Chennai: India’s free trade agreement (FTA) with the European Union, announced on Tuesday, will allow European carmakers such as BMW, Mercedes-Benz India and Volkswagen Group to use imports more strategically to introduce newer models and test demand in India, without committing upfront to local manufacturing. The deal, however, is unlikely to trigger immediate price cuts for most vehicles already sold in the country.
Under the FTA, India has agreed to cut tariffs on imports of fully built cars over a period of time from 110% to 10%, with a quota of 250,000 cars annually.
To be sure, the India–EU FTA does not go into effect immediately, with both sides now starting processes to ratify the deal. The agreement is expected to kick in only by 2027.
The trade deal comes as India and the European Union seek to hedge against the US, with Prime Minister Narendra Modi saying the agreement would strengthen India’s manufacturing and services sectors and boost investor confidence.
Import flexibility
The tariff reduction gives European manufacturers optionality: they can bring in select completely built units (CBUs) without committing upfront to local manufacturing, and assess market response before deciding on localization, industry executives and analysts said.
At the same time, the near-term impact on pricing is expected to be limited because most European carmakers have already localized production or assembly in India.
Luxury carmakers such as Mercedes India and BMW operate local assembly lines in Chakan and Chennai, respectively, importing completely knocked down (CKD) kits for more than 90% of the cars they sell in India, which already attract tariffs of 16.5% even before the FTA comes into force.
Mercedes-Benz India highlighted the opportunities the FTA could create for customers while maintaining its focus on local production.
“The FTA opens up new avenues for customers with improved vehicle allocations, better availability of top-end global models for Indian market, faster access to latest technology and creating a stronger luxury car ecosystem. Mercedes-Benz will however continue to value add to customers with local production of world-class models from our manufacturing plant,” said Santosh Iyer, managing director and chief executive at Mercedes-Benz India.
BMW India ruled out any immediate price change. “While we do not foresee any immediate price changes in the near term, the FTA could create opportunities to introduce new and niche products and, if demand scales, support deeper localization over time. We will closely evaluate the detailed implementation roadmap, timelines and qualification criteria once the fine print of the agreement is available,” said Hardeep Singh Brar, president and CEO of BMW India.
Analysts at Morgan Stanley echoed this view in a 26 January note, saying the FTA will not have a drastic immediate impact on established carmakers in India, as most European models are already assembled through the CKD route.
“We see limited near-term impact on Indian OEMs but over time the door opens for EU OEMs, particularly premium players, and competitive intensity could rise,” Binay Singh, Javier Cerdan, Sushrut Ghalsashi, and Cindy Huang of Morgan Stanley wrote.
French carmaker Renault lauded the free trade agreement, saying it would drastically improve the investment environment across both Europe and India. "For us, this is very positive news, as Renault Group has made long-term, high-value commitments to both regions. This agreement further reinforces our confidence and willingness to invest across both sides," said Stephane Deblaise, CEO at Renault India.
Local manufacturing
Analysts said the structure of the Indian market limits downside risks to domestic mass-market manufacturers.
With most European carmakers focused on luxury vehicles or already localized mass-market models, analysts anticipate low risk to manufacturers such as Maruti Suzuki, Mahindra and Mahindra, Hyundai Motor India, and Tata Motors Passenger Vehicles Ltd.
Analysts at brokerage PL Capital wrote in a note on 27 January that the FTA will help European carmakers scale up quickly as their model line-up expands.
“This will provide EU carmakers greater access to Indian PV market (3rd largest globally by volume, just behind the US & China). Luxury vehicles form ~1% of Indian market. Therefore, the tariff reduction should not impact the mass market players like Maruti Suzuki and entry/mid-level vehicles from TMPV and M&M, but it will impact to a small extent premium plus cars from these players,” Aditya Jakhotia of PL Capital wrote.
Beyond imports, the agreement could also reinforce India’s role as a manufacturing base for exports to developed European markets, analysts said, potentially encouraging automakers to invest more in local plants.
Vinay Piparsania, founder of MillenStrat Advisory & Research, an auto-focused consultancy, said the proposed India-EU FTA could make India a more attractive destination for local assembly and manufacturing by unlocking lower and more predictable tariff structures.
“India offers a strong cost-competitive manufacturing base. For global automakers, local production becomes more compelling when it also supports export opportunities at internationally competitive prices. At the same time, improved market access allows European auto OEMs to selectively import and test a broader range of models before committing to scale and deeper localization,” Piparsania said.
Volkswagen Group has manufacturing operations in Chakan and Chhatrapati Sambhaji Nagar with an annual capacity of 200,000 units. French carmaker Renault has a 480,000-units-per-annum plant near Chennai where it makes most of its cars.
Shares of carmakers Maruti Suzuki, Tata Motors, Hyundai Motor India and Mahindra and Mahindra fell on Tuesday by 1.5-4%, amid expectations that rising competition from European imports under the FTA could weigh on sales of domestic automakers.