After GST 2.0 tax rate rationalisation, India’s automobile industry reported a strong performance during the October–December 2025 quarter, supported by improved affordability, a pickup in rural demand and sustained festive momentum. With volumes recovering across segments, all eyes are now on the Union Budget 2026, scheduled to be presented on February 1.
Improved affordability, easing financing conditions and a recovery in consumer sentiment supported broad-based growth across passenger vehicles, two-wheelers and commercial vehicles during the quarter. However, rising raw material costs are expected to weigh on margins in the coming quarters, experts said.
Saurabh Agarwal, Partner and Automotive Tax Leader at EY India, said accelerating electric vehicle adoption alongside the revival in internal combustion engine (ICE) demand under GST 2.0 requires steady and balanced policy support. “EVs continue to attract a 5 percent GST, but recent rate changes for some ICE segments have narrowed the gap. It is therefore important to protect a clear GST advantage for EVs, including on charging infrastructure, charging services and battery swapping, to keep EVs affordable and investments viable,” Agarwal said.
He added that demand incentives under the PM E-DRIVE scheme should remain focused on segments where electrification delivers maximum impact such as public transport, shared mobility, commercial fleets and last-mile delivery. Faster adoption in these areas is essential to achieving the 30 percent EV penetration target by 2030.
Big trends
Strong recovery in automobile volumes following GST 2.0 rate rationalisation
Renewed growth across passenger vehicles, two-wheelers and commercial vehicles
Continued momentum in SUVs and the premiumisation trend
Increasing focus on EV localisation and domestic manufacturing
Major issues and challenges
Rising raw material costs impacting margins
Shortage of rare-earth magnets affecting EV production
Narrowing GST gap between EVs and ICE vehicles
Dependence on imports for critical EV components
What happened in Budget 2025
Removal of import duties on 35 key EV battery components and critical minerals
Rs 2,819 crore allocation under the Auto PLI scheme to support domestic manufacturing
Rs 4,500 crore allocation for the PM E-Drive scheme to expand EV charging infrastructure
Investment and turnover limits for MSMEs increased by 2.5 times, along with enhanced credit guarantee cover
Tax-free income slab raised to Rs12 lakh to boost vehicle demand
Support announced for R&D in lightweight materials, advanced components and EV safety technologies
What the industry expects from Budget 2026
Protection of GST advantage for electric vehicles
Continued EV incentives under PM E-DRIVE
Extension of duty exemptions on critical battery inputs
Support for domestic rare-earth magnet production
Greater focus on localisation of EV components
Policy continuity for both EV and ICE segments
Sustained support for R&D, MSMEs and supply-chain development
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