India is planning to significantly reduce import tariffs on cars from the European Union, potentially marking the biggest opening of its automotive market yet. As the two sides approach a free trade agreement, tariffs could be slashed from as high as 110% to 40%. Sources familiar with the discussions indicate that an official announcement regarding the conclusion of the long-running negotiations could come as early as Tuesday, January 27.

The tariff reduction will apply to a limited number of cars imported from the EU priced above €15,000 (US$17,739). Over time, the tariffs are expected to decrease further to 10%, giving European automakers greater access to the Indian market. This move is anticipated to benefit European manufacturers such as Volkswagen, Mercedes-Benz, and BMW. However, electric vehicles will be excluded from the tariff cuts during the first five years to protect investments by domestic manufacturers like Mahindra & Mahindra and Tata Motors.

Currently, India levies tariffs of 70% and 110% on imported cars. These high tariffs have been a point of contention for corporate executives, including Tesla's Elon Musk. India is the world's third-largest car market in terms of sales, trailing only the United States and China, but it has also been one of the most protected, with a focus on supporting its domestic industry.

The anticipated free trade agreement (FTA) between India and the EU has been dubbed the "mother of all deals" in India. It is expected to not only boost the automotive sector but also expand bilateral trade and increase Indian exports of goods like textiles and jewelry, which have faced challenges due to 50% tariffs imposed by the U.S. since late August. In fiscal year 2025, India-EU goods trade surpassed $136 billion.

Experts suggest the FTA will likely reduce input costs, deepen value-chain integration, and increase trade volumes, ultimately benefiting producers and consumers on both sides. The agreement is expected to shift India's exports to the EU towards higher-value products like electronics, machinery, and chemicals, as opposed to the traditional labor-intensive goods that have dominated trade in the past.

The India-EU FTA is projected to increase India's trade surplus with the EU by over $50 billion by fiscal year 2031. It is also expected to increase the EU's share in India's total exports from 17.3% in fiscal year 2025 to around 22-23%. The agreement is also significant for the EU, as it aims to reduce its reliance on China and diversify its global supply chains.

The proposed FTA is expected to sharply reduce import duties on automobiles, including EVs, potentially triggering a surge in European luxury EV sales in India and positioning the country as a competitive manufacturing hub for these vehicles. The agreement is likely to contain provisions to balance market access with protections for domestic manufacturers such as Tata Motors and Mahindra & Mahindra.