Why India should not lower tariffs on auto imports: Explained

As global trade tensions rise, India faces increasing pressure to lower tariffs on imported automobiles, particularly from the United States. However, such a move could significantly harm the domestic automotive industry, which has flourished under protective tariff policies. The Indian government must carefully weigh the long-term economic consequences before making any changes to its trade policies.

High Tariffs Have Nurtured India’s Auto Industry

India’s high tariffs on automobile imports have played a crucial role in fostering a robust domestic automobile industry. These protective measures have attracted significant foreign direct investment, led to job creation, and helped develop a strong auto component sector.
According to Abhijit Das, former head of the Centre for WTO Studies, India’s high tariffs have encouraged international automakers to set up local manufacturing facilities rather than simply exporting cars to the Indian market. This has contributed to the country’s emergence as a global automobile hub.

Lessons from Australia’s Experience

According to Ajay Srivastava, Founder of the Global Trade Research Initiative, the risks of lowering tariffs are evident from Australia’s experience. Srivastava said, “In the 1980s, Australia had a 45% tariff on automobiles, which supported domestic car manufacturing by European and Japanese companies.

However, when the government reduced tariffs to 5% over a decade, the industry collapsed. Today, every car sold in Australia is imported, and despite offering incentives, Australia has failed to revive its once-thriving automotive sector. India must avoid a similar fate by maintaining strong trade barriers to protect its own industry.”

A Global Shift Towards Protectionism

The international trade landscape is becoming increasingly protectionist. US President Donald Trump has announced tariffs on various imports, including auto parts, which will directly impact India’s $7 billion auto parts exports to the US.

Peter Wells of Cardiff University said that many countries are moving towards internalising production to shield their economies from global trade disruptions. In this context, India must strengthen its domestic industry rather than opening its market to foreign automakers, which could weaken its economic resilience.

A significant reduction in tariffs would lead to a flood of foreign cars into the Indian market, undermining local manufacturers and threatening thousands of jobs. Furthermore, excessive dependence on imports could lead to supply chain vulnerabilities, making the country susceptible to external economic shocks.