As developed countries turn protectionist and seek tariff parity, Autocar Professional examine the implications for India's strategy of becoming a global auto manufacturing hub while keeping its domestic industry protected.
04 Jun 2025 | 1113 Views | By Prerna Lidhoo & Mayank Dhingra
Centuries ago, in pursuit of trade, merchants charted the Silk Road and navigated sea routes that connected continents. Over time, as nations opened doors to free markets, enabling the movement of goods, capital, labour, and ideas flow more liberally, philosopher Marshall McLuhan aptly called this new world a “global village” ...
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Centuries ago, in pursuit of trade, merchants charted the Silk Road and navigated sea routes that connected continents. Over time, as nations opened doors to free markets, enabling the movement of goods, capital, labour, and ideas flow more liberally, philosopher Marshall McLuhan aptly called this new world a “global village” in the 1960s. Today, the winds are shifting.
Recent tariff hikes by the US, targeting everything from Chinese electric vehicles to European steel signals a stark departure from the old world order. National security and job protection has prompted many developed economies to pivot towards promoting local industries. As countries turn protectionist, can India continue to push for exports-based growth, while shielding its domestic automotive industry?
A New Global Order US President Donald Trump’s move to put in place steep tariffs on imports of goods into the world’s largest economy has disrupted the post-World War II global economic order. To encourage local manufacturing, he has put in a 25% tariff on the import of steel and aluminium used in auto parts followed by a 25% tariff on imported passenger vehicles.
Additionally, a 25% tariff will apply to imported automobile components. Although this tariff is under a temporary 90-day pause, a 10% ad valorem (according to value) duty remains applicable on components and vehicles not already covered under the earlier US orders. While high tariffs are creating problems for India on the US front, paradoxically, it is low tariffs that are creating challenges on the European front for the Indian auto industry, specifically, the European Union’s push for tariff reductions as part of FTA (Free Trade Agreement) talks.
Despite strong lobbying from domestic players, India is expected to be open to a phased reduction of tariffs from over 100% down to 10%. Experts say that any tariff cuts would be a significant win for European automakers like Volkswagen, Mercedes-Benz, and BMW and Elon Musk’s Tesla, which is expected to begin selling imported EVs likely sourced from its Berlin plant in India this year. The India-UK FTA adds to the impact.
The lower import tariff of 10% on the auto sector from 100% will feature different quota bands for various types of automobiles. The quota will have separate bands for internal combustion engine (ICE) vehicles and EVs. Import duties on automobiles will be gradually reduced over a 10-15 year period, with “futuristic cars” and “low-cost” vehicles excluded from the agreement. This is expected to significantly benefit Jaguar Land Rover (JLR) in launching its battery electric vehicles (BEVs) in India.
“India is an important market; it is a very high growth market and our brands have a lot of affinity. So, we will absolutely leverage the FTA to increase our revenue and share of the HNIs wallets in India. JLR India is isolated from a duty structure, and that will continue. The FTA, however, helps a lot of our future cars that we would not have a CKD operation in India, particularly the BEVs,” says Richard Molyneux, chief financial officer, JLR.
V G Ramakrishnan, Managing Partner at Avanteum Advisors, points out that the developed economies, particularly the United States, are borrowing a leaf from the playbook of countries such as India, and that the emerging tariff regime could significantly reshape global trade in the auto sector.
“India has consistently maintained some of the highest tariffs on both auto components and fully built vehicles. High import duties have been our strategy for building a domestic automotive manufacturing base. What Trump is doing now with tariffs is the same policy India has followed for the past 25 years. The policy pushed many global players like BMW, Mercedes, Audi, and Volvo to invest in local manufacturing. Left to themselves, they would’ve preferred to produce in Europe and export to India, given the limited volumes,” he says.
Since the situation is evolving as trade negotiations are ongoing, India’s reaction to this flurry of tariff changes is bound to be a complex balancing act. Experts point out that the government and industry will need to navigate these tariff shifts with strategic diplomacy, targeted domestic support, and accelerated efforts to boost competitiveness.
Domestic Manufacturing and Export Plans
One of the significant impacts of developed economies such as the US also implementing high tariffs will be on the ‘export-based growth’ strategies pursued by developing countries such as India, China and Bangladesh. Developed economies, particularly the US, has for decades served as open markets for goods manufactured in less developed countries, helping the latter ‘export their way’ out of economic backwardness, as was seen in the case of China and Vietnam.
With the picture changing rapidly, this model of economic development will be called into question, as will programs such as ‘Make in India’. Ramakrishnan points out that the first casualty of the tariffs will be domestic manufacturing. “We may see domestic investments will start getting impacted. There could be margin pressures as well. When I can import my fully built car at 15-20%, why would I localise? There's headache in localisation. Companies did not localise in India, because they thought it wasn't making great business sense,” he says.
He adds that the initial effects of global trade tensions are beginning to be felt in domestic manufacturing plans. He cites Jaguar Land Rover’s decision to shelve its proposed $1 billion EV plant in southern India as a clear sign that India’s ambition to be a global manufacturing hub is facing headwinds amid shifting tariff regimes and trade negotiations.
“JLR was supposed to put large capacity in India for global markets. The tariff talks are not only impacting the Indian automotive sector, auto component sector, but also the manufacturing sector. When we allow JLR at lower import duties, their investments will not come into India. But the Indian customers will benefit from this. And companies that were trying to look at India as a manufacturing base for exports in other markets may also start rethinking. Why would they want to make in India if tariffs aren't barriers anymore,” he explains.
He added that across countries, the element of globalisation will be replaced with protectionism barring certain countries. “Large auto manufacturing countries like Japan and South Korea for example, cannot continue to be protectionist since they have to look at markets outside for production, because the age profile of people [in these countries] is significantly changing. From an India perspective, where some of these automobiles can be made in the future could get impacted because of these tariffs,” he says.
However, Maruti Suzuki India’s Chairman RC Bhargava believes that India’s car exports won’t be affected as it has limited exposure to the US. “I don't think the car industry, especially our exports, is going to be affected. We are not exporting to the USA. I think all of these things are going to get worked out in the next 2–3 months. There might be some slight slowing down in global growth rates, but I don't think it's going to be anywhere near a recession,” he says.
India’s largest carmaker added that its international business which is mostly developing nations that lack domestic auto manufacturing capabilities will not be affected by ongoing tariff talks. “The USA has a car industry which is trying to grow, increase output, and create jobs. But countries that don't have a car industry—due to their size or other constraints—will always need to import vehicles. They are unlikely to impose 100% barriers to imports," he adds. In FY25, the automaker accounted for nearly 43% of the country's total vehicle exports.
Shridhar Kallani, Auto Research Analyst at Axis Securities, has a slightly different take, and believes the beneficiaries of the US tariff imposition could include India, especially in comparison to countries like China, Thailand, or Vietnam, which face steeper tariffs due to significant trade imbalances. “There’s a need to view the development in relative terms—not simply as India versus the US, but in the broader context of how India stacks up against other exporting nations,” he added.
Impact on the Components Sector
According to ICRA, the recent sharp increase in US import tariffs from a previous 2.5% to as high as 25% on steel, aluminium, key automobile parts, and components will impose an estimated incremental cost of around Rs 9,000 crore on the entire supply chain. This burden is expected to be shared among US consumers, importers, and Indian exporters, with the extent borne by Indian firms depending on their competitiveness and product price elasticity. Around 65% of India’s auto component exports to the US fall under the 25% tariff category, while the US market accounts for roughly 8% of the industry’s overall revenues.
Export growth to the US had been strong at a 15% CAGR during FY20-FY24, driven by vendor diversification, higher value addition, and favourable forex. ICRA believes India may benefit from improved cost competitiveness against Chinese suppliers if tariffs persist. However, pricing pressures could arise both in the US and other export markets like Europe and Asia, where competition from China remains intense.
If Indian exporters absorb 30-50% of the tariff increase, it could reduce industry earnings by Rs 2,700-4,500 crore, equivalent to 3-6% of operating profits industry-wide and 10-15% for exporters specifically. Some companies with manufacturing units in the US may be shielded from tariff impacts.
"A large part of the auto industry demand comes from the domestic market and hence the impact of the recent tariff related development would be for entities deriving a sizable share from the US. While developments remain an ongoing matter (90-day pause on reciprocal tariffs), the tariff action is likely to influence the business decisions and investment strategies of auto players (especially in the component space),” Srikumar Krishnamurthy, Senior Vice President & Co-Group Head, Corporate Ratings, ICRA Limited says.
He adds that the players are expected to be on 'wait and watch mode' pertaining to any large investment decisions, given the uncertain environment and inherent high price elasticity for products. “Factors like realignment of supply chain, renegotiation of pricing terms, derisking strategies [on sourcing, sales and partnerships] enhanced hedging against currency risks etc. are expected to be the key near-to-medium term focus areas for the domestic players in the auto industry,” he adds.
According to Vinnie Mehta, Director General, Automotive Component Manufacturers Association of India (ACMA), India-US trade agreements are expected to be much broader and would incorporate investments, as well as nontariff barriers. “We are hoping that the auto components industry will be a part of the bilateral trade agreement and will be allowed for zero-duty access into the US, just like we are willing to give zero-duty access for made-in-US automotive components,” he says. India's auto components exports to the US stands to the tune of $7 billion, in contrast to $1.4 billion exports to India.
The US is emulating countries like India in trying to use tariffs to boost local manufacturing.
“There is currently no US-based OEM in India. Furthermore, the US is a high-cost production centre, and the items that we are proposing to give to the US on zeroduty, are already covered under zero-duty when it comes to India's FTA with Japan and Korea. So, India is competitive enough to deal with a zero-duty import (from the US) access structure,” he adds.
According to ACMA, the US imported around $340 billion worth of automotive components in FY24, and of this, 35% came from Mexico, 15% from Mainland China, 10% from Canada, 10% from Japan, 7.5% from Germany, and only 3% from India. “A zero-for-zero duty structure might not work in case of finished goods (CBU vehicles) as India does not export vehicles to the US. From a components industry perspective, the US is a very important and sizable (US$ 340bn) market. Hence, the opportunity is very huge, and considering the entire anti-China sentiment, maybe there is a window of opportunity if we can harness it,” Mehta adds.
Where the global automotive components market stands at $1.5 trillion, India's component exports are only $21 billion. “We are only a fraction (around 3%) of the global trade and therefore, there is a lot of room for us to cover. We would request the government to have cordial relationships with like-minded countries and nations like the US and EU, where we have a huge exposure already. The dynamics are changing but the Indian automotive components industry has been resilient so far, and we hope that it will continue to do so,” Mehta says.
According to Kallani, India is increasingly focused on enhancing its global competitiveness, as reflected in the government’s Production-Linked Incentive (PLI) schemes. These initiatives mandate a certain level of localisation for both OEMs and auto component manufacturers. In the near term, PLI represents a positive shift—strengthening domestic supply chains, boosting production capacity, and positioning Indian manufacturers to better compete on the global stage.
"While competitive pressures from developed nations like the US or UK are possible, I don't anticipate an immediate impact for Indian auto component manufacturers. In the long term, the evolution of tariff talks will be critical," he adds. In the long term, it needs to be seen how tariff talks evolve. India's advantages, such as scalability, cheap labor, and affordable energy, will play a significant role. Lower tariffs might prompt companies to shift production, but it's essential to ensure benefits reach auto component manufacturers, especially tier-one manufacturers, to expand their global footprint.
Exports to the US account for around 8% of the Indian auto component industry's revenue.
Luxury Segment Prices
With high import duties historically limiting access, upcoming FTAs, particularly with the UK and EU, promise lower tariffs, potentially boosting sales of premium brands like Mercedes-Benz, BMW, and JLR. While some luxury models are already assembled in India, reduced duties on fully imported vehicles could open the door to a broader portfolio of high-end electric and ICE models, accelerating growth in the premium segment and deepening their presence in India.
Luxury carmakers say that trade pacts could create many macroeconomic opportunities for India. "What we are looking forward to is an increase in overall trade. Economic activity increases, more wealth in the country, more per capita increases, and then you have demand generated, which is more organic and natural. The real value lies in India's opportunity to become more integrated with global value chains and explore export possibilities. It opens up possibilities for OEMs to look at other markets. So it's a two-way street, not a one-way street when tariffs come down," says Mercedes-Benz India MD and CEO Santosh Iyer.
He also addressed one of the fallacies doing the rounds that the prices of cars will come down with these trade agreements. "There is no expectation of a zero tariff. Around 10-20% tariff will be applicable still. It will be reduced from the current 60% and 110%. Over 90% of our business is based on Completely Knocked Down (CKD) kits, which are already imported at a 15% duty,” he says.
Typically, the prices of cars in India are not expensive because of import duty since CKD pricing dynamics are unlikely to change due to FTAs. “For the smaller Completely Built Unit (CBU) segment, which comprises around 5–8% of our volumes, there could be marginal benefits that would be tightly regulated,” he says. Shridhar Kallani of Axis Securities notes that the reduction in tariffs could positively impact demand for the luxury car segment, particularly for companies with electric vehicles in their portfolio.
"The government's policy appears to be geared towards calibrated protectionism, especially in strategic industries like electric vehicles. The focus is on smart policies, such as lowering tariffs on critical inputs to add value to Indian OEMs, rather than blanket tariffs."
He adds that cars above a certain price point, such as those above Rs 30 lakhs, might benefit from reduced import duties (quotas on imported CBU cars would exist), whereas Indian OEMs primarily manufacture vehicles below the Rs 30 lakh price bracket. This selective opening up of trade in the auto sector could aim at mutual cooperation and value creation.