While immediate price relief for the buyer is unlikely, the India-EU FTA will help reshape long-term industry strategy, opening new markets and influencing localisation, sourcing and investment decisions.
12 Feb 2026 | 256 Views | By Prerna Lidhoo
As soon as the India–EU free trade agreement was announced, the internet was filled with memes and hot takes centered on the assumption that European luxury cars were about to become meaningfully cheaper. Alas, luxury cars aren't going to suddenly drop from crore-plus price tags to ₹70 lakh. That said, ...
This is an Autocar Pro Plus article. Subscribe to continue reading.
As soon as the India–EU free trade agreement was announced, the internet was filled with memes and hot takes centered on the assumption that European luxury cars were about to become meaningfully cheaper. Alas, luxury cars aren't going to suddenly drop from crore-plus price tags to ₹70 lakh. That said, the India-EU FTA can have meaningful implications for India’s auto industry.
Over the long term, the shift could reshape competitive dynamics in the country, while opening up a large opportunity for India’s auto component makers, particularly in the high-value segment. It is also likely to provide a boost to the industry’s engineering capabilities and facilitate much wider cross-border integration.
Under the agreement, India and the European Union have concluded negotiations on a free trade pact that meaningfully reworks market access for automobiles and auto components on both sides. Under it, India will progressively reduce import duties on fully built cars from the EU from 110% to 10% over a five-year period, subject to an annual quota of 250,000 vehicles. Auto components and ancillaries will move to a zero-tariff regime covering 99.5% of India's export value to the EU.
Around 70% of EU tariff lines—accounting for roughly 90% of India's exports—will see duties eliminated while some other product lines, covering approximately 6% of export value, will receive partial reductions or quota-based access, including certain shrimp categories, automotive exports and specific agricultural goods. Taken together, this grants India an exceptional level of tariff-free access to the EU market, more generous than what the bloc has extended to any of its other trading partners.
However, the agreement does not provide India with any exemption or rollback from the EU's Carbon Border Adjustment Mechanism (CBAM), leaving Indian exports exposed to carbon-linked costs when entering Europe. On the other side of the table, India has offered substantial reciprocal access to the EU. It will eliminate or reduce tariffs on 92% of its tariff lines, covering 97.5% of EU export value. Nearly half of India's tariff lines (49.6%) will move to zero duty immediately for EU imports, while roughly another 40% will be phased down to zero over timelines of 5, 7 or 10 years.
According to ICRA, the India–EU free trade agreement is likely to alter competitive dynamics and market access for automakers on both sides, though the impact will be uneven across segments. "Lower tariffs are expected to improve access for European brands like BMW, Mercedes, Audi, and Porsche, enabling competitive pricing and new growth opportunities in India's fast-expanding auto market," the ratings agency said.
However, it added that the benefits are unlikely to extend meaningfully to the mass market. "The tariff cuts are likely to only benefit premium internal combustion engine (ICE) vehicles, with small/mid-segment cars (constituting a bulk of the Indian market) remaining largely unaffected. Additionally, tariffs on electric vehicles stay unchanged for the first five years. Nonetheless, the deal has the potential to marginally increase competitive intensity in the market to an extent," it said.
Gradual Shift
Concerns around the India–EU Free Trade Agreement materially disrupting Indian automakers appear overstated, with analysts pointing to a gradual and tightly calibrated opening instead of a sudden influx of imports.
According to Kumar Rakesh of BNP Paribas, tariffs on Completely Knocked Down (CKD) units are expected to be cut to 8.25% from 16.5% for an annual quota of around 75,000 units, with the agreement likely taking at least a year to come into force. Exports to the EU currently account for only about 2% of India's car exports and roughly 1% of two-wheeler exports, limiting near-term exposure.
From a pricing and plant-structure perspective, large-volume imports remain unlikely. While CKD-based ex-showroom prices could fall by around 8% to approximately ₹2.1 million, Rakesh does not expect European OEMs to use completely built units for high-volume models, as all major European manufacturers already operate plants in India and rely on CKD routes.
As a result, price cuts are expected to be limited, with most OEMs likely to deploy tariff savings to improve profitability and offset foreign exchange headwinds and not increase volumes. The FTA is expected to marginally expand product offerings in both premium and mass segments, without materially disrupting existing players, he said.
Jay Kale, Executive Vice President – Institutional Research at Elara Capital pointed out that the practical impact on luxury car pricing may be limited. "Most of the vehicle imports from the EU are currently done as CKD (the likes of Mercedes, BMW, Audi) at rates which are already low at 15% and hence no real benefit for the luxury car segment.
For some of the mass market OEMs of the EU like Renault, VW, Skoda, Stellantis, their presence in India with manufacturing facilities already in India is unable to garner volumes and market share for years…Even with reduced import duty, vehicles are likely to cost around ₹30 lakh+ and hence have very limited volume impact,” he said, adding that incremental imports are unlikely to make any dent on the volumes of domestic players.
Harshvardhan Sharma, Group Head, Automotive Technology and Innovation at Nomura Research Institute Consulting and Solutions India, also said that the agreement's structure limits near-term disruption. "While the headline narrative focuses on tariff reduction for EU-built cars, the fine print suggests a calibrated opening and not a disruption."
He added that the proposed quota of ~250,000 vehicles annually, against India's ~4.3 million passenger vehicle market, effectively caps the immediate volume impact at under 6%. As a result, he said, the near-term effects will be concentrated in the premium import segment, with the strategic focus for global OEMs gradually shifting towards decisions around CKD versus direct imports as product mix and technology considerations begin to outweigh pure duty arbitrage.
A central feature of the FTA and a key protection for the domestic auto industry is the annual quota of 250,000 vehicles eligible for reduced import duties, designed to allow liberalisation without destabilising the market. Put in context, "250,000 cars a year" sounds large only until it is benchmarked against India's passenger vehicle base. With SIAM reporting 4.3 million PV sales in FY25, a 250,000-unit annual quota represents roughly 5.8% of total PV volumes.
The quote can also have an impact on the composition of imports. When market access is quota-bound, OEMs typically prioritise higher-margin trims, powertrains and feature-rich variants. Over time, this can widen the perceived technology and feature gap between imported models and locally assembled ones. Meanwhile, it can also affect decision-making around the future role of CKD operations in India, as these will need a clearer rationale to continue.
Win for Exports
According to ICRA, export-oriented mid-sized firms and MSMEs engaged in specialised components and aftermarket products could gain improved access to European customers as a result of the FTA as sourcing bases diversify and procurement strategies evolve across global automotive supply chains. This matters particularly in categories where the EU already accounts for a meaningful share of India's exports.
Automobiles and auto components currently account for around 3% of India's exports to the EU, indicating clear headroom for expansion as trade barriers ease. India already exports auto components worth about €6 billion to Europe, and Europe accounts for roughly one-third of India's ~$21 billion component exports. The planned elimination of tariffs on car parts over a five-to-ten-year period materially strengthens India's position within EU automotive supply chains, particularly for specialised component makers and firms integrated into global manufacturing programmes.
Specifically for component exporters, tariff rationalisation and preferential access to European markets are likely to improve the pricing competitiveness of Indian manufacturers. Harshvardhan Sharma of Nomura Research Institute Consulting and Solutions India said that the FTA resets premium-segment economics while reinforcing India's long-term supply-side integration with Europe.
He pointed out that the bigger prize lies in parts and subsystems, where the deal creates a clearer runway for two strategic shifts: greater localisation by EU Tier-1 suppliers in India to serve both domestic and export programmes, and the upgrading of Indian Tier-2 and Tier-3 suppliers into global supply chains anchored by European Tier-1s.
However, execution will be critical. European supplier nomination cycles are long and audit-intensive, and compliance requirements are tightening just as the FTA takes shape. The EU's Carbon Border Adjustment Mechanism (CBAM) enters its definitive phase from 2026, raising expectations around emissions data, verification and supply-chain transparency, particularly for metals and other energy-intensive inputs. In the near term, the focus for OEMs and suppliers is on implementation readiness. Sharma adds that suppliers are encouraged to identify a narrow set of "right-to-win" product families and treat compliance, audits and emissions data as part of the core product offering.
However, Jay Kale added that EU import duties were never the primary constraint for Indian component exporters and that the absence of CBAM relief limits near-term gains. "In the current form with no concessions from CBAM, it is unlikely to have a meaningful impact on India auto component exports. In future if CBAM concessions come in, it could be an incremental positive," he said.
Beyond component makers, there could also be benefits for automakers, particularly premium brands and product lines. "Royal Enfield's EMEA markets account for 26% of its exports but only 3% of total volumes in FY25, with an even smaller share coming from the EU. Maruti Suzuki's decision to begin exporting its new EV, the eVitara, to the EU could see some upside from lower EU tariffs, while other passenger vehicle, commercial vehicle and tractor manufacturers may also benefit modestly," said Rakesh, of BNP Paribas.
Meanwhile, electric vehicle tariffs are expected to remain unchanged during the initial phase of implementation, reducing near-term pressure on emerging domestic EV supply chains and allowing component manufacturers time to adjust to evolving trade dynamics. Improved access to European markets could nonetheless act as a catalyst for higher-value manufacturing.
Experts say that while Mahindra and Tata Motors remain less competitive against European brands in internal combustion engine vehicles in the European market, EVs could provide a more level playing field, with fewer legacy disadvantages if local players are able to compete with Chinese EV makers that have flooded the European market. ICRA notes that closer trade linkages may drive investments in "precision engineering, electronics integration and specialised component manufacturing."
Mahindra Group CEO and Managing Director Anish Shah was optimistic, adding India’s auto sector stands to gain from improved access to European markets and increased investment interest. "We see a huge positive for the auto sector as it provides duty-free access to European markets and will attract European OEMs to invest further in India," he said, adding that the agreement represented a good balance between opening the market while nurturing manufacturing in India.