CNBC's Inside India newsletter: EU edges out U.S. in getting India to slash auto tariffs, but can European carmakers win big?

India’s automobile sector, long shielded by some of the world’s highest import tariffs, is showing signs of opening up—and Europe appears to have taken the lead. In a notable shift in trade diplomacy, the European Union has edged ahead of the United States in persuading India to consider reducing its steep duties on imported vehicles. This development, highlighted in CNBC’s Inside India newsletter, marks a potential turning point for global carmakers seeking access to one of the fastest-growing auto markets in the world. Yet even as trade doors begin to open, the central question remains: can European car manufacturers truly win big in India?

A Market Protected by Policy

For decades, India has imposed import tariffs as high as 100% on fully built automobiles. These measures were designed to protect domestic manufacturers and promote local production under initiatives such as “Make in India.” While successful in building a robust homegrown auto industry, the policy also discouraged foreign brands from exporting vehicles directly into the country, forcing them instead to establish local plants or limit their footprint.

The European Union’s recent progress in negotiations suggests that India may be ready to rethink this approach, at least partially. As part of broader talks toward a long-awaited free trade agreement, India has signaled a willingness to reduce auto tariffs for European manufacturers in exchange for greater investment, technology transfer, and cooperation in clean energy and electric vehicles.

The United States, by contrast, has struggled to achieve similar momentum. Differences over regulatory standards, market access, and digital trade have slowed progress, allowing the EU to gain a diplomatic edge in one of the most sensitive areas of India’s trade policy.

Why Europe Matters to India

The EU’s interest in India goes beyond simply selling more cars. European automakers such as Volkswagen, BMW, Mercedes-Benz, and Stellantis see India as a strategic growth market as sales plateau in Europe and competition intensifies in China. India’s expanding middle class, young population, and rapid urbanization make it an attractive destination for long-term investment.

For India, closer ties with Europe offer access to advanced manufacturing techniques and cutting-edge electric vehicle technology. This aligns with New Delhi’s goal of transitioning toward cleaner mobility while strengthening its industrial base. Reduced tariffs could encourage joint ventures, local assembly plants, and research centers that bring high-value jobs and expertise into the country.

The Challenge of Price Sensitivity

Despite the promise of lower tariffs, European carmakers face a difficult reality: India is one of the most price-sensitive car markets in the world. The majority of vehicles sold in the country cost under $15,000, and buyers prioritize affordability, fuel efficiency, and low maintenance over luxury or brand prestige.

European brands are traditionally positioned in the premium or mid-range segments, which limits their appeal to a small slice of Indian consumers. Even with tariff reductions, imported European cars may remain too expensive for mass adoption. This means that success will depend less on exporting finished vehicles and more on producing them locally at competitive price points.

Localization will be key. Companies that invest in Indian manufacturing facilities and develop models specifically designed for Indian roads and consumer preferences are more likely to gain market share. Without such adaptation, European automakers risk remaining niche players in a market dominated by domestic and Asian competitors like Maruti Suzuki, Tata Motors, Hyundai, and Kia.

Electric Vehicles: Opportunity and Competition

Electric vehicles present both an opportunity and a challenge for Europe in India. European firms lead in EV engineering and sustainability standards, but India’s EV market is evolving differently from that of Europe. Two-wheelers and three-wheelers account for most EV sales, while affordable small cars are the focus of government incentives.

If European automakers bring only high-end electric sedans and SUVs, their impact will be limited. To truly “win big,” they must participate in India’s push for affordable and scalable electric mobility. This may involve partnerships with Indian firms, battery manufacturing investments, and the creation of low-cost EV platforms suited to local demand.

At the same time, competition is intensifying. Chinese and Korean companies are also targeting India’s EV market, while Indian manufacturers are rapidly developing their own electric models. European firms will need to move quickly and strategically to avoid losing ground.

Beyond Economics: Geopolitics and Strategy

The EU’s success in nudging India toward tariff reductions also reflects shifting geopolitical priorities. Both sides are eager to diversify supply chains away from China and strengthen partnerships with like-minded economies. Auto and EV cooperation fits neatly into this broader strategic alignment.

For Europe, deeper integration with India could provide a hedge against economic uncertainty elsewhere. For India, closer ties with the EU reinforce its position as a global manufacturing hub and an essential player in future green industries.

The Road Ahead

While the EU has edged out the U.S. in influencing India’s auto tariff policy, this is only the beginning of a long journey. Lower tariffs create opportunity, but they do not guarantee success. European carmakers will need to rethink their strategies, invest locally, and adapt to the realities of the Indian market.

In the end, the real winners will not be those who simply export more cars, but those who commit to India’s vision of affordable, sustainable, and locally produced mobility. The question is no longer whether Europe can enter India’s market—but whether it can truly compete and thrive within it.