India to Slash Tariffs on EU Cars in Historic Free Trade Deal

India is set to significantly reduce import tariffs on cars from the European Union (EU) as part of an upcoming free trade agreement (FTA), with the deal potentially being finalized as soon as Tuesday, January 27. The new tariff cuts could provide a major boost to European automakers looking to expand their presence in India.

Tariff Cuts and Market Opening

As reported by Reuters on January 25, India is expected to lower the import tariff on European vehicles from as high as 110% to 40%. This move represents the most significant opening of India's vast market to foreign goods to date. The reduction is part of ongoing negotiations for an EU-India free trade deal, which could be finalized this week.

Sources familiar with the talks revealed that the Indian government, led by Prime Minister Narendra Modi, has agreed to immediately reduce tariffs on cars imported from the EU's 27 member states that are priced over 15,000 euros (approximately $17,000). Furthermore, the tariff is expected to drop further to 10% in the near future, opening the door for major European automakers such as Volkswagen, Mercedes-Benz, and BMW to gain better access to the Indian market.

Expansion of Bilateral Trade and Future Prospects

The FTA between India and the EU is expected to boost bilateral trade, benefiting industries like textiles and jewelry, which have been under pressure due to high U.S. tariffs. These goods have been subject to a 50% tariff in the U.S. since late August of last year.

India, the world's third-largest car market, has traditionally kept its domestic automotive industry highly protected. The country currently imposes import tariffs on foreign vehicles ranging from 70% to 110%, a system that has faced criticism from industry leaders, including Tesla CEO Elon Musk. The new proposal to lower tariffs is seen as a major step toward opening up the country's automotive market.

The Indian government's proposal involves imposing a 40% import duty on approximately 200,000 internal combustion engine (ICE) vehicles annually. This is the most aggressive measure taken to date to liberalize this sector, although the quota may be subject to adjustments in the final stages of the deal.

Electric Vehicle (EV) Exemption and Future Changes

To protect Indian companies such as Mahindra and Tata Motors, which are investing in the emerging electric vehicle (EV) sector, the proposed tariff reduction will exclude pure electric vehicles for the first five years. After five years, EVs will be subject to the same tariff reduction as other vehicles.

The tariff cuts are expected to benefit European automakers such as Volkswagen, Renault, and Stellantis, as well as luxury brands like Mercedes-Benz and BMW. While these companies already have manufacturing plants in India, the high tariffs have hindered their ability to grow. Reducing the tariffs will allow manufacturers to sell imported cars at more competitive prices and test the market with a broader product lineup before committing to local production.

Currently, European carmakers account for less than 4% of the annual 4.4 million vehicles sold in India, with Japanese brands like Suzuki and local companies such as Mahindra and Tata Motors dominating the market, holding about two-thirds of the market share.

With the Indian automotive market expected to grow to 6 million vehicles by 2030, several automakers are already preparing for new investments. Renault is re-entering the Indian market with a fresh strategy, aiming to increase its presence outside of Europe. Meanwhile, Volkswagen Group is finalizing its next phase of investments in India through its Škoda brand.

U.S.-India Trade Developments

Meanwhile, developments in U.S.-India trade also continue to unfold. U.S. Treasury Secretary Janet Yellen recently hinted that the U.S. might ease its additional 25% tariff on Indian goods, imposed in 2025, due to significant reductions in India's oil imports from Russia.

In an interview with Politico at the Davos World Economic Forum, Yellen remarked, 'India's significant reduction in oil imports from Russia is a success. While the tariffs are still in effect, there may be diplomatic pathways to removing them as India shifts its energy sources.' She emphasized that these trade measures have brought substantial benefits to the U.S. economy.

In 2025, the U.S. imposed a 25% 'reciprocal tariff' on India, alongside an additional 25% punitive tariff related to the import of Russian crude oil, pushing the tariffs on many Indian goods to nearly 50%.