The recently finalized India-European Union (EU) Free Trade Agreement (FTA), announced on January 27, 2026, after nearly two decades of negotiations, has been described as the "mother of all deals" and is expected to significantly impact various sectors, including the automotive industry. While the FTA aims to reduce tariffs and ease trade barriers between the two regions, its implications for India's auto sector are multifaceted, presenting both opportunities and challenges.

Tariff Reductions and Market Access

The most significant aspect of the FTA for the auto sector is the reduction of import duties on Completely Built Units (CBUs) or cars imported as finished products, from Europe. Currently, these imports face duties of 70% to 110%, which, combined with other taxes, can triple the vehicle's landing cost. The new framework proposes a phased reduction of these duties. For vehicles with a landed value exceeding €15,000 (approximately ₹16.5 lakh), duties will be immediately slashed to 40%, potentially even lower (30-35%) for specific high-end segments. Over the next 5 to 10 years, these duties will further decrease to a flat 10%.

However, to prevent a surge of imports that could destabilize local manufacturing, these concessions are capped at a quota of 250,000 vehicles per year. This strategic quota aims to protect the domestic mass market while allowing European manufacturers preferential access to India's premium auto segment. The FTA also includes the complete elimination of duties on automotive parts and industrial machinery over the next decade, a move that should lower the cost of local assembly for brands like Mercedes-Benz, BMW and Audi and reduce the cost of maintenance due to cheaper spares.

Potential Benefits

• Increased competitiveness: The tariff reductions will enable European Original Equipment Manufacturers (OEMs) to price their imported models more competitively, expand their model range, and recalibrate launch price points. This could lead to increased sales of European luxury cars in India.
• Return of enthusiast cars: The FTA makes it feasible for European brands to reintroduce "niche" enthusiast models like the Volkswagen Golf GTI and Skoda Octavia vRS as CBUs at competitive prices, filling the gap between mass-market cars and entry-level luxury.
• Boost to "Make in India": Federation of Automobile Dealers Associations (FADA) President CS Vigneshwar notes that over 95% of European OEM sales in India are already locally manufactured. The FTA could strengthen the "Make in India" initiative by opening reciprocal export opportunities for Indian OEMs and expanding consumer choice.
• Higher benchmarks: The FTA is expected to increase "benchmark pressure" as customer expectations rise in premium segments. Greater pricing flexibility may encourage European brands to offer upper-end variants, faster refresh cycles, and stronger feature offerings, raising the bar for technology, safety, and overall brand experience.

Potential Challenges

• Impact on domestic manufacturers: While the mass passenger vehicle market is expected to remain largely insulated due to its price sensitivity, Indian OEMs with exposure to the premium SUV segment may face increased competition. They may need quicker product upgrades and sharper value positioning to defend their market share.
• Limited impact on overall volume: The FTA's impact on overall industry volume is likely to be limited, as the tariff reductions primarily target the top end of the market. Nearly 95% of vehicles sold in fiscal year 2025 were priced below ₹20 lakh.
• Exclusion of EVs: Electric vehicles (EVs) are excluded from the agreement for the first few years. This is designed to give domestic manufacturers time to scale platforms and localize supply chains without direct import pressure and safeguard India's EV roadmap.

Overall Assessment

The India-EU FTA represents a significant step towards integrating the Indian automotive market with the global economy. The agreement is expected to benefit European luxury carmakers by making their products more competitive and accessible to Indian consumers. It may also encourage increased localization and exports by Indian OEMs. However, domestic manufacturers in the premium segment may face increased competition and need to adapt to the changing market dynamics. The long-term impact of the FTA will depend on how effectively Indian companies can leverage the opportunities it presents while mitigating the potential challenges. The FTA incorporates rules on modern 21st-century trade issues, such as digital trade, government procurement, competition policy, as well as labor and environmental standards.