals, the health sector, defense cooperation and an artificial intelligence innovation center.

Commerce and Industry Minister Piyush Goyal, speaking at a separate event in Gujarat, said the India-EU agreement was "almost at its final stages."

Trade negotiations enter final stretch amid global protectionism

Negotiations on the free trade agreement commenced in June 2022 after a previous attempt that began in 2007 was stalled in 2013 due to political conditions in both regions. The two sides have completed 14 rounds of negotiations, with a 15th round expected to finalize remaining issues.

"Unfortunately we are seeing a renaissance of protectionism. It is directed against the principles of free trade and open markets," Merz said at the press conference.

The comments came days after Goyal's meetings with EU Trade and Economic Security Commissioner Maros Sefcovic in Brussels, where both sides reported "good progress" and said outstanding issues had narrowed. During those talks, Goyal and Sefcovic directed their negotiating teams to expedite discussions and resolve pending matters ahead of the next India-EU Summit scheduled later this month in New Delhi.

Bilateral trade between India and the EU totaled €120 billion ($140.21 billion) in 2024, making the bloc India's largest trading partner in goods. Germany accounts for more than one-quarter of India's total trade with the European Union.

"Our bilateral trade has reached its highest level ever, surpassing $50 billion. More than 2,000 German companies have a long-standing presence in India. This reflects their unwavering confidence in India and the infinite potential it holds," Modi said Monday.

Challenges remain on sustainability, market access

Negotiations over the sustainability chapter have proven difficult, particularly regarding the introduction of a dispute settlement mechanism tied to green standards, the European Commission told EU lawmakers last September.

The EU's Carbon Border Adjustment Mechanism, adopted in 2023, has been a particular sticking point for India. Disputes over steel, carbon levies and market access will require further compromise, an Indian official familiar with the talks told Reuters last month.

The EU is pushing for steep tariff cuts on cars, medical devices, wine, spirits and meat, along with stronger intellectual property rules. A significant 50% increase in exports of European cars is expected if import duties of more than 60% on European fully assembled vehicles fall in India.

India is seeking duty-free access for labor-intensive goods such as garments, textiles, and gems and jewelry products, as well as faster recognition of its growing automobile and electronics sectors.

Both sides seek to reduce dependence on China, Russia

The urgency to complete negotiations is driven in part by threats and opportunities arising from geopolitics. Both parties require reliable proven partners for trade as the United States has raised tariffs on both Indian and EU goods and China has pursued increasingly nationalist trade policies.

"China wants to pierce the heart of the European industrial and innovation model, which has been historically based on machine tools and the automobile," French President Emmanuel Macron said in an interview with the French newspaper Les Echos.

China's aggressive efforts to control production of rare earth minerals and curb their exports have threatened to shutter key factories in the developed world. The EU's Critical Raw Materials Act identified India as one of the key countries with potential for raw material extraction, and by friend-shoring India the EU can reduce its supply squeeze from China.

India faces U.S. tariff rates of 50% and hopes to deepen economic engagement with Europe as a result. A separate India-U.S. trade deal failed to materialize last year after a breakdown in communication between the two governments.

Defense and security cooperation also on agenda

On security, Modi and Merz reaffirmed plans to step up defense cooperation, including more joint exercises, training and exchanges between their armed forces.

"It is of particular strategic importance that we deepen cooperation between our defense industries. This strengthens both sides and also helps to make India less dependent on Russia, for example," Merz said.

India still works closely with Russia, where much of its military equipment originates, on security policy, and it is one of the largest buyers of Russian gas and oil alongside China. Germany is working to ensure the Indian government prevents Indian companies from circumventing sanctions on Russia and reduce its energy imports, demands India has so far rejected.

"We are in complete agreement in our assessment of Russia's war of aggression against Ukraine," Merz said. "Obviously, it is not that simple in India, and I am the last person to visit other countries wagging my finger at them."

Germany's Thyssenkrupp Marine Systems is expected to partner with Indian firms to build six advanced conventional submarines in India, part of New Delhi's ongoing efforts to modernize its naval capabilities and replace its aging fleet of Russian-built submarines. The deal would likely include technology transfer provisions to help India's domestic defense industry.

India welcomed Germany's intention to take part in major Indian-led naval and air exercises in 2026 and Berlin's decision to deploy a liaison officer to India's Information Fusion Centre for the Indian Ocean Region.

The two sides also signed an agreement that makes it easier for Indians to work in Germany's health care sector. Germany has announced a visa-free transit facility for Indian passport holders traveling through its airports to another country, a move expected to ease international travel for Indian nationals.

There are around 300,000 Indians and people of Indian origin in Germany, including about 60,000 students, many of them in critical science, engineering and other key technology research fields. Many Indian workers have filled a recent shortfall of qualified professionals in Germany's IT, banking and finance sectors.

Merz is scheduled to travel to the southern technology hub of Bengaluru on Tuesday to meet Indian and German business and technology leaders before concluding his visit.