India to Slash Car Import Tariffs to 40% in Historic EU Trade Deal

Image used for representational purposes only. | Photo Credit: Getty Images/iStockphoto

New Delhi — India is preparing to dramatically reduce import tariffs on European Union vehicles to 40% from as high as 110%, sources familiar with the matter told Reuters, marking the country's most significant market opening as the two economic powerhouses near completion of a landmark free trade agreement expected as early as Tuesday.

The tariff reduction, part of what officials are calling "the mother of all deals," represents a major shift in India's historically protectionist automotive policy and could reshape the competitive landscape of the world's third-largest car market.

Phased Tariff Cuts on the Horizon

Prime Minister Narendra Modi's government has agreed to immediately lower duties on a limited number of cars from the 27-nation bloc valued above €15,000 ($17,739), according to two sources briefed on the confidential negotiations. The tariffs will be further reduced to just 10% over time, opening doors for European manufacturers including Volkswagen, Mercedes-Benz, and BMW.

The initial proposal calls for cutting import duties to 40% on approximately 200,000 combustion-engine vehicles annually, though this quota could still be subject to last-minute adjustments, one source noted.

Both India's Commerce Ministry and the European Commission declined to comment on the ongoing negotiations.

Electric Vehicles Get Special Treatment

In a move to protect domestic manufacturers like Mahindra & Mahindra and Tata Motors, battery electric vehicles will be excluded from the tariff reductions for the first five years. After this protection period, EVs will follow similar duty reduction schedules as conventional vehicles.

Mother of All Deals' Takes Shape

The announcement is expected to coincide with a key Delhi summit, where EU leaders will serve as chief guests at India's Republic Day function. India and the EU are poised to announce the conclusion of long-running negotiations for the comprehensive free trade pact, after which both sides will finalize technical details and ratify the agreement.

The deal could significantly expand bilateral trade and provide relief to Indian exporters of textiles and jewelry, sectors that have been battered by 50% U.S. tariffs imposed since late August.

Opportunity for European Automakers

The tariff reduction offers a lifeline to European manufacturers struggling to gain traction in India's market, currently dominated by Japan's Suzuki Motor and domestic brands Mahindra and Tata, which together control two-thirds of the 4.4 million units sold annually.

European carmakers currently hold less than 4% market share despite several manufacturers operating local production facilities. Lower import taxes will allow these companies to sell imported vehicles at more competitive prices and test the market with broader portfolios before committing to expanded local manufacturing.

The timing is strategic, as the Indian market is projected to grow to 6 million units annually by 2030. Renault is already planning a market comeback with a new strategy, while Volkswagen Group is finalizing its next phase of investment through its Skoda brand.

Breaking Down Barriers

India's automotive sector has long been among the world's most protected, with New Delhi currently imposing tariffs of 70% and 110% on imported cars—a policy frequently criticized by industry executives, including Tesla CEO Elon Musk. The U.S. is separately pursuing a trade deal with India that could feature zero tariffs on cars as Tesla's entry into the Indian market nears.

The proposed changes represent India's most aggressive move yet to liberalize its automotive sector and could mark a turning point for European manufacturers seeking growth outside their home market, where Chinese automakers are making significant inroads.