As 2025 draws to a close, automobile companies in India is experiencing a massive shift from a phase of weak demand and cautious spending to one of significant momentum. Driven largely by the GST 2.0, the new wave has reshaped vehicle pricing and improved sentiments across segments. With industry veterans expecting a double-digit growth in FY26, this reveals a notable turnaround from earlier projections of drastically low expansion.
The majority of 2025 in the Indian auto industry was a phase of struggle where consumer sentiment remained guarded, discretionary spending was slow to revive, and rural demand was at a consistent low. According to the data of the Society of Indian Automobile Manufacturers (SIAM), total automobile sales in the first half of 2025 stood at 2,670,857 units, which represented only a 0.6 per cent rise compared with the same period a year before.
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September 3: The policy shift that changed the mood
The policy shift arrived on September 3, 2025, following the announcement of GST rebates across vehicle categories by the Union Finance Minister Nirmala Sitharaman. This has directly addressed the prolonged concerns of exorbitantly high taxes that were hurting the demand. Passenger vehicles under four metres, such as compact SUVs and small cars, experience a GST reduction of 18 per cent from 28 per cent. Timed perfectly during the festive season, this initiative saw a 40.5 per cent hike in retail auto sales, with two-wheelers up by 52 per cent and passenger vehicles 11.5 per cent, and three-wheelers 5.5 per cent, restoring revived confidence across the industry.
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Growth expectations reset for FY26
As sales surged from October, analysts reassessed their forecast for the rest of the fiscal year, moving from a low single-digit expectation to a double-digit growth projection in FY2026.
Puneet Gupta, Director at S&P Global Mobility, noted that the improvement since October had been meaningful enough to change the broader picture. He said the industry should now close the current fiscal year with double-digit growth.
Vehicle registration data supports this optimism. According to Vahan data, registrations reached 2,73,84,328 units in 2025 as of December 19, around 5 per cent higher than the same period last year, signalling a positive trend heading into the final months of the fiscal year.
Nalinikanth Gollagunta, Chief Executive Officer of the Automotive Division at Mahindra & Mahindra and Executive Director at Mahindra Electric Automobile Ltd, said growth had clearly returned to the sector. While acknowledging that performance across manufacturers would vary, he said Mahindra expects mid-to-high teens growth for itself during the current fiscal.
EV adoption remains intact despite ICE price cuts
The reduction in GST on internal combustion engine vehicles has raised questions about whether electric vehicle adoption could slow as conventional vehicles become more affordable. Industry experts, however, do not see this as a major risk.
Electric vehicles continue to attract the lowest GST rate at 5 per cent. Compared with hybrid and ICE vehicles across categories, this remains the most favourable tax treatment. Sheena Sareen, Partner at Deloitte India, said this differential continues to support EV demand.
Media reports indicate that EV sales have doubled this year, even though they still account for around 4 per cent of total vehicle sales. In the luxury segment, EVs were always popular, and the tax cut will only accelerate the adoption.
Luxury cars get a structural reset
For luxury vehicles, the GST overhaul will full-fledgedly support future long—term growth, eventually improving affordability. While luxury cars attracted a base rate of 28 per cent GST along with a cess ranging from 15 to 22 per cent, taking the total tax incidence to between 43 and 50 per cent, the new structure has rationalised the entire tax structure with a flat 40 per cent GST charge, thus making luxury vehicles more accessible to the aspiring customers.
Small Cars, sedans, and the SUV question
Amidst the domination of SUVs and other luxury cars in the market, the revival of small cars remains a subject of debate. However, there’s a double view regarding this amongst the industry veterans, with some suggesting that the federal tax cut could help reverse the declining market share of small cars, prompting manufacturers to revisit their product strategies under GST 2.0.
Maruti Suzuki Chairman R C Bhargava has previously suggested that carmakers may need to bring more small cars back into their portfolios. However, current data does not fully support a strong revival in this segment.
SIAM figures show that mini car sales grew by 3 per cent year-on-year to 22,415 units during the October–November period. In comparison, sub-four-metre compact SUV sales rose by 17 per cent to 207,180 units over the same period.
Sedans, however, appear to be holding their ground with Maruti Suzuki Dzire being one of the bestselling products of the year, with a sustained demand from the fleet operators and personal buyers.
The road ahead
The demand rebound, largely concentrated in the third quarter of the fiscal year, is fuelled by the festive season and the tax cut. However, the question that still prevails is whether this positive sentiment will still be reflected in FY26 on a strong note. The growth trend, however, suggests that the momentum will likely continue with consumer sentiment improving after a prolonged phase of uncertainty.
What began as a long-awaited tax correction has evolved into a broader confidence boost, one that could shape the industry’s trajectory well beyond the current fiscal year.
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