Union Budget 2026-27: How to drive stability and growth in India’s auto sector

By Jeffry Jacob

As the Union Budget 2026-27 approaches, India’s automotive industry, one of the country’s flagship sectors, stands at an inflection point. In recent years, auto OEMs and suppliers have made notable progress in exports, technology shifts, and capacity investments. Yet, at the same time, the environment has grown more volatile with global supply chains remaining unpredictable, constant changes and increases in tariffs and trade barriers, and high cost of capital. What the industry needs now is not a dramatic overhaul but a budget that signals stability, and strengthens competitiveness, to help unlock the next phase of growth.

India’s automotive sector has demonstrated strong global competitiveness, with overall exports registering 24% year‑on‑year increase. This underscores the strength of domestic manufacturing and its growing global relevance. Leading OEMs have significantly expanded capacity, positioning India as a reliable hub for emerging markets. Already the world’s third‑largest passenger vehicle market, a conducive Budget can help to further accelerate its progress toward becoming a global automotive manufacturing powerhouse.




While the domestic auto market has bounced back and shown a strong growth across segments, recovery in motorcycles and entry‑level cars continues to be slow, reflecting affordability pressures among middle- and lower-income households. The most effective demand stimulus will therefore come from measures that give more disposable income to consumers through calibrated tax relief, rationalised deductions, or lower credit costs. More than product‑specific subsidies, households today need confidence to make long‑deferred purchases. Even modest improvements in take‑home pay can translate into meaningful volume growth in mass segments.

Infrastructure is a major focus area where the Budget can create a multiplier effect. Over the past decade, India has made significant progress in road construction, logistics corridors, rural connectivity, and multimodal transport. These networks directly shape consumer behaviour and reduce operating costs. Sustained capital investment in transport infrastructure will generate demand over the medium term. Rural infrastructure, in particular, is central to reviving two‑wheeler and entry‑level passenger vehicle segments. Even with fiscal consolidation pressures, sharp cuts to capital expenditure must be avoided, as they would be counterproductive.

What they need from the Budget is a clear, steady roadmap that reduces uncertainty rather than introduce new variables.

Four priorities stand out for advancing electrification:

1. Long‑term visibility on incentive frameworks, including schemes for advanced manufacturing, battery technology, and charging infrastructure.
2. Revisiting high GST slabs, especially on motorcycles above certain capacities and on luxury vehicles, which distort affordability. GST rationalisation should be seen as an enabler of volume growth and compliance, not a revenue loss. Targeted incentives for entry‑level EVs could also offset pricing pressures created by earlier GST reforms which made petrol cars cheaper.
3. Targeted support for high‑impact fleet segments such as buses, e‑commerce logistics, and ride‑hailing, where electrification delivers disproportionate economic and environmental returns.
4. Greater investment in public and semi‑public charging points, particularly in dense urban centres and freight corridors, with focus on interoperability and smart‑charging standards.

Over the next decade, India must focus on competitiveness not just for assembling EVs at scale but by owning more of the value chain. This means strengthening domestic manufacturing of batteries, motors, power electronics, semiconductors, and embedded software. The Budget can accelerate this transition through clear eligibility norms, calibrated incentives for high‑value components, and robust R&D support. Reducing dependence on imports is equally critical. India currently relies heavily on imported lithium, cobalt, nickel, graphite, and rare earth magnets which are essential for EVs and power electronics. A coherent policy on domestic exploration, strategic overseas partnerships, and end‑of‑life battery recycling will help build a strong foundation and secure India’s position across the value chain.

The backbone of India’s automotive sector is its extensive network of tier‑2 and tier‑3 suppliers, predominantly comprised of MSMEs. They continue to face working‑capital shortages, delayed payments, and fluctuating order loads. Addressing these constraints should be a key Budget priority. Expanding credit guarantee coverage, streamlining GST refunds for inverted duty structures, and mandating time bound invoice settlement through digital platforms will ease liquidity pressures. Incentives for shopfloor digitalisation and quality enhancement technologies can further strengthen MSMEs’ reliability and integration into global supply chains.

What the industry needs today is a Budget that builds on the progress made so far in infrastructure and electric mobility, promotes localisation of high‑value components, and boosts consumer confidence. In an uncertain environment, a Budget that provides clarity, continuity and stability will give the industry the confidence to invest and accelerate its growth trajectory.

(Jeffry Jacob is Partner and National Sector Leader – Automotive, KPMG in India)