India's automotive industry is positioned for a significant demand resurgence over the next two to three years, according to a comprehensive analysis by Incred Research. The recovery is expected to be fueled by multiple macroeconomic stimulus initiatives including the upcoming Pay Commission salary revisions, income-tax reductions, and strategic interest rate cuts.
Market Performance and Analyst Outlook
The Nifty Auto Index demonstrated remarkable momentum with a sharp 9% rally immediately following the GST rate reduction implemented during August-September 2025. However, this upward trajectory has since moderated, with the index experiencing a period of consolidation and underperformance in recent sessions.
Despite this temporary pause, market analysts maintain a positive long-term perspective. Incred Research has reaffirmed its Overweight rating for the automotive sector, citing favorable forward P/E valuations that remain slightly above the 10-year mean level.
"We believe macroeconomic stimulus measures including income-tax rate reduction, interest rate cuts, and Pay Commission salary revision will drive a two-to-three year demand cycle recovery," the report emphasized, highlighting the sector's promising prospects.
Strong Quarterly Performance and Margin Dynamics
Original Equipment Manufacturers (OEMs) delivered impressive financial results during the second quarter of fiscal year 2026, registering double-digit year-on-year net sales growth. This robust performance was primarily driven by heightened festive demand and the beneficial impact of GST rate reductions.
While rising raw material costs presented challenges to profitability margins, companies successfully leveraged operational efficiencies to maintain overall EBITDA margins. The effective use of operating leverage helped sustain financial performance despite cost pressures.
Segment-Wise Sales Analysis and Policy Support
Industry management commentary revealed distinct growth patterns across different vehicle categories during the extended festive period spanning from August to mid-November 2025. Two-wheeler sales recorded robust mid-teens growth, significantly outperforming passenger cars which managed only mid-single-digit expansion.
The government has implemented substantial policy measures to further stimulate automotive demand. In a significant move during October, the Union Cabinet approved the Terms of Reference for the Eighth Central Pay Commission, which will recommend salary and benefit revisions for central government employees.
Such salary revisions typically result in increased disposable income, which often translates into higher consumer spending on significant purchases including automobiles.
Additionally, September witnessed the implementation of second-generation Goods and Services Tax reforms, which substantially reduced tax slabs across multiple automobile categories. The government lowered taxes from 28% (plus applicable cess) to a uniform 18% rate for small cars, two-wheelers up to 350cc, and commercial vehicles.
This tax reduction, effective from September 22 following the 56th GST Council meeting, was specifically designed to benefit end consumers and stimulate demand.
According to the comprehensive analysis, these combined policy initiatives are expected to provide sustained support to automotive demand and strengthen the industry's growth outlook through the medium term.
