India-EU FTA to cut car import tariffs sharply, but market challenges remain, say experts

India and the European Union have finalised a landmark Free Trade Agreement (FTA) that is set to significantly reshape automotive trade by sharply lowering tariffs on EU-manufactured cars entering the Indian market. Under the pact, import duties on European cars will be reduced from as high as 110 per cent to 10 per cent for a quota of 250,000 vehicles annually, marking one of the most substantial tariff liberalisations undertaken by India in the auto sector.

The agreement comes at a crucial time for European carmakers, which are facing mounting pressure from higher US import tariffs and fierce price competition in China. The sharp cut in Indian import duties offers welcome relief and opens up new opportunities for companies such as Volkswagen and Renault, which have been seeking growth markets beyond Europe. The tariff reduction represents the biggest opening yet of India’s tightly protected automotive market to EU manufacturers.

Implications

The deal is expected to have far-reaching implications for both European automakers and India’s fast-growing car market, which is projected to reach annual sales of around 6 million units by 2030. India is already the world’s third-largest car market by volume after the United States and China, but high import duties have historically limited the presence of foreign-built vehicles. At present, India levies a 70 per cent duty on imported passenger cars priced below $40,000, while vehicles above that threshold attract customs duties of up to 110 per cent.

Steep tariffs

These steep tariffs have acted as a major barrier for European manufacturers, restricting their market share in a landscape dominated by domestic players and Japanese brands. Industry data show that European carmakers currently account for less than 3 per cent of India’s car market. By contrast, Suzuki Motor and Indian manufacturers Tata Motors and Mahindra & Mahindra together control roughly two-thirds of total sales. Popular, affordable models such as the Maruti Suzuki Wagon R continue to dominate volumes in India’s highly price-sensitive market.

Analysts told Reuters that while the tariff cuts are significant, they only partially open the door. The benefits are expected to accrue mainly to the premium segment, as the reduced duties apply to a limited number of vehicles, particularly higher-end models priced above €15,000 ($17,740). Mass-market cars, where price competition is most intense, are unlikely to see immediate gains from the agreement.

"It's a start. When we talk about exports from Europe, it's only about premium cars. For the volume sector it is difficult," said Stefan Bratzel of German auto research group CAM, who said Suzuki and Hyundai had better understood the market.

"In India it's about cheap, reliable, stable cars. The Volkswagen Group cars have been too expensive. Suzuki has benefited from the kei cars which are highly popular in Japan."

What changes with India-EU FTA

The FTA adopts a calibrated, quota-based approach to market opening. A press statement outlining the agreement said, “Tariffs on cars will gradually go down from 110% to 10% with a quota of 250,000 vehicles a year.” This tariff rate quota mechanism is designed to balance increased market access for European manufacturers with safeguards for India’s domestic automotive industry.

Welcoming the deal, FADA President C S Vigneshwar described the India–EU FTA as a milestone for the sector. “The India–EU FTA is a milestone for the automotive sector, and we are proud that FADA could contribute meaningfully to its shaping,” he said. He added that the calibrated tariff glide path and safeguards closely mirror industry recommendations and noted that with more than 95 per cent of European OEM sales already locally manufactured, the agreement would strengthen the Make in India initiative, expand consumer choice and create reciprocal export opportunities for Indian automakers.

European carmakers in India

With limited production capacity and annual sales still in the tens of thousands, European carmakers have substantial scope to expand in India after steadily losing market share over the past decade. Industry data show that European brands account for less than 3 per cent of India’s passenger vehicle market, which is dominated by Suzuki Motor and domestic players Tata Motors and Mahindra & Mahindra that together command nearly two-thirds of total sales.

India, the world’s third-largest car market after the United States and China, sells about 4.4 million vehicles annually. However, it has long been one of the most protected major auto markets, with import duties of 70 per cent on cars priced below $40,000 and as high as 110 per cent on higher-priced vehicles.

Germany’s VDA automotive association highlighted the importance of the India–EU trade agreement for the country’s export-oriented auto industry, with the chief executives of Volkswagen, Mercedes-Benz and BMW all welcoming the deal. “This will bring about urgently needed improved market access in an increasingly protectionist global environment, even if not all barriers are removed,” VDA President Hildegard Mueller said in a statement.

Volkswagen Group CEO Oliver Blume said the company would closely study the details of the agreement, while Renault brand CEO Fabrice Cambolive indicated that India would rise on the carmaker’s list of strategic priorities. “It will reinforce our willingness to invest on both continents because we are kind of an Indian and European company,” Cambolive said.

While the tariff concessions apply only to conventional vehicles and exclude electric vehicles—reflecting India’s cautious approach to protecting its emerging EV ecosystem—the FTA is widely seen as a catalyst for fresh investment, greater competition and deeper integration between the Indian and European automotive industries. With India’s car market expected to grow rapidly over the coming decade, European automakers view the deal as an important foothold in one of the world’s most promising automotive markets.

(With Reuters inputs)