India’s Auto Paradox: Competitive, Capable, but Still Circling the Home Track

India’s automobile industry is one of its stars. It has scale, cost competitiveness, and engineering depth, supported by a large and growing domestic market.

India’s automobile industry is one of its stars. It has scale, cost competitiveness, and engineering depth, supported by a large and growing domestic market. Passenger vehicle (PV) production surpassed 5 million units in 2024–25, placing India third globally in total PV output. It leads the world in two-wheeler production and ranks second and third in bus and medium-to-heavy commercial vehicle output, respectively.

Despite these achievements, India remains a marginal player in global automobile exports. While its cars are affordable and capable, they do not reach far-flung markets. This paradox, of world-class potential constrained by an inward-looking industrial strategy, raises important questions about incentives, trade policy, and the role of the state in shaping competitiveness.

A Thriving Domestic Market, But a Missing Export Engine

India’s domestic market is one of the largest in the world, with demand rising steadily, driven by urbanisation, income growth, and aspirational consumption. Domestic sales of passenger vehicles crossed 4.3 million units in 2024–25, up from 2.77 million in 2019–20, reflecting a growth of 48 percent. By contrast, exports grew by only 16 percent over the same period, from 0.66 million units to 0.77 million units. These trends have led automakers, both domestic and foreign, to focus overwhelmingly on the domestic market.

Table 1: Passenger Vehicle Sales

Source: Society of Indian Automobile Manufacturers

This highlights the core issue: although the fundamentals such as vendor depth, labour skills, and cost structure are in place, the incentives to build globally competitive businesses remain weak, almost inert.

…although the fundamentals such as vendor depth, labour skills, and cost structure are in place, the incentives to build globally competitive businesses remain weak, almost inert

A Protective Tariff Regime, and “Water in the Tariff”

India’s auto tariffs are among the highest in the world. The applied most-favoured-nation (MFN) tariff on passenger vehicles is around 125%, compared to 15% in China, 9.8% in Germany, and around 27.5% in the United States, where it was previously around 2.5% before President Trump’s 2025 announcements (see Table 2).

Why does the industry require such high tariffs? Surely these levels are not essential for its survival. What explains its resistance to lower rates? Put differently, why insist on such high “water in the tariff”, meaning tariff redundancy, where domestic prices remain well below what tariff-based pricing would suggest?

Table 2: Comparative Import Tariffs on Passenger Vehicles

Source: WITS

Note: After President Trump’s latest announcements, the US tariff has increased to 27.5% and India’s tariff has been reduced to 70%-110% in 2025. In both cases, the previous tariff rates are presented to allow for a clearer comparison(SIAM 2025)(Palmer & Desrochers 2025).

High tariffs, along with restrictions on used vehicle imports and local content requirements, have long been used to nurture fledgling car industries. However, the Indian automobile sector is no longer in its infancy, having enjoyed nearly eight decades of protection. Such tariffs enable price-cost markups, dull innovation, and discourage global ambition.

…tariffs enable price-cost markups, dull innovation, and discourage global ambition.

Moreover, incumbent firms operating in protected environments begin to view such protection as integral to their business model. Whether domestic or foreign, once firms invest under the promise of tariff protection, they naturally resist its removal. This was clearly seen in Australia, where GM, Ford, and Toyota lobbied aggressively to delay tariff reductions, a pattern echoed globally.

When high tariffs are combined with a large, under-penetrated domestic market (car ownership in India is only 57 per 1,000 people compared to 322 in China and 670 in Japan (Table 3)), it is unsurprising that many capable automakers prefer to focus on meeting domestic demand. As a result, Indian carmakers have made limited investments in building global brands, aligning with international standards, or developing export-oriented platforms. Consequently, India exports only 16.62 percent of its car production, down from 2019, compared to 93 percent in Germany, 62 percent in Japan, and 59 percent in South Korea (Table 3). Even China and the United States, with far larger domestic markets, export a greater share of their output.

It is instructive to look at the case of Brazil, a large car market and producer. In 2011, Brazil hiked import duties on cars by about 30 percentage points, hoping to boost domestic production (Magalhaes & Alerigi Jr 2025). In the short-term, production did increase, to a peak of 3.7 million vehicles in 2013. In 2024, production was only 2.55 million vehicles, down about a third from the peak. While Brazil suffers from several other economic problems, high protection for its car industry has created inefficiencies and lowered demand.

Table 3: Comparative analytics

Source: International Organization of Motor Vehicle Manufacturers, World Population Review,  The Global Economy, UNCOMTRADE

Could Car Prices be an Issue?

No, that hypothesis does not hold water. India’s car prices are globally competitive. The comparative vehicle price index for India is just under 70, one of the lowest in the world, with the world average benchmarked at 100 (Table 3).

Some cars with identical specifications, like the Suzuki Swift, clearly highlight India’s cost advantage. In India, the Swift is a popular hatchback, with base models starting at around ₹5.9 lakh and better variants costing ₹8–9 lakh including GST. In the UK, the same car (albeit with stricter safety specifications) is priced at approximately £15,000–£17,000, or about ₹20 lakh including 20% VAT—more than double the Indian price. Even in Japan, Suzuki’s home market, the Swift typically costs ¥1.5–2 million, equivalent to ₹10–13 lakh, still notably higher than in India (Kitamura 2023) (Srithar 2023) (Adams and Walton 2025).

Could Car Quality be an Issue?

The answer to this question is also no, although there are nuances.

India exports cars to a wide range of markets, including both emerging economies and developed countries. The United States and Germany have historically been major destinations. In 2019, the US and Mexico each imported nearly a billion dollars worth of Indian vehicles. Since then, exports to these markets have declined sharply, first due to the disruptions caused by COVID-19 and more recently because of rising protectionist policies across key importing nations (OEC 2025).

The point is that India cannot export to exacting markets unless it meets their safety and emission standards, so the capability to meet those standards exists.  Moreover, India has introduced upgraded standards – including the Bharat New Car Assessment Program (NCAP) for crash testing in 2023, aligning in protocol with the Global NCAP; and the Bharat VI emission norms, introduced in 2020, equivalent to Euro 6 standards.  Where India remains behind is on scope, scoring and enforcement. There are fewer testing facilities and less rigorous testing protocols. Domestic standards are somewhat weaker in some protocols, but the bigger gap lies in enforcement and test scores (Das 2023) (Jadhav et al. 2024).

Electric Vehicles: New Opportunities and Challenges

The global shift to electric vehicles (EVs) offers India both opportunities and challenges. A major hurdle is the global dominance of Chinese EVs, driven by China’s leadership in battery manufacturing. India’s strength lies in the size and growth potential of its domestic market, which is just beginning to embrace EVs.

Continued policy support, such as the 5 percent GST on EVs and subsidies for charging infrastructure, can help Indian manufacturers scale up, lower costs, and invest in research and development. These scale-driven advantages could provide a strong base for Indian EV makers to compete in global markets.

Trade Negotiations: The Auto Sector as a Stumbling Block

Domestic carmakers argue that steep tariff cuts could hurt local manufacturing and investment. The auto sector remains a key hurdle in India’s trade talks, especially with the EU, which has demanded significant tariff reductions as a condition for a deal (TOI Business Desk 2025) (Mishra 2025)

It is not realistic to expect that automobiles will continue to enjoy such high levels of protection that the sector has been used to. And this is not just about the United States and its recent trading strategy.

The world in general does expect much more reciprocity in trade, especially from a major partner like India that is now exporting more than $800 billion in goods and services (Kathuria 2025).

This defensiveness seems increasingly anachronistic. Countries such as South Korea and Japan did not succeed by permanently shielding their markets, but by gradually opening them to competition while supporting their exporters. India, too, needs to pivot, using trade policy not merely as a shield but as a lever to enhance competitiveness.

To complement tariff rationalization, India will need to deepen global engagement through free trade agreements, foster technological development, and enhance regulatory quality to reverse its declining competitiveness (Prabhakar et al. 2025).

The Way Forward

For India’s auto industry to become more export-oriented and dynamic, several steps are essential. Tariffs should be rationalized to reduce redundancy and sharpen competitive pressures. Even countries with protected markets, like Brazil, maintain car tariffs at “only” 35 percent. As free trade agreement partners push for lower duties, India would benefit from a more flexible stance on auto-sector commitments. Aligning domestic regulations more closely with global safety and emission standards, and improving enforcement, would enhance the industry’s international competitiveness. Most importantly, firms must view exports not as a risk but as a strategic goal. This shift will require long-term investment and a willingness to move beyond domestic comfort zones. Government backing, including incentives for research and development, and calibrated support for branding, and market access, can help nurture this ambition.

Conclusion

A typical car firm in India produces a reliable and respectable quality product that, especially in the smaller segments, is very competitively priced. It benefits from a strong auto components sector to support its growth. But it also enjoys unusually high protection from foreign competition, arguably more than any counterpart firm in other major markets. Since the firm’s domestic market is large and growing, it does not feel any pressure to cater to consumers in overseas markets. It does export a relatively small share of its output, typically to markets where meeting regulatory standards and catering to customer preferences is less demanding.

India has built cars for itself. Now it must build them for the world.

The real challenge for this firm lies not in capacity but in vision and ambition. Exporting is demanding since it requires long time horizons, openness to feedback, and the resolve to meet rigorous standards. Yet exporting fosters valuable learning and will also help the firm to compete better in its home market, especially once protection declines. The firm should remember that all world class firms are strong players not only in their respective home markets, but also significant players in multiple international markets.

India has built cars for itself. Now it must build them for the world.