Auto Sector Revival: How Tax Cuts and Pay Hikes Will Fuel Demand

The report stated that after a sharp rally in the Nifty Auto Index, which rose 9 per cent following the GST rate cut in August-September 2025, the index has taken a breather and underperformed in recent months. However, analysts expect a positive turnaround ahead.

"We feel macroeconomic stimulus measures like income-tax rate reduction, interest rate cut, and Pay Commission salary revision will drive a two-to-three year demand cycle recovery and therefore we reiterate our Overweight rating for the sector, as forward P/E valuation is just above the 10-year mean level," the report said.

In the second quarter of FY26, the sector posted strong double-digit year-on-year net sales growth for original equipment manufacturers (OEMs), aided by an early festive season and increased customer footfalls following the GST rate cut.

Although rising raw material costs impacted gross margins during the period, operating leverage helped support EBITDA margins.

Industry management commentary highlighted that two-wheeler retail volume sales saw mid-teen growth during the festive period from August to mid-November 2025, while the passenger car segment lagged behind, recording only mid-single digit growth.

The policy environment is also expected to support purchasing power and consumer sentiment. In October, the Union Cabinet approved the Terms of Reference for the 8th Central Pay Commission, which will recommend revisions in salaries and benefits for central government employees.

Such revisions typically enhance disposable income and support consumer spending on high-value items, including automobiles.

Additionally, in September, the government implemented the second generation of Goods and Services Tax reforms, lowering tax slabs to benefit consumers.

The government reduced tax slabs on several categories of automobiles, primarily small cars, two-wheelers (up to 350cc), and commercial vehicles, by changing the rate from 28 per cent (plus applicable cess) to a uniform 18 per cent.

The revised GST structure came into effect on September 22 following the 56th GST Council meeting.

According to the report, these combined measures could provide sustained support to demand and strengthen growth prospects for the auto industry over the medium term.

- ANI