India EU FTA: Will New Delhi slash import duties on cars to 40% in ‘mother of all deals’? Here’s what we know

India, the third largest car market in the world in terms of sales, is scheduled to reduce customs duties on cars with combustion engines from 70% and 110% currently to 40% on about 200,000 cars annually. This represents the most significant step taken by New Delhi to open up the highly protected automobile sector. The final stake can still be changed before execution.

Sources told Reuters news agency that the government agreed to immediately reduce the tax on a limited number of cars from the European Union with an import price of more than 15,000 euros (1,626,420 rupees or $17,743). This percentage will be reduced to 10% over time, facilitating access to the Indian market for European automakers such as Volkswagen, Renault, Stellantis, Mercedes-Benz and BMW.

These companies, despite some domestic manufacturing, have faced limited growth under the current high tariff regime.

Currently, European manufacturers own less than 4% of the Indian car market of 4.4 million units annually, which is dominated by Japanese and Indian companies. With the market expected to reach 6 million units by 2030, global automakers are reevaluating their strategies in anticipation of regulatory changes and expansion.

Some companies are preparing new investment plans to take advantage of the expected growth. The government’s approach also encourages foreign automakers to test more models in India before expanding local production.

Negotiations on these customs amendments are still ongoing, and the final details have not yet been confirmed. These changes are expected to be included in an upcoming trade agreement, “after which the two sides will finalize the details and ratify the so-called ‘mother of all deals’.”

The move comes in the wake of growing international criticism of India’s hefty import tariffs, with industry leaders such as Tesla’s Elon Musk pushing for liberalization. By reducing import taxes, the government aims to attract a wide range of new vehicles and investments from global manufacturers. However, battery electric vehicles will not benefit from duty reductions for the first five years, a measure to protect domestic investment by Mahindra & Mahindra and Tata Motors.

After five years, electric cars will be eligible for similar reductions in import duties. This phased approach is designed to support the domestic electric vehicle sector before opening it up to greater foreign competition, reflecting a carefully managed policy shift.

Lower import taxes are likely to allow automakers to offer imported models at more competitive prices and expand their investment portfolios before considering more local manufacturing. “It makes the Indian market easier for European automakers like Volkswagen, Mercedes-Benz and BMW,” they added, “making the Indian market easier to access.”