India’s economic relationship with the European Union (EU) is set to blossom with a new free trade agreement (FTA). This deal between two of the world’s most important economies, under negotiation since June 2007, would be a recession-busting fillip for global trade, bringing huge increases in productivity, prosperity and jobs. Yet, obstacles remain if it is to be signed by the end of 2010.

India has come a long way quickly. Up to the early 1990s, it maintained vertiginously high tariff walls in a misguided attempt to promote development through self-sufficient domestic production. Decades of consequent economic stagnation forced India to liberalize from 1991. Falling average tariff rates—from 80% to 17%—have been a huge driver of India’s stellar average growth rates of at least 7% this decade.

This engagement with the global economy has allowed Indians finally to realize their potential. In steel, pharmaceuticals, computer programming and management consultancy, India now competes with the world’s best.

As its biggest export market, Europe is becoming increasingly crucial to India’s fortunes, accounting for 21% of its total exports. Bilateral trade has tripled in the past decade, accounting for €77 billion annually—up 1750% since 1980.

Moreover, the growth in trade has also brought greater economic integration. European investment provided almost €3 billion in capital for Indian enterprises in 2006, and some of the new powerhouse Fortune 500 Indian companies such as Tata rely on supply chains and staff from Europe.

Despite this progress, trade between the world’s two biggest economies is far from free. Indian tariffs are still high at an average 17%, and there is a maze of non-tariff barriers that make it difficult for Europeans to trade with India, such as onerous health restrictions on Indian agricultural produce.

But free trade is a goal worth pursuing: Indian ambassador to France Ranjan Mathai claims an Indo-EU FTA would triple bilateral trade to a staggering €160 billion by 2015. Further calculations from PricewaterhouseCoopers estimate that the Indian textile industry would grow by 46%, boosting employment amongst India’s massive pool of low-skilled workers. European-based businesses can also expect to increase exports to the subcontinent by as much as 60%, relieving pressure on some of the more heavily indebted members of the EU.

In spite of these benefits, problems remain. The negotiations are laden with the usual special protections for “sensitive” industries: in India’s case, automobiles and alcohol and in Europe’s, agriculture. The EU is pushing India to adopt European-style regulations on employment, human rights and the environment, which could stifle Indian growth.

Most seriously, the whole deal could be derailed by a pointless spat on intellectual property. This peripheral issue has recently erupted into a major disagreement, with India accusing the EU of seizing shipments of its generic medicines en route to Latin America on suspected patent infringements. Although this has not so far affected the negotiations, there is a grave danger it could.

This complaint has been vigorously supported by anti-trade non-governmental organizations and some Indian generics producers, but it poses an important question for India: How does it move from a low-value manufacturing and copy economy to one that encourages innovation?

Trade and innovation will generate India’s future jobs, growth and prosperity. The emerging local research-based pharmaceutical industry, software and chemicals sectors depend on the protection of intellectual property. If New Delhi wants these industries to compete on the global stage, it needs to listen less in the future to industrial interests that depend on copying, such as the domestic generics lobby.

The EU-India FTA could be one of the bright spots of the 2010 global economy. Freeing trade between these two giants will boost the global economy just as it is beginning to recover. Let us hope special interests do not derail it.

Philip Stevens and Alec van Gelder are analysts at International Policy Network, a London-based think tank. Comments are welcome at otherviews@livemint.com