Auto stocks are expected to be in focus on Tuesday, January 27, as India and the European Union (EU) are reportedly on the verge of announcing a free trade agreement (FTA). The FTA, potentially to be unveiled at the bilateral summit, is anticipated to significantly impact the automobile sector, particularly with regard to import duties on cars.

Key Highlights of the Proposed India-EU FTA:

• Tariff Reduction: India is considering slashing import duties on cars from the EU, potentially reducing them from as high as 110% to 40% immediately. Over time, these duties could be reduced further to a mere 10%.
• Quota on Vehicles: The immediate tariff reduction to 40% may apply to a limited number of cars, reportedly around 200,000 vehicles annually.
• Exclusion of Electric Vehicles (EVs): To protect domestic EV manufacturers like Tata Motors and Mahindra & Mahindra, battery electric vehicles are likely to be excluded from the duty cuts for the first five years. After this period, similar duty reductions could be applied to EVs.
• Focus on Higher-Priced Cars: The initial tariff reductions are expected to apply to cars with an import price exceeding 15,000 euros (approximately $17,739).
• Potential Benefits for European Automakers: Lower tariffs would allow European luxury EV makers to price their products more competitively in the Indian market. European carmakers such as Volkswagen, Mercedes-Benz and BMW may see increased access to the Indian market.

Impact on Indian Automakers:

The proposed FTA has the potential to intensify competition for Indian automakers. The domestic industry, which has benefited from high tariff protection, may face challenges as European brands become more price-competitive. However, the exclusion of EVs from immediate tariff cuts aims to provide a cushion for local manufacturers like Tata Motors and Mahindra & Mahindra, allowing them to further develop their EV ecosystems. Moreover, phased localization requirements and value-addition norms for EV makers are expected to remain in place, ensuring that the increase in imports does not undermine India's long-term manufacturing ambitions.

Stocks in Focus:

Given these developments, auto stocks, including Tata Motors, Mahindra & Mahindra, and Bharat Forge, are expected to be closely watched by investors on Tuesday. How these companies adjust their strategies to address the changing competitive landscape will be critical. While some experts believe that the FTA may hurt the Indian auto sector, others, like the Global Trade Research Initiative (GTRI), suggest that the agreement is likely to lower costs and expand trade, rather than threaten the domestic industry. GTRI notes that India and the EU are partners operating on different rungs of the value chain, with India exporting labor-intensive goods and the EU supplying capital goods and advanced technology.

Broader Implications:

The India-EU FTA is expected to have broader implications beyond the automotive sector. It could significantly expand bilateral trade, with the EU already being India's largest trading partner in goods. The agreement may also boost Indian exports of textiles, jewelry and other goods, particularly in light of the tariffs imposed by the United States.

Overall, the India-EU FTA represents a potentially significant shift in India's trade relations, with the automotive sector poised to experience notable changes. While challenges may arise for domestic manufacturers, the agreement also presents opportunities for increased trade, technology exchange, and economic growth for both India and the EU.