Exports to USA accounted for approximately 27 per cent of the auto-component exports from India in FY2025 and the share has ranged between 25-28 per cent since FY2020, aided by vendor diversification by global OEMs and higher outsourcing. 

The steep increase in tariffs imposed by the USA on products from India, including auto-components, ranging from 25-50 per cent depending on the type of components, places Indian auto-component exporters at a disadvantage compared to other Asian exporters, like China, Japan, Vietnam and Indonesia which faces lower tariff of 15-30 per cent. While the incremental costs are largely being passed on, the extent of pass-through remains dependent on the supplier’s criticality, their share of business, competition and technology intensiveness of the components supplied, among other factors.

The auto component suppliers are dependent on USgeography diversifying their revenue base across other geographies (including Asia). Measures to improve value addition, diversification into non-auto segments, and cost-optimisation strategies are also being worked upon to reduce the potential impact on margins. The exporters are also exploring rerouting supplies via alternate geographies to mitigate the impact of the tariffs. 

Overall, given the established position of Indian auto-component suppliers, and the lead times associated with development of alternate vendors, there is fair degree of comfort regarding stability of existing business over the near to medium term. Nevertheless, awarding new businesses and products issomewhat deferred, given the uncertainties and evolving environment. The capex programme of the component players accordingly remains cautious.

The Indian auto-component sector is expected to continue its growth trajectory over the near to medium term, given underlying tailwinds in terms of improving automotive penetration, steady replacement market demand, premiumisation and localisation trends in underlying automotive market, in addition to opportunities emerging from the diversification strategies of global automotive OEMs. However, some of the potential risks to growth include -

Rising trade protectionism – Around 27 per cent of the Indian auto component market revenues are driven by exports, key geographies being North America, Europe and APAC. With the rising trade protectionism, reflecting in the recent changes in tariffs and duty structures globally, the competitiveness and margins of Indian exporters stand risks of being eroded, which can impact their growth prospects. 

Supply chain constraints – While the automotive supply chain is largely globalised, there are still a few critical elements whose production is concentrated among few countries or entities, which has resulted in production disruptions in recent periods (such as semiconductors and rare-earth magnets). Additionally, logistic bottlenecks such as the Red Sea crisis can impact the smooth functioning of an otherwise well-lubricated global supply chain, resulting in production delays, cost escalations, etc. 

Volatility in raw material prices and currency rates – sharp changes in input commodity prices, as well as currency rates, for players who have import or export dependence, impact of which needs to be borne partially or completely by the auto-component manufacturers, can have a debilitating impact on the earnings of such entities, affecting their growth prospects.

Transition to alternate fuel technologies – the shift from ICE to EVs threatens obsolescence for traditional component makers. With only 30–40 per cent of EV drivetrain parts currently localised, it leaves many upscale capabilities unrealised. The technological capability for product development and India’s expertise/reliability in these new fuel technology components remains yet to be demonstrated/accepted in a meaningful manner, which can erode competitiveness in the global market in the transition to green mobility.

Access to capital for smaller players – the ability of Indian auto component players to continue to grow, expand and compete in global markets also remains contingent on their ability to expand capacities, develop technologies and relevant products etc, which require adequate capitalisation. Accordingly, their growth prospects remain contingent on their access to capital, which can be a constraint especially for smaller sized players. Overall, India’s SMEs find it difficult to compete with larger players from China, Vietnam, and Indonesia, especially when facing scale, cost, and preferential trade deals.

The rationalisation in Goods and Services Tax (GST) rates had commenced from September 22, 2025, in line with the onset of the festive season, which spanned till end-October 2025. GST rate cuts have eased the tax burden for consumers and businesses by lowering prices and improving affordability across key sectors, including automotive. Festive season trends and early indicators validate these benefits, pointing to a rebound in demand. However, sustenance the same will depend on broader economic conditions and industry-specific dynamics in the quarters ahead.

Within various automotive segments, the two-wheeler retail sales recorded a strong 22 per cent growth (YoY basis) during the festive season, supported by the festive cheer, steady rural demand, and GST rate reductions. GST rate cuts and the drop in vehicle prices have unlocked the deferred demand, notably among first-time buyers and those in Tier-2/3 cities, and this is likely to sustain going forward. Accordingly, ICRA expects the 2W segment volumes to grow by 6-9 per cent in FY2026, even as the volumes in H1 FY2026 were flattish (0.7 per cent growth).

Like two-wheelers, the PV sector too recorded healthy sales during the festive season with a robust 21 per cent growth, supported by discounts, GST rate reductions, and competitive financing options. Entry-level and Hatchback cars saw price corrections of up to Rs. 0.7 lakh and Rs. 1 lakh, respectively. Price cuts averaged around 5-15 per cent across categories. This also helped rationalise the inventory levels across dealerships post the festive period. The OEMs are continuing to offer discounts, at least until December, to clear the slow-moving entry-level models. Given the structural positives from the GST rationalisation, ICRA expects the PV segment to report low to medium single digit wholesale volume growth in FY2026, despite a contraction of 1.5 per cent in H1 FY2026 on a high base.

As increased total cost of ownership (TCO) has been one of the key demand headwinds for the commercial vehicle (CV) segment, the moderation in TCO with tax cuts can fuel overall demand. In this context, a 6-8 per cent reduction in vehicle costs in this segment has supported demand momentum after the GST rate rationalisation. The segment has seen increasing preference for pre-owned vehicles due to price consciousness; the tax cuts can push new vehicle sales. 

For tractor manufacturers, the recent GST rate cut, coupled with healthy monsoon, spurred farmers to invest in tractors, driving strong industry sales. Trends around increasing preferences for higher horsepower tractors from small farmers have been noticed after the GST rate cuts, indicating a preference for premiumisation. With strong Rabi sowing and Kharif harvest progress, tractor demand is expected to remain positive in the coming months.  

The aforementioned factors will cumulatively support demand from the domestic OEM segment, which accounts for 56 per cent of the segment revenues. Accordingly, supplies to domestic OEMs are expected to grow in high single-digits at 8-10 per cent over the current fiscal, supporting the overall growth momentum. Additionally, the aftermarket segment, which contributes another 15 per cent to the sector's revenues, benefits structurally from the GST rationalisation given improved affordability. The rate cuts further augur well for this segment of the auto-component market given the positive impact on liquidity, consumer sentiments etc. which are key demand drivers for this market. Although there can be a dampening in demand for used vehicles, which is also one of the demand drivers for aftermarket products, the overall positives are expected to outweigh the same.

Overall, considering the challenges ongoing in the export market with macro-economic uncertainties and tariff wars, the GST rate cut has been a timely and welcome positive for the auto sector. 

Sruthi Thomas is Vice President and Sector Head at ICRA Ltd, with extensive expertise in credit research, sector analysis, and financial markets. She leads high-impact teams, drives strategic insights, and contributes to industry thought leadership, leveraging deep analytical skills and broad experience in financial services and corporate research.

Blurbs (if required) -- FOR PRINT

GST rate cuts have eased the tax burden for consumers and businesses by lowering prices and improving affordability across key sectors, including automotive.

Price cuts averaged around 5-15 per cent across categories. This also helped rationalise the inventory levels across dealerships post the festive period.