Why India-EU Trade Deal May Have Limited Impact on Auto Sector

The recently concluded India–European Union free trade agreement has sparked debate over its potential impact on the Indian automobile industry, particularly around pricing and competition. However, early assessments by global brokerages and industry analysts suggest that the disruption to India’s auto sector may be far more limited than initially feared, especially in the near to medium term.

A central concern surrounding the trade deal relates to import duties on cars. Under the proposed framework, customs duties on fully built imported vehicles, known as completely built units (CBUs), could be sharply reduced from the current level of around 110 percent to nearly 40 percent in the initial phase. On the surface, such a reduction appears substantial and has raised fears of an influx of cheaper European vehicles into the Indian market.

However, analysts point out that the scope of impact is relatively narrow. Most mass-market European car manufacturers operating in India do not depend heavily on fully built imports. Brands such as Volkswagen, Skoda and Renault largely assemble vehicles locally using completely knocked-down (CKD) kits. These kits already attract a significantly lower import duty of roughly 17 percent, which is not expected to change under the trade agreement. As a result, popular models from these manufacturers are unlikely to see any meaningful reduction in prices.

The primary beneficiaries of the duty cut are expected to be niche luxury carmakers. High-end brands such as Porsche and Lamborghini, along with premium models from Audi and BMW, import a portion of their vehicles as fully built units. Lower duties could make these luxury offerings more competitively priced, but their sales volumes remain small relative to India’s overall passenger vehicle market, limiting their broader impact.

India is currently the world’s third-largest automobile market by sales, behind the United States and China, with the bulk of demand concentrated in the affordable and mid-range segments. Given this structure, analysts believe the trade deal is unlikely to significantly disrupt domestic manufacturers or mass-market players.

Brokerage analysis has also examined the possible effect on Indian automakers, particularly Mahindra & Mahindra, which has a relatively higher presence in the premium SUV segment. According to estimates, a European car priced at around €15,000 could enter the Indian market at approximately Rs 23.2 lakh under the revised duty structure. This could place such models in direct competition with Mahindra’s higher-end offerings like the XUV700 and Scorpio-N.

Around 12.9 percent of Mahindra’s domestic passenger vehicle volumes fall in the Rs 23 lakh and above category, which is higher exposure compared to peers such as Hyundai, Tata Motors, and Maruti Suzuki. Despite this, Mahindra’s passenger vehicle business contributes only about 30 percent to its overall profit after tax, with tractors, financial services and other segments accounting for the majority of earnings.

Analysts at Goldman Sachs estimate that even under a severe scenario, the impact on Mahindra’s profitability would remain modest. A 50 percent drop in volumes in the affected premium segment is projected to reduce overall profits by less than 2 percent, while even a complete loss of volumes in that category would likely result in a profit decline of under 4 percent.

Overall, the assessment suggests that concerns about the India–EU trade deal significantly shaking up the Indian automobile sector may be overstated. While luxury imports could gain marginally from lower duties, mass-market carmakers and large domestic players are unlikely to face major pricing pressure or profitability challenges in the foreseeable future.