Speaking to EurActiv ahead of a debate on the FTA in Strasbourg this week, the UK Liberal Democrat MEP stressed that EU-India relations are on the cusp of a potentially big step forward or possibly a step sideways.
Which direction it takes will very much depend on whether the two take into account each others' concerns, Watson said.
Although India does not want any reference to social and environmental standards to be included in the FTA with the EU, the European Parliament, which has a legal say on such international deals, might put up a fight, Watson suggested.
The EU assembly adopted a resolution on 26 March 2009, stressing that investors should respect core International Labour Organisation standards as well as social and environmental governance. Watson, quoting from it, insisted that the EU could not tolerate a race to the bottom.
"It might be a statement. It might be a memorandum of understanding. It might be a commitment to work together on some of these things," said Watson, adding that the European Parliament recognises that India needs to do a lot more to improve social standards in the country.
"If we are going to accompany the global economy with a global social contract, that means the Indians need to be a little more active in fighting some of the worst abuses of child labour, of environmental unsustainability," argued Watson.
Delhi has repeatedly explained that there are strict laws banning child labour, but it is the devastating poverty and gaps in law enforcement which lead families to push their children out of school and into work.
"It's a wonderful argument but it doesn't stack up does it?" said Watson, noting that India is no longer a poor country and must do whatever it takes to deal with that challenge. Many Indians do recognise this, he added.
As an example, Watson quoted the progress made by the State of Bihar, in the northern part of the country. Previously one of the poorest states in India, Bihar has taken serious action against corruption and has put in place projects to tackle poverty and schooling for local children.
"We looked at the European Union-funded scheme designed to keep girls in school rather than have them marrying at the age of 12, 13, 14. There are a number of projects going on in some of the poorest areas of India which show the way forward," Watson said.
According to the UK MEP, the EU and India can cooperate more, especially on climate change and energy security. He said: "We have a lot in common and a lot of common work to do."
Answering a question on development aid, Watson pointed out that what India needs is not money, but expertise from the European Union.
"Strangely we also need expertise from India," he added, saying that one of the most difficult discussions in the FTA negotiations is the so-called "mode 4", which is the free movement of people to travel and work in the EU.
"Maybe there is a common agenda there. We need their expertise particularly in computer science graduates. They need ours in some other areas. That becomes very quickly a commercial or at least non-aid-driven agenda," Watson ended.