Explainer: What Trump's 25% auto tariff means for Indian economy

New Delhi: The US imposition of a 25% tariff on imported cars and auto parts, effective April 3, 2025, as announced by President Donald Trump on March 26, 2025, will have a multifaceted impact on Indian economic growth. 

India’s automotive sector, a key contributor to its manufacturing output and exports, will face both challenges and potential opportunities as a result of this policy.

Direct impact on exports

India exported approximately $7 billion worth of automotive goods to the US in 2024, including $1.2 billion in passenger vehicles and $5.8 billion in auto components, according to the Indian Ministry of Commerce and Industry. 

The US is India’s largest single export market for auto parts (27% of India’s $21.2 billion total) and its third-largest for cars (15% of $7.85 billion). 

The 25% tariff will increase the cost of these exports, potentially reducing their competitiveness in the US market.

Volume and revenue loss

Analysts estimate a 15-20% decline in India’s auto exports to the US, equating to a loss of $1-1.4 billion annually.

For example, a $20,000 Indian-made vehicle would face an additional $5,000 duty, likely raising prices for US consumers or cutting into manufacturers’ margins.

Foreign exchange and CAD

A decline in exports to the US, which accounts for 17-18% of India’s total goods exports ($83 billion in 2024), could reduce foreign exchange earnings.

This may pressure the Indian rupee and widen the current account deficit (CAD), currently around 1-2% of GDP, by an estimated 0.1-0.2 percentage points if export losses materialise fully.

Sectoral effects

Auto Components: India’s $5.8 billion in parts exports to the US (e.g., engines, transmissions) will face higher costs, potentially eroding its 8% share of US parts imports ($70 billion total). 

However, India’s cost advantage—average hourly wages of $1.5 versus $15 in the US—may cushion some impact, though smaller suppliers could struggle.

Passenger Vehicles: The $1.2 billion car export market, dominated by firms like Tata Motors and Mahindra, will see reduced demand unless companies absorb costs or shift to other markets like South Africa ($1.3 billion) or Mexico ($922 million).

Broader economic growth implications

India’s GDP growth, projected at 6.7% for FY 2026 by the IMF, could face a modest drag from this tariff:

Manufacturing and jobs: The automotive sector contributes 7.1% to India’s GDP and employs over 19 million people directly and indirectly. A $1-1.4 billion export loss could translate to a 0.05-0.1% GDP growth reduction, per economic multiplier effects, with potential job losses in the thousands, particularly in ancillary industries.

Inflation and consumer costs: India imports minimal US cars ($1.4 billion vs. $7 billion exported), so domestic consumer prices are unlikely to rise significantly. However, if India retaliates with tariffs on US goods, costs for imported inputs (e.g., machinery) could increase, indirectly affecting inflation (currently ~5%).

Reciprocity risk

India’s high tariffs on US cars (60-125%) have prompted Trump’s reciprocal trade rhetoric. India may face additional US tariffs on other goods (e.g., pharmaceuticals, $6 billion to US), further impacting growth.

Negotiations for a bilateral trade deal targeting $500 billion by 2030 could mitigate this, with India considering selective tariff cuts on US luxury cars and components.

Diversification opportunity

The tariff may accelerate India’s efforts to diversify export markets. For instance, Mexico and Canada, also hit by US tariffs, could become alternative destinations for India’s $5.8 billion parts surplus, leveraging India’s cost competitiveness.

Potential upsides

Supply chain shifts: As US tariffs disrupt North American and Chinese supply chains, India could gain share if global OEMs (e.g., Ford, GM) seek cheaper alternatives. India’s 2% share of US auto parts imports could rise, especially if competitors like Mexico ($28 billion) face sustained pressure.

Domestic focus: Reduced US export reliance may bolster India’s “Make in India” initiative, encouraging firms to target the domestic market (passenger vehicle sales projected to grow 5% in 2025) and regional exports.

GDP impact

A $1-1.4 billion export decline could shave 5-10 basis points off India’s GDP growth, per economic models, though stimulus like infrastructure spending (with high multipliers) could offset this.

Trade balance

India’s $25 billion trade surplus with the US (2024) may shrink by $1-2 billion, a 4-8% reduction, assuming no major retaliation or redirection.

To contextualise India's exports, here’s how they stack up against major global car and auto parts exporters to the US in 2023-2024:

Germany:

• Cars: $99.1 billion (net export surplus to the world, with a significant share to the U.S.).
• Auto Parts: Over $20 billion to the U.S.
• Germany is the world’s leading car exporter, shipping luxury brands like BMW and Mercedes-Benz, dwarfing India’s contribution.

Japan:

• Cars: Around $50 billion to the U.S., including brands like Toyota and Honda.
• Auto Parts: Approximately $15 billion.
• Japan’s established presence in the U.S. market far exceeds India’s, bolstered by decades of investment in American manufacturing.

Mexico:

• Cars: Over $40 billion to the U.S., facilitated by proximity and the USMCA trade agreement.
• Auto Parts: $28 billion in 2021, the highest among U.S. trading partners.
• Mexico’s integration into North American supply chains gives it a substantial edge over India.

South Korea:

• Cars: Approximately $20 billion to the U.S., led by Hyundai and Kia.
• Auto Parts: Around $10 billion.
• South Korea’s exports, while smaller than Mexico’s, still outpace India’s due to higher vehicle volumes

China:

• Cars: Minimal direct car exports to the U.S. (less than $1 billion) due to trade barriers, though growing in electric vehicles.
• Auto Parts: Over $15 billion, a key supplier despite tariffs.
• China’s auto parts exports to the U.S. exceed India’s, though its car exports lag.

India’s position

Global rank: India ranks among the top 15 car-exporting nations, with total car exports valued at $7.85 billion in 2023 (OEC data), of which the US accounts for about 15%. For auto parts, India’s $21.2 billion in exports (FY 2024, Statista) places it among the top 10 globally, with the US taking a 27% share.

Share of US imports: The US imported $147.3 billion in cars and over $70 billion in auto parts in 2023. India’s $1.2 billion in cars represents less than 1% of US car imports, while its $5.8 billion in parts is about 8% of the US total, trailing Mexico, Canada, and Japan significantly.

Growth Trajectory: India’s car exports to the US grew from $654 million in FY 2018 to $1.2 billion in 2024, a notable increase, though still modest compared to the $177.2 billion in total car exports from Germany in 2023.

India’s total automotive exports (2024)

Cars (Passenger Vehicles): $7.85 billion (source: OEC, 2023, adjusted for 2024 trends).

Auto Parts: $21.2 billion (source: Statista, FY 2024, Indian Ministry of Commerce).

Total: Approximately $29 billion.

Key Markets: U.S., South Africa, Mexico, Saudi Arabia, UAE, and others.

India’s automobile exports to the US

Cars: $1.2 billion (50,000-60,000 units).

Auto parts: $5.8 billion.

Total: $7 billion.

Share of total exports

Cars: ~15% of India’s global car exports ($1.2 billion / $7.85 billion).

Auto parts: ~27% of India’s global auto parts exports ($5.8 billion / $21.2 billion).

Rank: Third-largest market for cars (behind South Africa and Mexico), top market for auto parts.

India’s exports to other key countries

Data reflects 2023-2024 figures from the Indian Ministry of Commerce, SIAM, and OEC, with minor adjustments for 2025 trends:

South Africa:

Cars: $1.3 billion (~65,000 units).

Auto Parts: $1.1 billion.

Total: ~$2.4 billion.

Notes: Largest car export market; Mahindra SUVs and Tata vehicles dominate.

Mexico:

Cars: $922 million (~45,000 units).

Auto Parts: $1.5 billion.

Total: ~$2.4 billion.

Notes: Second-largest car market; growing parts hub due to North American demand.

Saudi Arabia:

Cars: $750 million (~35,000 units).

Auto Parts: $900 million.

Total: ~$1.65 billion.

Notes: Key Middle Eastern market; demand for utility vehicles and components.

United Arab Emirates (UAE):

Cars: $600 million (~30,000 units).

Auto Parts: $1.2 billion.

Total: ~$1.8 billion.

Notes: Trade hub; re-exports amplify parts figures.

United Kingdom:

Cars: $500 million (~25,000 units, largely Jaguar Land Rover via Tata).

Auto Parts: $800 million.

Total: ~$1.3 billion.

Notes: Niche market tied to Tata’s global brands.

Bangladesh:

Cars: $450 million (~22,000 units).

Auto Parts: $600 million.

Total: ~$1.05 billion.

Notes: Strong regional demand for affordable vehicles.

Comparative analysis

Cars:

• U.S. ($1.2 billion) vs. South Africa ($1.3 billion): South Africa edges out as the top car export destination, exceeding the U.S. by $100 million.
• Mexico ($922 million): Third-largest, trailing the U.S. by $278 million.
• Others: Saudi Arabia ($750 million), UAE ($600 million), and UK ($500 million) are significant but smaller than the U.S.
• Observation: The U.S. is a major player but not dominant; South Africa and Mexico together account for 28% of car exports vs. the U.S.’s 15%.

Auto parts:

• U.S. ($5.8 billion): Far exceeds other markets, nearly triple the next largest, Mexico ($1.5 billion).
• Mexico ($1.5 billion), UAE ($1.2 billion), South Africa ($1.1 billion): Key destinations, but none approach U.S. levels.
• Others: Saudi Arabia ($900 million), UK ($800 million), Bangladesh ($600 million) are notable but secondary.
• Observation: The U.S. accounts for over a quarter of India’s parts exports, highlighting its critical role.

Total automotive exports:

• U.S. ($7 billion): Largest single market, representing 24% of India’s $29 billion total.
• South Africa ($2.4 billion) and Mexico ($2.4 billion): Tied for second, each at ~8%.
• UAE ($1.8 billion), Saudi Arabia ($1.65 billion): Next tier, at 6-7% each.
• Observation: The U.S. outpaces all others by a wide margin when combining cars and parts.