How The Indian Auto Sector Is Driving $5 Trillion Economy Dream

India’s auto sector is a key pillar of its $5 trillion economic vision, contributing 7.1 per cent to GDP, driven by strong manufacturing, export growth, and policy support for EVs and innovation. However, ICE and CNG vehicles still dominate due to cost and infrastructure gaps, while import dependence poses critical supply chain risks. The question remains - what comes next?

As India accelerates towards its $5 trillion economic goal, the auto sector is expected to be one of the core drivers. With its vast scale, deep linkages to manufacturing, exports, employment, and technology, the auto sector is increasingly being seen not just as a commercial engine, but it also reflects India’s rise as a credible global manufacturing and innovation hub.

As of financial year 2024-25, India is the third-largest automobile market globally in terms of sales and the fourth-largest in vehicle production, manufacturing more than 31 million vehicles across segments. This includes over 5.06 million passenger vehicles, 1.03 million commercial vehicles, 1.05 million three-wheelers, and a massive 23.88 million two-wheelers. In exports, India shipped around 5.7 million vehicles, with growing demand from markets like Japan, Mexico, Latin America, and Africa.

The automobile sector contributes around 7.1 per cent to India’s GDP and 49 per cent to manufacturing GDP, supports over 37 million jobs, and makes up nearly 8 per cent of the country’s total exports."

These figures are more than just statistics; they’re signs that the health and growth of the Indian auto industry are closely tied to the overall economic momentum of the country.

Policy Driving the Transformation

Much of this growth has been powered by focused government policies that aim to strengthen domestic manufacturing, reduce import dependence, encourage clean technologies, and make India a central player in global value chains.

One of the most transformative initiatives has been the Production Linked Incentive (PLI) Scheme for the Automotive and Auto Components sector, with a total outlay of Rs 25,938 crore. The scheme supports manufacturers investing in new-age automotive technologies such as electric vehicles (EVs), hydrogen vehicles, autonomous systems, and software-defined vehicles. By early 2025, the scheme had attracted investment proposals worth over Rs 67,000 crore, with the potential to generate Rs 2.3 lakh crore in incremental sales and create 7.5 lakh direct jobs over the next few years. However, out of the US$23 billion approved for PLI across all sectors, only US$1.7 billion has been disbursed so far, prompting calls for quicker execution.

Another key policy has been FAME-II (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles), launched with a budget of Rs 11,500 crore. This program aims to boost EV adoption across India by subsidising electric two-wheelers, three-wheelers, buses, and taxis. As of 2025, over 1.3 million EVs have been supported under the scheme. While it was originally set to end in March 2024, it was extended to March 2025 to support continued momentum.

Supporting EVs further is the PLI scheme for Advanced Chemistry Cell (ACC) Battery Storage, with a budget of Rs 18,100 crore, which is helping India reduce its dependency on imported batteries. Three companies are already building battery gigafactories under this scheme, with more expected to join. This is critical, as batteries account for over 40 per cent of an EV’s cost.

Adding to these is the Vehicle Scrappage Policy, which aims to phase out old, polluting vehicles from Indian roads. This initiative not only improves road safety and air quality but also boosts demand for newer, fuel-efficient vehicles.

Jyoti Malhotra, Managing Director of Volvo Car India, highlights, “From a policy standpoint, consistency and long-term clarity are paramount. While incentives under schemes like FAME and various state-level EV policies have proven beneficial, a more uniform framework across states, particularly for luxury EVs, would undeniably accelerate adoption. Infrastructure remains another critical pillar. India requires a more extensive and rapid rollout of public charging stations, especially along highways and in Tier 2 and Tier 3 cities.”

EV Reality Check: The Road Ahead for India's Electric Dreams

The electric vehicle market in India has started to take off, especially in the two-wheeler and three-wheeler categories. In FY 2024–25, EVs accounted for more than 6 per cent of all vehicles sold, showing a shift in both consumer sentiment and product availability. In May 2025, 12,304 electric cars were sold, crossing 4 per cent for the first time ever from 2.57 per cent last year in May 2024, with companies like Tata Motors, MG Motor and Mahindra leading the charge.

However, the road to full electrification is still dotted with speed bumps. India still imports significant portion of critical EV components from China like rare earth magnets used in motors and some battery materials, lithium cells, and semiconductor chips. In FY2025, India imported around USD 200 million worth of these magnets for both automotive and non-automotive applications, with approximately 85 per cent of this sourced from China.

A stark reminder came in April 2025, when China’s export restrictions on rare-earth magnets triggered supply disruptions in India. India’s top carmaker, Maruti Suzuki had to reduce the production of its first electric vehicle, e-Vitara by 70 per cent in first half of the FY2025-26, from 26,500 to just 8,200 units. The Maruti’s EV launch has already been delayed by months but it is now scheduled for September this year.

Jitin Makkar, Senior Vice President and Group Head of Corporate Ratings, ICRA, noted, “The current unease over rare earth magnet supplies feels all too familiar for India’s automobile industry. The industry, having recovered from the semiconductor supply crunch of 2021–22 that shaved off nearly 100,000 units or about 4 per cent from passenger vehicle production, now faces a fresh disruption. With China tightening export controls and delaying shipment clearances, rare earth magnet inventories are projected to last only until mid-July 2025 for several, if not all, passenger vehicle and two-wheeler applications.”

This situation has prompted renewed urgency in building self-reliant supply chains, including domestic magnet manufacturing, lithium refining, and semiconductor manufacturing. At the same time, India needs to scale up its charging infrastructure, particularly in highways and rural areas where adoption is still slow.

“Despite many luxury EVs offering ranges exceeding 400 km per charge, range anxiety persists among a segment of consumers. A critical requirement is the expansion of fast-charging infrastructure along highways, and a policy framework that incentivises Public-Private Partnerships (PPP) in establishing these charging stations would significantly accelerate the pace of electrification” Malhotra added.

A Sector at the Crossroads

A looming challenge also lies in electricity supply. According to a report by Brookings, if EVs account for 33 per cent of total auto sales by 2030, the country would require approximately 37 TWh of additional electricity annually. As of 2025, India’s total installed generation capacity stood at around 472.4 GW, highlighting the scale of investment needed to align grid readiness with the EV transition. What’s more? Over 50 per cent of power still comes from thermal (coal). So, switching to EVs won’t help much unless the electricity itself becomes cleaner.

Adding to the complexity is the issue of used batteries. As more EVs hit the roads, India will also need a proper system to recycle or safely dispose of old batteries. Otherwise, it could create a new environmental problem.

Recently, Toyota Chairman Akio Toyoda claimed that building and charging one battery-electric vehicle (BEV) can be worse for the environment than three hybrids combined, especially in countries where electricity still comes largely from fossil fuels.

For India, the journey towards green mobility will be a mix of old and new, where both ICE and EVs will co-exist for the foreseeable future. The future will also be about rethinking mobility itself - moving from just vehicle sales to services, subscription models, fleet electrification, and smart urban transport. India’s cities and consumers are evolving, and so too must the auto industry.

The ICE Age Isn’t Over Yet: Future of Internal Combustion in India

With the rise of electric vehicles (EVs), some believe that the ICE age is ending. But in India, the story is more complex. The ICE age isn’t over yet and may continue for years to come. While electric vehicles (EVs) are growing, the shift is slow. Today, more than 92 per cent of vehicles in India still run on traditional fuels like petrol, diesel, and compressed natural gas (CNG).

Vikram Pawah, President and CEO, BMW Group India, said, “There are no old or new technologies, only future-proof ones. Technology openness pays off. It’s crucial to continue to invest consciously in various technologies. At BMW Group, customers have the power of choice to go for a drivetrain of their choice whether petrol, diesel, hybrid or electric. Thanks to our flexibility, we can react quickly to changing requirements in the markets at any time and in any situation.”

There are several reasons why ICE vehicles continue to lead the Indian market. The biggest one is cost. Petrol and diesel vehicles are cheaper to buy than EVs. For most Indian customers, especially in small towns and rural areas, price is a major factor. EVs are improving but still too expensive for many families. Infrastructure is another challenge. India has a large and well-established network of petrol and diesel stations. In contrast, EV charging infrastructure is still limited, especially outside major cities. Charging can also take hours, while refueling a petrol or diesel car takes just a few minutes. This makes ICE vehicles more practical for long-distance and daily use.

While electric vehicles (EVs) get much of the spotlight, a quieter but stronger shift is happening with Compressed Natural Gas (CNG). In FY 2024–25, over 1.2 million CNG vehicles were registered in India. This includes not just cars, but also three-wheelers and commercial vehicles. The shift is so prominent that in some places, CNG vehicle sales have even outpaced petrol. For instance, in Gujarat during FY 2025, 1,25,000 CNG vehicles were sold, compared to 1,18,000 petrol vehicles, a clear sign of changing consumer preferences.

Adding to this is India’s growing strength in automotive software, R&D, and vehicle electronics, with companies like Bosch, Continental, Tata Elxsi, and KPIT making India a global center for software-defined vehicles. Meanwhile, in a move that could shake up the global auto landscape, Toyota Motor recently unveiled a hydrogen-powered engine that runs on water-derived hydrogen produced via electrolysis, emitting only water vapor. No lithium. No charging stations. Just clean, high-performance combustion. With this move Toyota isn’t just competing with EVs, they are declaring the end of the battery era.

Roadblocks on the Highway

Despite continued momentum, India’s auto sector is beginning to show early signs of stress. In May 2025, passenger vehicle (PV) retails declined by 3.1 per cent year-on-year and a sharp 13.6 per cent month-on-month, marking a concerning reversal from the 8 per cent growth seen in FY24. While two-wheelers grew 7.31 per cent YoY, this came with a 2.02 per cent MoM dip, highlighting demand fragility, especially in rural markets. High inflation, fuel costs, and persistent financing constraints are weighing heavily on low- and mid-income buyers.