Why India must cut its auto sector tariffs

India and the US have resumed trade talks with the July 9 deadline on tariffs looming.

- Shreyas Narla is a research scholar and Shruti Rajagopalan is a senior research fellow with the Mercatus Center at George Mason University. The views expressed are personal.

Without tariff reductions by India, the US ‘will impose additional duties (26%) on all Indian exports. One central issue remains India’s triple-digit automobile tariffs, which face a 25% retaliatory duty if unchanged.

India must reduce auto tariffs. The prize isn't just avoiding Trump's retaliation. It is ending ‘over 70 years of protectionism that has entrenched India’s automobile sector in mediocrity. India’s automobile tariffs are global outliers. Cars priced below $40,000 face effective tariffs of 70%. Above that price tag, effective tariff rates jump to 110%. Used cars get hit hardest at 137.5%. In contrast, China levies 15% on automobile imports, with higher rates on US cars. The European Union applies a uniform 10% on all non-EU car imports. South Korea charges 8% on cars. Japan imposes no tariffs.

Since 1948, India has historically priced out foreign manufacturers in favour of the domestic auto sector. The rationale was to protect the infant auto industry by outright banning imports of fully-built cars. Only companies committed to local manufacturing were allowed to operate after 1953.

Liberalisation since the 1990s ended licensing requirements. Tariff rates fell from 65% in 1992 to about 35% by 2000. This liberalisation in the auto sector was short-lived: By 2014, tariffs had climbed back into triple digits, peaking at 125%.

India ranked third in car production in 2024, but only exported 14% of its total output. Homegrown manufacturers, Tata Motors and Mahindra, contributed only 2% to exports. In contrast, Japan exported nearly half its production. Spain, Germany, and South Korea, despite producing fewer vehicles than India, exported 89%, 77%, and 67% of their output, respectively. As centuries of trade theory predict, protectionism meant to nurture export giants ended up creating an octogenarian infant.