India is keeping an eye on a proposed legislation of the European Union (EU) which seeks to mitigate any labour and environmental impact on its importers’ business. The directive, known as the Corporate Sustainable Due Diligence Directive, requires companies to conduct due diligence on human rights abuses and environmental harm throughout their global value chains. This law is based on a similar law put in place by Germany, which is applicable to German firms with 1,000 German workers from 2024. Non-compliance by suppliers could lead to fines of up to Rs 8 million or 2% of the firms’ global sales, whichever is higher, according to the German Supply Chain Due Diligence Act.

An official, who chose to remain anonymous, stated that the new law will also impact India after the European Union’s deforestation law. The law has several parameters, including labour standards, and it is based on importers’ responsibility.

India’s exports to the EU in 2022-23 amounted to $74.8 billion, with mineral fuels, electrical machinery and iron and steel being the top products. The new law will apply to companies operating in sectors such as textiles, agriculture, and extraction of minerals. It covers companies with more than 250 employees and worldwide revenue of over Rs 40 million. This means that India’s micro, small, and medium enterprises (MSMEs) will be affected as the entire value chain would be covered by the law.

The new law assumes significance as India and the EU are negotiating a free trade agreement. India has already raised concerns about the Carbon Border Adjustment Mechanism (CBAM) with the bloc and at the World Trade Organization. CBAM is a global carbon tax levied on imports to the EU and it will take effect from October this year.

Apart from Germany, the Netherlands has also put in place a law that obligates its companies, including subsidiaries, to audit their supply chains and those of their business relations for adverse impacts such as human rights, working conditions, and the environment.

India’s official emphasized the need for India’s version of carbon credits to be internationally recognized in order to balance out the impact of such rules. The official also mentioned that these regulations may be aimed at generating revenue to reduce the budget deficit, according to Ajay Srivastava, co-founder of the Global Trade Research Initiative (GTRI).