Why India must cut its auto sector tariffs

Hindustan Times

5 days ago

India and the US have resumed trade talks with the July 9 deadline on tariffs looming. Without tariff reductions by India, the US will impose additional duties (26%) on all Indian exports. One central issue remains India's triple-digit automobile tariffs, which face a 25% retaliatory duty if unchanged.
India must reduce auto tariffs. The prize isn't just avoiding Trump's retaliation. It is ending over 70 years of protectionism that has entrenched India's automobile sector in mediocrity. India's automobile tariffs are global outliers. Cars priced below $40,000 face effective tariffs of 70%. Above that price tag, effective tariff rates jump to 110%. Used cars get hit hardest at 137.5%. In contrast, China levies 15% on automobile imports, with higher rates on US cars. The European Union applies a uniform 10% on all non-EU car imports. South Korea charges 8% on cars. Japan imposes no tariffs.
Since 1948, India has historically priced out foreign manufacturers in favour of the domestic auto sector. The rationale was to protect the infant auto industry by outright banning imports of fully-built cars. Only companies committed to local manufacturing were allowed to operate after 1953.
Liberalisation since the 1990s ended licensing requirements. Tariff rates fell from 65% in 1992 to about 35% by 2000. This liberalisation in the auto sector was short-lived: By 2014, tariffs had climbed back into triple digits, peaking at 125%.
India ranked third in car production in 2024, but only exported 14% of its total output. Homegrown manufacturers, Tata Motors and Mahindra, contributed only 2% to exports. In contrast, Japan exported nearly half its production. Spain, Germany, and South Korea, despite producing fewer vehicles than India, exported 89%, 77%, and 67% of their output, respectively. As centuries of trade theory predict, protectionism meant to nurture export giants ended up creating an octogenarian infant.
Instead of fostering innovation and competitiveness, India's protectionism combined with relaxation of foreign investment limits has encouraged foreign automakers to manufacture for its captive market. By 2024, seven-in-ten passenger cars sold domestically were from foreign-controlled companies such as Maruti Suzuki, Hyundai, Toyota and Kia. Maruti Suzuki alone accounted for 41% of domestic sales.
Protectionism has also shaped vehicle quality. To meet local price pressures, foreign-controlled brands sell older or stripped-down models. Hyundai's Indian line-up lags its global fleet by a generation. Between 2014 and 2016, popular Indian models received a zero-star safety rating in international crash tests, missing basic features like airbags. Dual airbags became mandatory in India only in 2022.
In the emerging global trade order, high tariffs on foreign cars undermine India's export successes in auto parts. India's auto components sector — engine parts, transmission systems, electrical components, and chassis parts — remains competitive. On components, India imposes a 10-15% tariff. In FY24, Indian companies exported nearly $6.79 billion worth of auto components to the US, its largest market. India's finished car exports to the US totalled only $8.9 million in the same period. Before the recent escalation, the US imposed standard most favoured nation (MFN) rates of 2.5% on passenger cars and auto parts, and 25% on light trucks.
In April-May 2025, the US imposed retaliatory tariffs of 25% on both automobiles and auto components from India. The globally competitive components sector, often supplied by MSMEs, will pay the price for protecting large and uncompetitive domestic car manufacturers.
The real obstacle to reform lies not in Washington, but India's domestic automobile lobby, which has perfected a system of resisting liberalisation. Lobbying has layered tariffs with surcharges and shifting exemptions that leave effective rates unchanged despite nominal tariff cuts.
The FY26 budget illustrates this obfuscation. The government slashed the basic customs duty on cars priced over $40,000 from 100% to 70%, and eliminated the 10% social welfare surcharge. However, it simultaneously introduced a 40% agriculture infrastructure and development cess applicable solely to imported vehicles, leaving the effective rate unchanged at 110%. Even government documents described this as a 'decrease in tariff rate with no change in effective rate'.
Tariffs on used cars seem to follow the same formula. The basic duty dropped from 125% to 70% and the 12.5% surcharge vanished, but a 67.5% cess cancelled the cut. Commercial vehicles, with an overlapping set of entrenched interests, saw no effective reduction. Only motorcycle tariffs were cut. Completely built-up large-capacity models — think Harley Davidsons — dropped from 50% to 30%. None of this is new. In 2012, the Society of Indian Automobile Manufacturers warned that any cut in duties 'has to be avoided at all cost' because reducing tariffs would risk domestic investment, manufacturing, and jobs. This stance aligned perfectly with that of the Make in India call — by raising tariffs and choosing national champions.
But protectionism is complex. During UK-India trade talks, Tata Motors, India's auto lobby titan, stood to gain from lowering British car tariffs to 10% through its Jaguar Land Rover (JLR) subsidiary. JLR now faces its own challenge as 23% of its sales come from the US, where new 25% tariffs on UK automobiles threaten profitability. On electric vehicles (EVs), Tata Motors dominates India's EV segment but continues arguing against easing the 100% tariff on imported EVs until 2029.
Tesla's blocked entry demonstrates how firmly this line has held. Since 2021, Tesla CEO Elon Musk has requested a 40% tariff rate for imported EVs. Domestic automakers opposed any reduction unless Tesla committed to local manufacturing. That proves difficult in India's regulatory labyrinth. General Motors exited after accumulating over $1 billion in losses. Ford followed in 2021 after $2 billion in losses and 4,000 job cuts. As talks head to Washington, the real question isn't India's national interest versus Trump's demands. It is whether India will finally choose consumers and small manufacturers over an auto lobby that masks its lack of competitiveness with patriotism.
Shreyas Narla is a research scholar and Shruti Rajagopalan is a senior research fellow with the Mercatus Center at George Mason University. The views expressed are personal.