The Union Budget 2025-26, presented by Finance Minister Nirmala Sitharaman on February 1, 2025, was hailed by Prime Minister Narendra Modi as a “people’s budget” and a “force multiplier.” It introduced a raft of strategic measures with implications for the long-term growth trajectory of the country’s automotive industry.
Key Highlights
- Tax Reforms and Increased Disposable Incomes
The increase in the income tax exemption limit to ₹12 lakh is seen as a measure to stimulate consumption-led growth in the economy. This change is set to boost disposable incomes with higher consumer purchasing power. For the automotive industry, this could mean potentially greater demand across multiple segments, including two-wheelers, passenger cars, and electric vehicles (EVs).
- Customs Duty Exemptions and Support for Electric Vehicles
Substantial reductions in customs duties on 35 key capital goods essential for EV battery production are expected to reduce manufacturing costs and accelerate the transition to electric mobility. Additionally, the government has granted full exemption from Basic Customs Duty (BCD) on critical minerals such as cobalt powder, lithium-ion battery waste, lead, and nickel, among others, that are key components in EV battery production. Such initiatives are poised to enhance domestic production capabilities, lower operational costs, and make EVs more affordable.
- Stimulating Rural Demand
Rural development schemes like Dhan-Dhaanya Krishi Yojana and increased limits on Kisan Credit Cards aimed at improving rural incomes could have a potentially cascading effect on vehicle sales. Stronger rural purchasing power could mean an uptick in demand for agricultural vehicles like tractors, small commercial vehicles, and two-wheelers.
- Strengthened Credit Access for MSMEs
Improved credit accessibility for Micro, Small, and Medium Enterprises (MSMEs) are set to drive investments in new technologies, expansion of production capacities, and scaling of operations by auto component manufacturers and dealerships. Given that MSMEs form the backbone of the automotive supply chain, easier access to credit is expected to support greater resilience among pivotal small- and medium enterprises and strengthen supply chains.
- Financial Allocations & Production Linked Incentive (PLI) Scheme
At ₹2,819 crore, this year’s Production Linked Incentive (PLI) scheme outlay is lower than last year’s ₹3,500 crore. Nevertheless, the funding is anticipated to strengthen local manufacturing, particularly EVs and hydrogen fuel cell vehicles. Among targeted outcomes of the PLI scheme include enhanced production efficiency, innovation, and global competitiveness. Additionally, the scheme is poised to streamline supply chains and boost the affordability of EVs and related components.
Another noteworthy proposal to increase the Foreign Direct Investment (FDI) cap in the insurance sector from 74% to 100% holds promise of expanding financing options for vehicle purchases, stimulating higher demand across various automotive segments.
Our Perspective
The Union Budget 2025 presented a strategic roadmap for the automotive industry rooted in the twin pillars of self-reliance and sustainable growth. It emphasized the key roles that clean technology, domestic manufacturing, and infrastructure development will play in shaping the Indian automotive industry’s future.
Financial incentives through the increased income tax exemption limit bodes well for improved consumer spending, including on vehicle purchases. Meanwhile, rural development initiatives will elevate rural incomes, potentially stimulating demand for agricultural tractors, two-wheelers, and small utility vehicles. For the automotive industry, this will mean not only higher sales but also wider market reach and more balanced expansion across rural and urban markets.
The introduction of the National Manufacturing Mission for clean technology manufacturing, besides targeted support for EV battery production, will promote self-reliance in clean technology manufacturing. Significant duty exemptions on key materials and capital goods essential for lithium-ion battery production will accelerate the shift to sustainable mobility. The removal of BCD on essential battery materials, including cobalt, lithium-ion battery scrap, lead, and zinc, along with the addition of 35 capital goods related to EV battery manufacturing to the exemption list, will bolster domestic battery manufacturing. Such measures will ultimately translate into lower production costs, supply chain resilience, stronger domestic manufacturing capabilities, and improved EV affordability – in essence, a robust EV ecosystem.
The increased credit guarantee coverage from ₹5 crore to ₹10 crore is a nod to the pivotal role of MSMEs in the automotive supply chain. Enhanced financial support will facilitate greater investments in technology innovation, while empowering auto component manufacturers and dealerships to scale operations and improve competitiveness.
In sum, the 2025-2026 budget will catalyze India’s journey towards clean mobility even as it lays the groundwork to transforming India into a global hub for EV manufacturing.
