How India’s Evolving Supply Chains Will Shape the Auto Industry – Expectations from the Upcoming Budget

India’s auto industry enters 2026 on a strong footing, with broad-based recovery across segments and a clear pivot toward clean mobility. Overall, the vehicle production across categories has been growing by over 4% year on year (YTD till October 25). The auto-component sector mirrored this momentum, reaching ₹6.73 lakh crore (US$80.2 billion) in FY25—a 9.6% year-on-year increase.

Yet this momentum coincides with heightened exposure to global shocks: shipping dislocations, tariff resets, and critical‑mineral dependencies that collectively test resilience and price competitiveness. The focus for the upcoming Budget should align with stitching together policy continuity and targeted incentives so that India’s supply chains can absorb turbulence while accelerating the transition to advanced, cleaner technologies.

Over the past year, vulnerabilities in global logistics became more pronounced. Disruptions linked to the Red Sea have elongated routes and raised freight costs, complicating inventory planning for OEMs and tiered suppliers already juggling tight working‑capital cycles.

Simultaneously, U.S. tariff action has materially altered India’s export economics: by late August 2025, parts of Indian auto‑component exports faced a 50% duty, contributing to a 28.5% drop in total exports to the U.S. between May and October 2025—from $8.83 billion to $6.31 billion.

This contraction has widened the performance gap between capital‑intensive firms with diversified markets and MSME‑heavy component clusters that depend on predictable cash flows and stable demand. The numbers highlight that maintaining export momentum now requires both market diversification and a rapid upgrade in compliance, traceability, and cost structures to meet evolving foreign regimes. 

At the same time, India’s dependence on imported lithium, cobalt, nickel, graphite, and rare‑earth magnets has sharpened the focus on upstream risk. China retains dominance in refining and magnet supply chains, making security of inputs pivotal to EV and power‑electronics roadmaps.

 Policy has begun to respond at scale. The National Critical Mineral Mission (NCMM) carries an outlay of ₹16,300 crore and targets seven Centres of Excellence and 1,000 patents by 2030, designed to build domestic capability across exploration, processing, and technology.

Parallel diplomacy has deepened engagement with Latin America—Argentina, Chile, Peru—alongside Australia to widen access to lithium, copper, and rare earths. 

The auto‑component industry sits at the core of this agenda and is deeply linked to the MSME fabric of the economy. Volatility in freight, input prices, and export access typically hits tier‑2 and tier‑3 suppliers first, compressing margins and complicating investment cycles in tooling, testing, and digital traceability.

The PLI for Auto already has proposed investments of ₹67,690 crore with ₹246.21 crore disbursed by February 2025, signalling both the scale and the need for execution discipline to translate allocations into capacity on the ground. 

A second stabiliser is circularity. Battery recycling, second‑life applications, and high‑purity material recovery enable feedstock security while lowering lifecycle emissions. Building out industrial‑scale recycling—alongside standards for battery collection, transport, and safety—would reduce exposure to volatile commodity cycles and support steady cell‑to‑pack localisation.

This, in turn, cushions downstream EV programmes and moderates total cost of ownership in fleets, where reliability and uptime metrics are essential for adoption.
Export strategies must adapt as the EU’s Carbon Border Adjustment Mechanism (CBAM) takes shape.

The framework introduces authorised declarants, audited embedded-emissions reporting, and the surrender of CBAM certificates linked to EU ETS pricing. Initially covering cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen, CBAM is expected to expand toward downstream metal products by 2030—impacting automotive inputs and components along the way.

In practice, that means building a CBAM‑ready toolbox inside manufacturing clusters: baseline and actual emissions accounting, supplier data systems, third‑party verification, and capacity‑building programs tailored to MSMEs embedded in iron, steel, and aluminium value chains.

International guidance and analyses already point to higher costs for carbon‑intensive inputs, but they also highlight how rapid decarbonisation and clean‑energy integration can bend the curve. If India invests in this capability now, CBAM becomes a doorway to diversified export markets.

Clean mobility outcomes—electric vehicles (EVs) and alternative fuels—rely on a strong foundational strategy. For EVs, securing mineral supply, localising component manufacturing, establishing battery recycling systems, and implementing robust verification frameworks are as critical as stimulating demand.

For alternative fuels, clear direction on the E20 biofuel transition and scaled green-hydrogen pilots in heavy-duty corridors will diversify decarbonisation pathways and reduce technology risk concentration. This creates a balanced approach: accelerate electrification where infrastructure and economics support it, advance low-carbon fuels where operational needs favour them, and ensure both are underpinned by supply chains that are localised, diversified, and measurably decarbonised.

A coordinated critical minerals policy is essential—domestic processing and refining capacity, fast-tracked recycling standards, and exploration support will lower embedded emissions and reduce import dependence.

The Budget 2026 expectation focuses on preserving momentum. India needs a predictable, incentive‑driven framework that ties localisation and MSME enablement to critical‑minerals security and CBAM‑ready exports.

By integrating infrastructure, technology, and finance—and by insisting on measurement, verification, and transparency—India can convert today’s supply‑chain stress into tomorrow’s strategic advantage. In doing so, the auto industry will not only sustain diversify growth beyond the U.S. but also accelerate the domestic shift to cleaner, more competitive mobility.

Saket Mehra is the Auto & EV Industry Leader. Views expressed are the author's personal.