Union Budget 2026: EV supply chain, batteries, magnets and capex in focus for auto industry

The government has earmarked Rs 1,500 crore for the PM E-DRIVE scheme in FY27.

• Budget 2026-27 boosts EV supply chains, rare earths and battery production.
• PLI scheme allocation for auto and auto components sector rises for FY27.
• Lithium-ion cell and battery duty exemptions extended to March 2028.

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The Union Budget 2026-27 has outlined a broad policy push for the automobile industry, with measures spanning electric vehicle (EV) supply chains, localisation of critical components, battery manufacturing, demand-side incentives and sustained public capital expenditure.

Presenting the Budget, Finance Minister Nirmala Sitharaman proposed supporting dedicated rare earth corridors across Odisha, Kerala, Andhra Pradesh and Tamil Nadu to strengthen India's rare earth ecosystem.

The proposed corridors will focus on mining, processing, research and manufacturing. The announcement follows the Union Cabinet's approval in November 2025 of a scheme to promote the manufacturing of sintered rare earth permanent magnets (REPM), a critical input for EV traction motors and several other automotive applications.

The REPM scheme has a total financial outlay of Rs 7,280 crore and aims to establish 6,000 metric tonnes per annum (MTPA) of integrated manufacturing capacity, covering the full value chain from rare earth oxides to finished magnets.

Under the scheme, the government will provide sales-linked incentives worth Rs 6,450 crore over five years, along with capital subsidies of Rs 750 crore. Capacity will be allocated to five beneficiaries through a global competitive bidding process, with each eligible for up to 1,200 MTPA.

The push comes at a time when India meets most of its REPM requirement through imports, largely from China, even as domestic consumption is expected to double by 2030 compared with 2025 levels, driven by electric mobility and renewable energy demand.

Tata Motors Passenger Vehicles MD and CEO Shailesh Chandra said: "The Union Budget 2026-27 is an inclusive, growth-oriented and forward-looking roadmap designed to accelerate sustainable economic expansion with fiscal prudence by scaling up manufacturing across strategic sectors, renewing focus on the services economy, and enhancing export competitiveness in a challenging global environment. The proposal to raise public capex to Rs 12.2 lakh crore strengthens the foundation for long-term growth and the focus on enhancing competitiveness, long-term resilience and broad-based development align strongly with the nation’s evolving priorities.

"Targeted initiatives for data centres, semiconductors, rare earths and electronic components will reduce critical import dependencies and position India as a global high-tech manufacturing hub. The higher Auto PLI allocation for FY27, customs duty exemptions on capital goods for lithium-ion cell manufacturing, and increased outlay under the PM E-Drive scheme reflect the government's continued commitment to catalysing the EV ecosystem," Chandra added.

In another key move for the EV ecosystem, the Budget extended the basic customs duty (BCD) exemption on capital goods used for manufacturing lithium-ion cells to include batteries for stationary energy storage applications, such as battery energy storage systems (BESS). The exemption was earlier limited to lithium-ion cells for electrically operated vehicles.

The government also extended the validity of existing BCD exemptions on lithium-ion cells, batteries and related inputs by two years, till March 31, 2028. These exemptions cover lithium-ion cells used in EVs, hybrid vehicles, mobile phones and other applications, along with parts, sub-parts and raw materials used in the manufacture of lithium-ion cells, batteries and battery packs. The exemptions were earlier set to expire on March 31, 2026.

"Further building on the mega GST 2.0 reforms, the Union Budget 2026-27 presents a long-term focussed roadmap that accelerates India's rise as a global manufacturing hub and Atmanirbhar Bharat. Focus on the rare earth corridor, EV battery and electronics manufacturing, MSME empowerment, inclusivity and AI investments position India for global leadership. The strong push for tourism, rural growth and enhanced regional connectivity will further spur economic activity and open new avenues for advanced mobility, logistics and transportation solutions," said Tarun Garg, MD and CEO, Hyundai Motor India.

On the demand-side support for electric mobility, the government earmarked Rs 1,500 crore for the Prime Minister Electric Drive Revolution in Innovative Vehicle Enhancement (PM E-DRIVE) scheme in FY27. This compares with a revised estimate of Rs 1,300 crore for FY26, against a budgeted allocation of Rs 4,000 crore for that year.

The Budget also increased allocation for the Production Linked Incentive (PLI) scheme for automobiles and auto components to Rs 5,939.87 crore in FY27, up from Rs 2,818.85 crore in FY26. The revised estimate for FY26 stands at Rs 2,091.26 crore.

From an infrastructure and demand perspective, the government proposed raising public capital expenditure to Rs 12.2 lakh crore in FY27, from an allocation of Rs 11.2 lakh crore in FY26.

BMW Group India President and CEO Hardeep Singh Brar said: "The Union Budget 2026-27 reflects a clear intent to balance fiscal consolidation with the need to sustain growth momentum. The reduced estimates for fiscal deficit reinforce assurance in India's macro-economic stability and commitment to fiscal discipline. A declining debt-to-GDP ratio will gradually free up resources for priority sector expenditure. At the same time, increase in capital expenditure will accelerate infrastructure development, improve road quality and enhance mobility ecosystems. The government's focus on logistics improvement such as accelerating customs clearance of goods (via AEO programme) will make them available for manufacturing activity faster. Also, the reforms in tax compliances like longer validity of Advance Rulings in customs duty (from 3 to 5 years) will give more certainty to business operations."

"These long-term investments from the centre will have a direct multiplier effect on auto market. Budget has reinforced the fundamentals that matter most to the auto segment -- economic stability, policy predictability and sustained infrastructure development. Recent initiatives taken before the budget like GST reforms and conclusion of various FTAs are already very positive steps taken by the government for auto sector. For premium customers, confidence is the biggest driver, and this Budget further strengthens that confidence while creating the right conditions for long-term, sustainable growth in mobility," Brar pointed.

According to Mercedes-Benz India MD and CEO Santosh Iyer, the Budget's strong focus on infrastructural development, with addition of Rs 1 lakh crore in capex, is a step in right direction, developing the country's evolving mobility ecosystem. "Better highways and improved intercity connectivity have historically driven luxury car demand in India. The fiscal prudence reflected in the 4.3% deficit target, combined with strong focus on exports, sends a strong signal of macroeconomic stability, which may lead to a less volatile currency," he added.

Hero MotoCorp CEO Harshavardhan Chitale said that the Union Budget 2026-27 presents a balanced and forward-looking roadmap. "Infrastructure investments, particularly in highways, rural roads and urban mobility, will enhance logistics efficiency and strengthen supply-chain resilience. A sharper focus on localisation will further reinforce domestic manufacturing while improving global competitiveness. We also welcome the Budget's continued support for the electric mobility ecosystem," he noted.