India's Auto Sector: A Policy-Driven Powerhouse Outperforming Asia

India's automotive sector is emerging as a standout performer in Asia, driven by a wave of fiscal policies that have catalyzed margin expansion and positioned the country as a global manufacturing hub. While China, South Korea, and Japan grapple with U.S. tariffs and margin compression, India's strategic interventions—particularly in electric vehicles (EVs) and clean technology—are creating a tailwind that is reshaping the region's competitive landscape.

Policy Tailwinds: From Customs Exemptions to Clean Tech Missions

The Union Budget 2025-26 has been a game-changer. By exempting Basic Customs Duty on 25 critical minerals—ranging from cobalt to lithium-ion battery waste—the government has slashed input costs for domestic manufacturers. This move, coupled with exemptions on 35 capital goods for EV battery production, has reduced reliance on imported lithium-ion cells and spurred investments in local supply chains India’s Automotive Industry Gets A Boost With Policy Changes in Union Budget 2025-26^[1]. The National Manufacturing Mission for Clean Tech, launched alongside these reforms, further bolsters India's position by incentivizing domestic production of EV batteries, motors, and controllers Driving India’s auto future: Budget 2025-26 Expectations for a Sustainable and Competitive Industry^[2].

These policies are not mere theoretical gestures. Tata Motors, for instance, has announced a third manufacturing facility in Haryana, aiming to boost production to 750,000 units annually by 2029. Similarly, Mahindra & Mahindra plans to invest $3 billion in its EV segment, leveraging the reduced cost of components to scale production India's Automobile Industry: Growth & Trends | IBEF^[3].

Margin Expansion: A Contrast with Asian Peers

India's fiscal reforms are translating into tangible margin improvements. In Q1 2025, the auto component sector maintained operating margins of 12–12.5%, buoyed by high-margin products like ADAS modules and infotainment systems Crisil projects 7–9% growth for India’s auto component industry in FY25^[4]. By comparison, global OEM EBIT margins averaged 5.4% in the same period, reflecting softening demand and price wars Automotive Profitability: How OEM and Supplier Margins Are Faring^[5]. South Korean automakers like Hyundai and Kia, while resilient, saw margins dip due to U.S. tariffs, while Japanese firms lagged further behind, with EV adoption rates below 2% 2025 Automotive Trends in East Asia: The Growing …^[6].

China's EV sector, though robust, faces margin pressures from intense competition. BYD's 6.4% operating margin in 2024 pales against India's emerging cost advantages, where domestic battery production is expected to cut input costs by 20–30% by 2027 India’s Automotive Industry Gets A Boost With Policy …^[7].

FDI Inflows and Export Growth: A Magnet for Global Capital

India's auto sector attracted $37.52 billion in cumulative FDI between 2000 and 2024, with the Union Budget 2025-26 further enhancing its appeal India's Automobile Industry: Growth & Trends | IBEF^[8]. Foreign automakers are betting on India's scale and policy clarity: Volkswagen's partnership with Mahindra to supply EV components and Hyundai's $32 billion investment plan over a decade underscore the sector's allure Indian Automobile Market 2025 : Sector Trends and …^[9].

Export growth is another bright spot. India shipped 5.7 million vehicles in FY25, with EVs accounting for 15% of exports. This compares favorably to China's 65% EV market share but with a critical edge: India's focus on cost reduction through localized production is making its vehicles more competitive in emerging markets Asia-Pacific Automotive Market Report - Country Analysis^[10].

Challenges and the Road Ahead

Despite these gains, challenges persist. India's EV ecosystem still relies on Chinese imports for rare earth metals, and infrastructure gaps—such as charging networks—remain. However, the government's emphasis on battery recycling and public-private partnerships (PPPs) is addressing these bottlenecks Driving India’s auto future: Budget 2025-26 …^[11].

For investors, the calculus is clear: India's auto sector is not just outperforming its Asian peers but doing so on a foundation of policy-driven cost advantages and margin resilience. As the National Manufacturing Mission for Clean Tech gains traction, the sector is poised to deliver returns that outpace the region's traditional powerhouses.