Indian Carmakers Have A Narrow Sweet Spot In 2026 Before Regulatory Reset
Automakers face a fleeting opportunity as demand rebounds before 2026, with tax relief boosting sales even as cost pressures, tariffs and regulation gather pace.
After a subdued first half, India’s car market has found fresh traction in recent months. Buyers have flocked to showrooms, aided by tax relief and festive-season deals. Footfalls have picked up across showrooms as buyers, who had deferred their car buy amid high prices and uncertain incomes, returned to shop.
A Delhi-based dealer said enquiries have surged over the past two months, with a growing share converting into sales. “One buyer, who had delayed a purchase for nearly a year while weighing used-car options within a tight budget, finally opted for a new vehicle in October after prices fell following the tax cut,” he said.
Dealers said similar stories are playing out across markets, raising expectations that there could be a turning point in FY26 for the auto industry after a slow start.
The recovery has placed India’s carmakers in a sweet spot with a window of revived demand, policy support and stable borrowing costs. Tighter emission norms, potential reversals for tax cut gains and rising output costs could come back to bite. Automakers are racing to convert showroom interest into volumes and pushing existing portfolios as hard as possible, with regulatory and export uncertainties looming beyond 2026.
SUVs Dominate Market
Domestic passenger vehicle wholesales reached about 2.8 million units between April and November 2025, according to the Society of Indian Automobile Manufacturers (SIAM). Utility vehicles (UVs) — including SUVs and MUVs — continue to dominate the market, accounting for more than half of passenger vehicle sales, while compact and sub-compact categories are driving incremental volumes. The momentum remains strong, said analysts, as automakers are increasingly launching more SUV-styled models across new sub-segments.
Maruti Suzuki, which currently lacks a presence in the sub-compact, or micro-SUV category, is likely to enter the space to challenge high-volume rivals such as Tata Motors’ Punch and Hyundai’s Exter, an industry insider told The Core.
With policy support, steady interest rates, income-tax relief and GST rationalisation, analysts expect leading automakers to post sales growth of about 10%.
“2026 will be a free-fall year, with the focus on converting enquiries into actual sales,” said Puneet Gupta, director for South Asia automotive sales forecasts at S&P Global Mobility, told The Core.
Carmakers also have a limited runway before tighter Corporate Average Fuel Efficiency-III (CAFE) norms kick in from April 2027, with fresh model launches likely from August 2026 as OEMs push existing portfolios to maximise volumes.
Industry watchers are optimistic that volumes will continue to rise in the next quarter, following the tax cuts. If they don’t — and the shortfall shows up in GST collections — state governments could attempt to raise road taxes, a move that would hurt demand and face resistance from automakers.
Margins, however, may come under pressure. Kotak Institutional Equities said base metals and platinum-group metals have rallied sharply in recent weeks on supply constraints, tariff shocks and rising safe-haven demand, partly offset by continued weakness in steel, crude-linked plastics and rubber prices. At current spot levels, passenger-vehicle makers could face margin pressure of about 70 basis points.
At the start of the fiscal year, ratings agency ICRA projected growth of 4–7% for the passenger vehicle segment. “The forecast for passenger vehicles has since been cut to 1–4%, reflecting expectations of muted demand amid high inventory levels and concerns over potential supply-chain disruptions,” Rohan Kanwar Gupta, Vice President and Sector Head, Corporate Ratings at ICRA, told The Core.
Dealers are wary of January price hikes, concerned that higher sticker prices could dampen recent demand momentum. So far, JSW MG Motor, Renault, Honda, Nissan, BYD, Mercedes-Benz and BMW have announced increases effective January 1, 2026, while the top four carmakers — accounting for roughly 80% of the market — have yet to reveal their pricing plans.
The Federation of Automobile Dealers Associations (FADA) said demand may moderate in January and February due to the absence of festive triggers and model-year change effects. However, stable macro conditions, improving farm income visibility and sustained dealer confidence should keep the sector on a steady growth path into 2026.
According to FADA’s Dealer Satisfaction Index, about 74% dealers expect growth in the next three months, FADA President CS Vigneshwar said.
Three dealers The Core spoke to said inventory levels remain comfortable at about 40 days, with automakers no longer pushing additional stock into the channel during the last week of December.
Naveen Philip, managing director of Popular Vehicles, said the dealership group expects about 6% growth in FY26, supported by a strong rebound in the third and fourth quarters following the GST cuts.
Small Cars Reloaded
In an effort to ease affordability pressures, recent tax reforms cut GST on small cars from 28% to a flat 18% and removed the compensation cess. Sales of small cars are now expected to remain resilient for another four to five months, at least through April, supported by demand outside major cities.
“The majority of sales are coming from rural and semi-urban markets, as well as upgrades from two-wheelers,” said Vinkesh Gulati, director at United Automobiles, pointing to steady first-time and value-conscious buyers supporting the segment.
Market leader Maruti Suzuki, with the broadest portfolio in the small-car segment, has what industry executives describe as a “golden opportunity” to revive volumes and defend market share, which has slipped from about 54% in FY19 to nearly 40% this year. The recent GST cut has rekindled interest in entry-level cars, creating a potential window for recovery.
The maker of Alto and S-Presso is also sharpening its push on affordability by expanding access to financing. Recently, the carmaker signed a memorandum of understanding with Uttar Pradesh Gramin Bank, one of India’s largest regional rural banks, to widen credit availability in semi-urban and rural markets.
“The Arena portfolio, which had been relatively subdued over the past two to three years, is now showing renewed traction,” Philip said during the company’s second-quarter earnings call. He expects the momentum to carry into FY27, supported by strong enquiry trends.
Regulatory uncertainty, however, clouds the long-term outlook. Final CAFE-III norms are still awaited, with major automakers lobbying the Prime Minister’s Office for and against the emission relaxations linked to vehicle weight, ahead of implementation in 2027.
Small cars also remain a profitability challenge for global OEMs, with one industry veteran calling them “dead products” in a market that has largely moved on to feature-rich bigger-sized vehicles. Their longer-term survival may hinge on whether the draft norms retain a special sub-909-kg category with relaxed emission targets—something that could prompt carmakers to refresh offerings with new colours and special editions.
Top Rankings Shake-Up
For years, Maruti Suzuki has dominated India’s car market, with Hyundai firmly in second place. In FY26, however, the race for the second, third and fourth spots has tightened, extending the competitive momentum that began to build last year.
Meanwhile, Maruti Suzuki is targeting a return to a 50% market share by FY31. Analysts caution that India’s car market has matured significantly from the era when a single automaker could command half the industry, with intensifying competition and evolving consumer preferences making such dominance increasingly unrealistic.
“Even sustaining a roughly 40% share over the long term would be a durable outcome,” an industry veteran said.
Mahindra & Mahindra, buoyed by strong demand for its SUVs, has climbed to the second spot with about 14.6% market share, followed by Tata Motors at 13.4% and Hyundai at 12.9%.
Hyundai displayed a muted product cycle this year, with the new-generation Venue its only major launch, while the Creta electric introduced in January fell short of expected momentum. Industry veterans, however, are betting on a turnaround in 2026, anchored in the automaker’s 2030 vision and a leadership reset.
Shareholders have approved Tarun Garg, currently chief commercial officer, as managing director and CEO from January 1, 2026 — the first Indian executive to lead Hyundai Motor India — as the company readies fresh investments and expansion.
Exports Face Fresh Risks
India’s auto industry exported about 5.99 lakh vehicles between April and November 2025, led by compact cars, putting the sector on track for record export volumes this fiscal year with four months still to go.
Maruti Suzuki, which is targeting exports of more than 400,000 vehicles this fiscal year, said it remains “on track” to meet that goal. Rahul Bharti, senior executive officer for corporate affairs, recently shared that India’s recent free-trade agreements have helped lift overseas shipments, with South Africa, Japan, Saudi Arabia, Chile and Colombia among the company’s strongest export markets.
Hyundai plans to position India as a global export hub, targeting overseas markets for about 30% of its local production by 2030.
"Our strong export performance is set to surpass FY26 targets," MD Unsoo Kim said in a statement. Hyundai had aimed for 7–8% export growth this fiscal, with the Middle East and Africa among key markets.
However, the outlook is now clouded by Mexico — India’s third-largest passenger vehicle export market after South Africa and Saudi Arabia—raising import tariffs on made-in-India cars to 50% from 20% starting January 1, 2026. The move could weigh on export growth and impact manufacturers including Volkswagen, Hyundai, Nissan, Kia and Maruti Suzuki.
Before the tariff was finalised, industry body SIAM told the government in a letter that Indian vehicles do not threaten Mexico’s domestic industry, as they do not compete in high-end segments produced locally for the North American market.
These are not premium luxury models but affordable, mass-market vehicles that Mexican consumers demand. A 35% tariff would make them unviable, pushing prices $3,000 to $4,000 higher for some India-made cars sold in Mexico, Wright Research said in a report last week.
While the decision has unsettled exporters, its ultimate impact will depend on Indian automakers’ ability to absorb higher duties or rework supply chains.
Maruti Suzuki and Hyundai — the country’s top two vehicle exporters — majorly leaned on overseas shipments to cushion the impact of softer domestic demand during periods of sales weakness.
