India appears ready to take a decisive step toward liberalising its automobile import regime as part of a comprehensive free trade agreement (FTA) with the European Union. According to sources cited by Reuters, New Delhi plans to reduce peak import duties on EU-made cars to 40 per cent from current levels that can go as high as 110 per cent, with further reductions to as low as 10 per cent over time.

This marks one of the most significant policy shifts in India’s automobile trade stance in decades. The country, now the world’s third-largest car market after the United States and China, has long maintained steep tariffs on fully built imports to encourage local manufacturing and protect domestic players. Import duties currently range between 70 per cent and 110 per cent, often cited by global carmakers as a key barrier to entering or expanding in the Indian market.

Under the proposed arrangement, the immediate tariff relief would apply to a limited number of fully built cars priced above €15,000 (around ₹16.3 lakh). Sources indicate that India has agreed to lower duties on roughly 200,000 internal combustion engine (ICE) vehicles annually, though the final quota remains subject to negotiation.

Battery electric vehicles (BEVs) will be excluded from the duty cuts for the first five years, reflecting New Delhi’s intent to shield domestic EV investments and manufacturing plans.

European manufacturers such as Volkswagen, Mercedes-Benz, and BMW stand to benefit directly from the change, gaining the ability to price imported models more competitively. The lower duties would also allow these companies to introduce and test new models in India before deciding on deeper localisation and manufacturing commitments.

The development comes as European Commission President Ursula von der Leyen and European Council President António Costa visit India for Republic Day celebrations, with summit-level discussions planned with Prime Minister Narendra Modi. The trade deal is expected to be announced alongside a broader strategic partnership, including defence cooperation and mobility arrangements for Indian professionals in Europe. While negotiations may conclude this week, the agreement will still require formal ratification on both sides.

For India, the move represents a delicate balancing act between protecting domestic manufacturing and integrating more deeply into global trade flows. The high tariff regime has historically incentivised global manufacturers to set up local production. However, it has also limited consumer access to a wider range of vehicles and kept premium imports at very high price points.

A phased tariff reduction, particularly with volume caps and price thresholds, suggests a calibrated opening rather than a wholesale liberalisation. By initially limiting the benefit to higher-priced vehicles and excluding EVs, the government appears to be insulating mass-market and future-facing domestic segments from immediate foreign competition.

At the same time, this could alter the competitive landscape in India’s premium and luxury car segment. Lower import duties may compress price gaps between locally assembled vehicles and fully imported models, giving consumers more choices and potentially reshaping demand patterns.

The immediate impact is likely to be felt in the premium passenger vehicle segment, where European brands have a strong presence. More competitive pricing of imported models could challenge the current economics of local assembly for some manufacturers, forcing a re-evaluation of localisation strategies.

For domestic automakers, particularly those with a strong presence in the mid and premium segments, the move introduces a new competitive variable. While the initial quota and price threshold provide some cushion, the direction of policy signals a gradual opening of the market over time.

The exclusion of EVs for the first five years is particularly significant. It indicates that India’s EV manufacturing ambitions, backed by policy incentives and private investments, remain a priority. This insulation period could help domestic players strengthen their position before facing similar import competition in the electric segment later.

From a trade perspective, the move aligns India more closely with global supply chains and signals its willingness to use tariff policy as a negotiating lever in broader geopolitical and economic partnerships.