The US administration has been pressuring India to reduce its import tariffs on cars, but India remains cautious about making drastic changes. While there is some openness to lowering tariffs on imported cars, a complete removal of these duties is unlikely in the near future. The ongoing discussions between the two countries may lead to some tariff adjustments, but India’s primary concern is protecting its local industries.
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PSR Analysis. Even if India were to reduce tariffs to zero, the impact on the domestic automotive market would likely be minimal. The duty differences are relatively small, and the risk of imports flooding the market is low. India’s automotive component sector, especially in areas like EV differentials, bevel gears, and crankshafts, has been growing steadily. This sector benefits from India’s low labor costs, significantly lower than countries like Mexico and the US, giving it a competitive advantage in global supply chains.
India’s share in global automotive exports remains small, around 2%, primarily due to the dominance of integrated supply chains. If tariffs were reduced, the immediate effect might be limited, but it would increase competition for local manufacturers, particularly in the premium vehicle and motorcycle segments. Foreign manufacturers, like GM and Ford, have already exited India due to unprofitable markets, and further reductions in tariffs could worsen this situation.
On the other hand, the US charges relatively low tariffs—around 2.5%—on automotive imports from India, while India imposes significantly higher tariffs, especially on fully built cars (up to 110%). These high tariffs have allowed domestic manufacturers to strengthen their position in the local market. A reduction in tariffs could heighten competition, but it could also benefit local manufacturers if high-quality foreign models enter the market.
India could strategically implement selective tariff reductions, offering benefits for US-made cars with substantial value-added components. This would help prevent exploitation of the system by countries with lower production costs, such as Mexico or China. Additionally, the recent appreciation of the US dollar has benefited US companies by allowing them to source cheaper goods, making their exports more profitable.
Looking forward, while tariff reductions might not cause immediate large-scale shifts in the market, they could intensify competition over time. India will need to navigate these challenges carefully, balancing international trade pressures with the needs of its local industries. At the same time, India’s competitive edge in the auto components sector should continue to be leveraged to secure its position in the global supply chain.
In conclusion, while reducing tariffs on imported cars and components might not drastically affect India’s automotive sector in the short term, it could lead to increased competition for local manufacturers in the long run. India must manage tariff adjustments strategically and continue to develop its auto components sector to maintain a competitive edge. The key for India will be balancing global trade pressures with the protection and growth of its domestic industries. PSR
Aditya Kondejkar is Research Analyst – South Asia Operations for Power Systems Research
