India’s auto sector faces US tariffs but eyes growth with tax cuts and hybrid push

India’s homegrown automotive sector in 2025 is riding a wave of export success while confronting mounting obstacles from new U.S. trade tariffs. During the opening quarter of FY 2025–26, Indian automakers shipped a record 1.46 million vehicles abroad, a 22% increase over the same period last year which is fueled by strong demand from markets including South Africa, Mexico, and Saudi Arabia.

But this growth faces a major hurdle with the U.S. imposing a 50% tariff on Indian auto exports starting Aug. 27. The move puts a large chunk of India’s $22.9 billion auto component trade at risk, hitting smaller and medium-sized manufacturers especially hard.

To counter the impact of rising U.S. tariffs, Indian automakers are actively seeking new export markets and weighing the option of setting up production units abroad. At the same time, the government is reviewing changes to the Goods and Services Tax (GST) with potential cuts on hybrid vehicles and auto parts aimed at boosting local manufacturing and encouraging domestic sales.

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“To mitigate the impact of high U.S. tariffs, we will look at alternative markets, primarily in Europe, where requirements are similar and exports are manageable. At the same time, we are focusing on strengthening our domestic business and diversifying into future-ready products such as electric vehicle (EV) components,” said Ajinkya Firodia, vice chairman and managing director of Kinetic Engineering, as per Business Standard.

“For EV battery players like us, this move could strain existing supply relationships with manufacturers, increase cost pressures, and potentially slow the momentum of EV adoption worldwide. We urge the Indian government to diversify export markets and accelerate domestic manufacturing investments. Strengthening India’s position as a reliable alternative supply base is now more critical than ever,” said Pratik Kamdar, cofounder and chief executive officer of Neuron Energy.

Reflecting on such measures, the Automotive Component Manufacturers Association of India stated in a statement, “it is important to increase domestic value addition and broaden export markets. We remain engaged with the Government of India and industry stakeholders to strengthen the sector’s resilience and long-term growth prospects.”

According to Business Standard, industry analysts estimate that around $3.58 billion of Indian auto exports to the U.S. roughly 55% will remain subject to a 25% tariff, while the other $3.08 billion, or 45%, will face a steep 50% duty.

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Meanwhile, Japanese automakers Toyota and Suzuki scored a policy boost as Prime Minister Modi’s government announced plans to lower the GST on small petrol-hybrid cars from 28% to 18%. The move comes after years of lobbying by the manufacturers, who argue that hybrid technology offers a cleaner alternative to traditional petrol vehicles.

The reduction in GST for hybrid vehicles which combine a traditional combustion engine with an electric motor narrows the gap with fully electric cars, which are taxed at just 5%. Indian EV makers like Tata Motors and Mahindra & Mahindra have previously voiced concerns that favoring hybrids could slow the country’s push toward full electrification.

Indian government has also proposed lowering taxes on motorcycles and scooters with engines under 350cc, which primarily includes commuter bikes and accounts for about 95% of the nearly 20 million two-wheelers sold in India last year by makers such as Bajaj Auto, Hero MotoCorp, and TVS Motor. These tax cuts are expected to give a boost to small car sales in the world’s third-largest automobile market, benefiting Maruti Suzuki, India’s largest carmaker, along with competitors Hyundai and Tata Motors.

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