Budget 2026 Analysis

Budget 2026: Why India's Auto Sector Feels "Left Wanting"

By PrincipaCore Team | February 2026 | Reading Time: 9 minutes

Executive Summary

Union Budget 2026–27 is not anti-auto — but it is clearly not pro-demand. While the government nearly doubled the Production-Linked Incentive (PLI) outlay for automobiles to ₹5,940 crore, direct support for electric vehicle adoption and hybrid incentives remained conspicuously limited. The message is unambiguous: the government is doubling down on manufacturing depth and localisation, not short-term demand stimulation. The Nifty Auto Index fell more than 1% on Budget day, capturing the market's sentiment — policy continuity, yes, but no acceleration.

A Sector Too Big to Ignore

7%of India's GDP comes from automotive sector

India's automotive sector is not just another industry vertical. It contributes nearly 7% of GDP and accounts for roughly 15% of total GST collections. It directly and indirectly supports more than 30 million jobs across the value chain — from component suppliers in Pune to dealerships in tier-three cities. When auto policy shifts, the macro impact reverberates across the economy.

Going into Budget 2026, the sector faced a mixed backdrop. Premium SUVs were selling well, driven by rising middle-class aspirations and improved financing access. But entry-level cars and two-wheelers remained stubbornly below pre-COVID trajectory, signaling that mass-market demand had not fully recovered. Electric vehicle penetration, after an initial burst of momentum, had begun to plateau as subsidy-driven early adopters exhausted their numbers. Input costs were rising sharply due to steel safeguard duties, squeezing margins across the board.

Industry expectations were therefore tilted toward a demand-side push — especially for EVs and hybrids. What the sector got instead was a manufacturing-focused reset that prioritizes long-term scale over near-term volume.

Supply-Side Strength: The PLI Push

FY26 PLI Allocation

₹2,974 Cr

FY27 PLI Allocation

₹5,940 Cr

The biggest positive in Budget 2026 is the near doubling of the PLI allocation for automobiles and auto components — from roughly ₹2,974 crore in FY26 to ₹5,940 crore in FY27. This signals clear government commitment to building domestic capabilities in advanced drivetrain manufacturing, EV and hydrogen components, auto electronics, and battery ecosystem development.

The government's stance appears strategic: rather than subsidising vehicle purchases to create artificial demand, it is paying for scale and localisation that can sustain long-term competitiveness. This aligns directly with India's broader export positioning strategy, particularly in light of recent developments.

Read: US Just Cut Tariffs on Indian Auto Parts — Why Export Competitiveness Matters More Than Ever

But manufacturing incentives alone do not guarantee near-term demand. And for a sector that lives quarter-to-quarter on volume momentum, that matters.

The EV Question: Continuity Without Acceleration

FY26 Original Budget

₹4,000 Cr

FY27 Allocation

₹1,500 Cr

The PM E-Drive scheme allocation stands at ₹1,500 crore for FY27. While this is slightly higher than FY26 revised estimates of ₹1,300 crore, it is dramatically lower than the original ₹4,000 crore budgeted for FY26. The implications are stark: subsidies for electric two-wheelers and three-wheelers end March 31, 2026. Support continues mainly for buses, trucks, ambulances, and charging infrastructure until 2028. Consumer-focused EV demand incentives are tapering faster than the market expected.

Policy Signal

This suggests the government believes the heavy lifting phase of EV subsidies is complete — that the market has crossed the early-support threshold and should now rely on economics, not incentives, to drive adoption. But is the market ready for that transition? The data suggests otherwise.

GST 2.0: The Silent Reset

The September 2025 GST rationalisation changed the competitive landscape more than Budget 2026 itself. Small ICE cars and two-wheelers were moved from 28% GST to 18%, while EVs remained at 5%. On paper, EVs still enjoy a 13-percentage-point advantage. In practice, the absolute price gap narrowed significantly enough to shift consumer behavior.

The result: Entry-level ICE car prices dropped 8–10% in some segments. Electric car penetration fell from ~5% to 3.7%. EV share in certain premium segments dipped from 16% to 12%. This behavioural shift confirms a fundamental truth about India's auto market — policy nudges matter, especially in price-sensitive segments where every ₹50,000 shifts the purchase decision.

Read: India's Economic Outlook FY26 — Why Growth Is Moderating and What It Means for Demand

Hybrids: Still in the Grey Zone

One of the biggest industry expectations going into Budget 2026 was clarity on hybrids as a bridge technology between ICE and full electric. That clarity did not arrive. There was no GST differentiation, no special incentives, no explicit long-term roadmap. Hybrids remain neither favoured nor penalised — simply ambiguous.

For OEMs investing billions in platform strategy, ambiguity is costly. Toyota and Maruti have bet heavily on strong hybrids as the pragmatic path for India's transition. Without policy support — or at minimum, policy certainty — those bets become riskier. The absence of a clear hybrid framework in Budget 2026 leaves that strategic question unresolved for another year.

External Headwinds Are Real

Three Major Trade Risks

1. India–EU FTA: The recently signed agreement will gradually reduce import duties on European vehicles from 70–110% to ~10%. This increases competitive pressure in premium segments while opening export opportunities in components.
2. South Africa Tariff Risk: South Africa — a key export market for Indian vehicles — is considering raising import duties from 25% to 50%. If implemented, this could significantly impact Indian entry-level car exports.
3. Steel Safeguard Duty: The three-year safeguard duty on steel imports (starting at 12%) has pushed domestic steel prices from ₹49,500 to around ₹57,500 per tonne, adding input cost pressure at a time when pricing power is limited.

These cost pressures mirror broader commodity-linked risks affecting Indian manufacturing, particularly in metal-intensive sectors.

Read: The Copper Crisis — How Commodity Inflation Is Reshaping India's Manufacturing Cost Structure

So Was the Sector "Left Wanting"?

Yes — but with important nuance.

Budget 2026 is not anti-auto. It is pro-manufacturing, pro-localisation, and pro-PLI. What it is not is aggressively pro-demand. EV subsidies are tapering, hybrid clarity is missing, and consumer demand incentives are absent. The government appears to believe that EV adoption has crossed the early-support phase, that infrastructure and localisation matter more than cash incentives, and that market economics should now drive the transition.

Whether this assumption holds will determine the sector's growth trajectory over the next three to five years. If the market proves ready to sustain EV adoption without subsidies, the government's calculated withdrawal will look prescient. If adoption stalls, pressure will mount for renewed support.

Investment Implications

Near-Term Outlook

1. ICE and hybrid players may show stronger volume traction as subsidy-driven EV momentum fades
2. PLI beneficiaries in EV components and electronics could outperform on multi-year order visibility
3. Export-heavy OEMs face a mixed outlook due to shifting global trade dynamics

Long-Term Structure

1. Localisation-backed EV component players remain structurally attractive regardless of near-term demand cycles
2. Companies with flexible product portfolios (ICE + EV + hybrid) will have strategic advantage in navigating policy uncertainty
3. Policy clarity — not just subsidy size — will drive valuation multiples and investor confidence

Final Take

Union Budget 2026–27 marks a clear transition in auto policy. From stimulus → to strategy. From subsidies → to scale. From acceleration → to stabilisation. The direction toward clean mobility remains intact. The pace, however, is now more market-led than policy-driven. For a sector that anchors India's manufacturing ecosystem, this is not a setback — but it is a recalibration.

Related Analysis

Auto Sector Deep Dive: Best Auto Stocks to Look Out in 2026 — Which OEMs and Ancillaries Are Positioned for the Long TermTrade & Tariffs: US Just Cut Tariffs on Indian Auto Parts — Why This Changes the Export EquationManufacturing Context: India's $1 Trillion Digital Economy — How PLI Schemes Are Reshaping Industrial PolicyCommodity Risks: The Copper Crisis — Understanding Input Cost Pressures Across Indian Manufacturing

Disclaimer: This is educational content for research purposes only. Not investment advice. Consult a SEBI-registered advisor before making financial decisions.

Sources: Ministry of Finance, Ministry of Heavy Industries, SIAM, ACMA, Nifty Auto Index data, Economic Times, Business Standard