Budget 2026 Reinforces Priorities for India's Automobile and Auto-Components Sector
This analysis is based on insights from industry experts Saurabh Agarwal, Partner EY, Parul Nagpal, Partner EY, and Soumya Murthy, Director EY. Budget 2026 strengthens India's strategic focus on the automobile and auto-components industry, addressing key challenges as vehicles become increasingly electrified and software-driven, while supply chains remain vulnerable to fluctuations in critical materials and imported subsystems. The Finance Bill and customs changes introduce a familiar yet impactful mix of policy continuity for clean mobility, tariff simplification, and extensions of crucial customs reliefs that shape domestic cost structures and localization plans.
Policy Push: Rare Earth Corridors, ISM 2.0, and Increased Outlay for ECMS
Budget 2026 enhances the "future-ready" manufacturing infrastructure supporting next-generation vehicles. The India Semiconductor Mission will progress through ISM 2.0, aiming to build domestic capabilities in equipment and materials, develop full-stack Indian intellectual property, and establish industry-led research and development centers along with training facilities. The Electronics Components Manufacturing Scheme, launched in April 2025, is proposed to be scaled up significantly, with the outlay increased from ₹22,919 crore to ₹40,000 crore, reflecting strong investment traction.
To secure essential inputs for the electric vehicle era, the Rare Earth Permanent Magnets initiative will receive support through dedicated Rare Earth Corridors in Odisha, Kerala, Andhra Pradesh, and Tamil Nadu. These corridors will promote mining, processing, research and development, and manufacturing activities. Additionally, sustained public capital expenditure across freight corridors, waterways, city economic regions, and public transport, including electric buses, is expected to benefit commercial vehicles and buses as near-term demand drivers.
EV Manufacturing: Continuity with a Localization Lens
Over recent years, India's automotive policy has strongly emphasized electrification through demand-side programs for EV adoption and production-linked incentives for EV and component manufacturers. Budget 2026 continues this trajectory by focusing on manufacturing economies, particularly in the battery sector. A critical extension in the customs framework is the continued support for lithium-ion cell manufacturing until 2028, along with expanded customs duty benefits for capital goods used in Battery Energy Storage Systems. This is vital because the ecosystem, including cells, separators, chemicals, and coatings, serves both electric vehicles and energy storage applications.
Furthermore, the concessional 5% import duty on lithium-ion cells has been extended until 2028, and a new exemption from import duty for compounds, inorganic or organic, of rare earth metals provides a crucial bridge until India's domestic cell-manufacturing ecosystem scales up effectively.
Auto Components Beyond EV: Emission Control Remains Relevant
Even as electric vehicle penetration increases, India's substantial internal combustion engine fleet ensures ongoing demand for emission-control systems. Inputs related to catalytic converters, such as washcoat materials including zeolite and cerium/ceria-zirconia compounds, and precious-metal-linked catalyst value chains, are granted customs duty exemptions. This highlights that localization efforts extend beyond batteries to include legacy component chains where India can develop deeper capabilities, including recycling and recovery loops.
Concessions for Upstream Inputs, Tariff Simplification, and Competitiveness
The broader customs package also offers benefits to upstream inputs that feed into auto components, such as graphite (natural and artificial), cobalt forms, copper and alloys, polymers like EPDM and PVC, and metal scrap streams supporting recycling. For domestic manufacturers, this is significant because modern vehicles increasingly integrate metal, polymer, electronics, and chemistry at scale, enhancing competitiveness.
A major feature of the 2026 package is tariff simplification, achieved by shifting effective duty rates from exemption notifications into the tariff schedule and rationalizing entries through removals and mergers. For original equipment manufacturers and Tier-1 suppliers, this reduces classification ambiguity and makes landed-cost planning more predictable. In the same vein, the Finance Bill introduces more granular tariff lines for select items in Chapters 84 and 85, reflecting the growing electronics and climate-control content in contemporary vehicles.
Bottom Line: Strategic Reinforcement for the Auto Sector
Budget 2026 may not present a single "big-bang" announcement, but it reinforces the direction of travel with deeper localization, clearer tariff architecture, and a more resilient supply chain. For domestic original equipment manufacturers, the immediate task involves re-costing imports and re-checking classifications. For Tier-1 suppliers and micro, small, and medium enterprises, the opportunity lies in moving upstream into battery subsystems, catalyst supply chains, engineered polymers, and high-quality components aligned with the electric vehicle transition.
Disclaimer: Views and opinions expressed in this analysis are solely those of the original authors and do not represent any organization or its employees.
