India-EU Trade Deal Set to Transform Auto Sector with Major Tariff Cuts
Indian auto stocks, including Tata Motors, Mahindra & Mahindra (M&M), and Maruti Suzuki, are poised to be in the spotlight during Tuesday's trading session on January 27. This heightened focus comes amid growing expectations of a landmark India-EU trade agreement that could significantly reshape the automotive landscape.
Substantial Reduction in Import Duties
According to a Reuters news report published on Sunday, January 25, India is planning a dramatic reduction in tariffs on cars imported from the European Union. The current rate of 110% is expected to be slashed to 40%, marking one of the most substantial openings of India's vast automotive market in recent history. This move is part of broader negotiations aimed at finalizing a free trade agreement, which could be announced as early as Tuesday.
Experts view this development as a pivotal moment for India's auto sector. Seema Srivastava, Senior Research Analyst at SMC Global Securities, commented, "India's decision to cut import tariffs on EU cars is set to shake up the auto sector. European luxury brands like Volkswagen, Mercedes-Benz, and BMW are likely to benefit, selling cars at more competitive prices."
Impact on Domestic and International Players
The tariff reduction is specifically targeted at cars with an import price exceeding 15,000 euros ($17,739) from the 27-member EU bloc. As per Reuters sources, this initial cut to 40% will eventually be further reduced to 10%, facilitating easier market entry for European manufacturers. This progressive lowering of barriers is expected to make the Indian auto market more competitive, ultimately benefiting consumers through increased choice and potentially lower prices.
However, the news presents a mixed bag for domestic automakers. While local dealerships and service providers may experience a boost from increased sales of European vehicles, Indian giants like Tata Motors and Mahindra & Mahindra could face intensified competition, particularly in the luxury segment. Srivastava added, "Local dealerships and service providers will also see a boost. However, domestic players like Tata Motors and Mahindra & Mahindra may face increased competition in the luxury segment."
Sentimental Shifts and Sectoral Dynamics
Mohit Gulati, CIO and Managing Partner of the ITI Growth Opportunities Fund, highlighted the potential sentimental impact on listed auto stocks. He noted that this development could tip the scales in favor of European brands such as Volkswagen, Mercedes, BMW, and Audi, potentially casting a negative sentiment over other Indian auto players.
The auto and auto ancillary stocks are likely to experience varied impacts:
- Positive Impact: Volkswagen India, Midas Components, and Bharat Forge are expected to benefit from the tariff reductions.
- Neutral to Minimal Impact: Maruti Suzuki and Apollo Tyres are anticipated to face almost no negative repercussions.
- Negative Impact: Tata Motors and Mahindra & Mahindra, especially in the luxury vehicle segment, are likely to be adversely affected.
Broader Implications for the Indian Auto Market
India holds the position of the third-largest car market globally in terms of sales, trailing only the United States and China. Despite this, the domestic automobile sector has historically been highly protected. The reduction in import taxes is expected to enable automakers to offer imported vehicles at more affordable prices and explore the market with a wider array of options before committing to increased local manufacturing.
This policy shift will particularly benefit European car manufacturers like Volkswagen, Renault, and Stellantis, along with luxury brands such as Mercedes-Benz and BMW. These companies already produce cars in India but have encountered expansion challenges primarily due to high tariffs, which New Delhi currently imposes at rates of 70% and 110% on imported vehicles.
Special Provisions for Electric Vehicles
In a strategic move to safeguard domestic investments, the tariff reductions will exclude battery electric vehicles (BEVs) for the initial five years. This exemption aims to protect the burgeoning investments made by local companies like Mahindra & Mahindra and Tata Motors in the electric vehicle sector. After this five-year period, electric vehicles will become eligible for similar duty reductions, as confirmed by Reuters sources.
Seema Srivastava of SMC Global Securities further elaborated that this policy not only enhances market competitiveness but also positions India as a more attractive manufacturing hub. This could lead to increased investments and job creation, while also giving a boost to European luxury electric vehicle sales in India.
Disclaimer: The views and recommendations mentioned above are those of individual analysts or broking companies and not of Mint. Investors are advised to consult certified experts before making any investment decisions.
