Auto sector outlook 2026: Demand seen sustaining, premiumisation key theme; GST cuts, pay commission to drive growth

India’s automobile industry is entering 2026 on a stronger footing after a volatile 2025 that unfolded in two distinct phases. While demand remained under pressure for much of the first half of last year, a policy-led revival in the latter months has improved the sector’s growth outlook.Until August 2025, the auto industry struggled with weak demand across most segments, barring sports utility vehicles (SUVs). Entry-level cars, two-wheelers and commercial vehicles continued to face headwinds as consumers deferred purchases amid higher prices and cost pressures.
The inflection point came in September 2025, when the government announced GST rationalisation across automobile categories. The tax cut led to lower prices for cars, two-wheelers and commercial vehicles, providing an immediate boost to demand, particularly at the entry level.
Market leader Maruti Suzuki, which has a strong presence in the entry-level passenger vehicle segment, saw a sharp rebound in sales following the GST cut. In December 2025, entry-level vehicle sales more than doubled to over 14,000 units, compared with around 7,500 units in the same period a year earlier.The commercial vehicle (CV) segment also showed early signs of an upcycle. Companies such as Ashok Leyland and Tata Motors benefited from improved demand following the GST rate cut, indicating a broader recovery in freight movement and infrastructure-related activity.

What to Expect in 2026

Looking ahead, the industry expects demand momentum to sustain through 2026, with premiumisation emerging as a key theme. Consumers are increasingly opting for higher-value vehicles, supporting better realisations for manufacturers even as volumes recover.Two potential policy developments could further strengthen demand. The implementation of the 8th Pay Commission would increase disposable incomes, particularly for government employees, supporting passenger vehicle sales. Additionally, a higher capital expenditure allocation in the Union Budget, due in February, could accelerate infrastructure activity and boost demand for commercial vehicles.

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Key Risks to Watch

Despite the positive outlook, risks remain. A sharp depreciation in the rupee is a key concern. In 2025, the rupee emerged as the worst-performing Asian currency, weakening nearly 5% against the US dollar. A weaker currency raises the cost of imported components and raw materials for automakers.

Rising commodity prices pose another challenge. Prices of key inputs such as copper, aluminium, steel and precious metals have increased sharply, leading to higher input costs across the industry. To mitigate margin pressures, several automakers have already announced price hikes, while others are expected to follow in the coming months.

Overall, after a strong recovery in the latter part of 2025, the auto industry is entering 2026 with cautious optimism. Sustained demand, policy support and a continued shift towards premium products could help the sector deliver another solid year, even as companies navigate currency volatility and cost pressures.

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