India’s passenger vehicle industry faces a significant slowdown in FY2026, with ICRA projecting modest wholesale volume growth of just 1-4%, a sharp deceleration from the robust double-digit growth witnessed during the post-pandemic recovery years of FY2022-24, and the 8-9% growth seen last year.
The conservative outlook comes after the industry already recorded a 1.1% contraction in the first four months of FY2026 (April-July 2025), signaling persistent challenges in sustaining the momentum built over the previous three fiscal years when pent-up demand and supply chain normalization drove strong sales.
The projected 1-4% growth marks a dramatic shift from the industry’s recent trajectory. During FY2022 and FY2023, the passenger vehicle segment witnessed growth rates of 23% and 27% respectively, as consumers rushed to purchase vehicles following pandemic-related disruptions. Even FY2024 maintained healthy growth of approximately 8-9%, supported by new model launches and improved semiconductor availability.
The current fiscal year’s subdued performance reflects the industry transitioning from a recovery phase to a more challenging demand environment, characterized by high base effects and evolving consumer spending patterns. The flat year-over-year growth in July 2025, despite 8.9% sequential improvement, underscores this new reality.
Inventory Buildup
A critical concern highlighted in ICRA’s analysis is the rising inventory levels at dealerships, which reached 55 days by the end of July 2025. This buildup suggests that while manufacturers continue producing vehicles in anticipation of festive season demand, retail absorption isn’t keeping pace. The situation is particularly concerning given that retail sales declined 0.8% year-over-year in July 2025, despite a 10.4% sequential improvement.
Industry experts suggest that optimal inventory levels should range between 30-35 days, making the current 55-day level a significant pressure point for dealers who face increased carrying costs and potential margin erosion through higher discounting.
SUVs: The Sole Bright Spot
The SUV and utility vehicle segment, commanding 65-66% market share, continues to defy the broader slowdown. This segment’s resilience stems from changing consumer preferences toward larger vehicles offering better road presence, features, and perceived value. However, even this segment’s growth is moderating compared to the explosive 40-50% annual growth rates seen in FY2022-23.
Small Cars: Bearing the Brunt
The small car segment, traditionally the volume driver for companies like Maruti Suzuki, continues to face severe pressure. Rising input costs have pushed entry-level car prices higher, while consumers increasingly prefer to stretch budgets for compact SUVs. This segment has seen consistent volume declines since FY2023, with no immediate recovery in sight.
Sedans: Continued Marginalization
The sedan segment’s decline accelerates, now representing less than 10% of total passenger vehicle sales compared to over 25% a decade ago. Even premium sedan offerings struggle to compete with similarly priced SUVs.
Despite maintaining export leadership, Maruti faces challenges in its traditional stronghold of small cars. The company’s strategy of expanding its SUV portfolio with models like Grand Vitara and Fronx partially offsets small car declines, but overall volume growth remains under pressure.
As the second-largest exporter and strong SUV player, Hyundai appears better positioned but faces inventory challenges similar to industry peers. The company’s recent focus on feature-rich SUVs helps maintain market share but at compressed margins.
Both companies, with SUV-heavy portfolios, are likely to outperform industry growth rates. Tata’s electric vehicle portfolio provides additional cushion, while Mahindra’s exclusive focus on SUVs aligns well with market trends.
Factors Driving Conservative Outlook
Rising interest rates through FY2025 increased vehicle financing costs, while persistent inflation impacted discretionary spending. Urban consumption, particularly in metros, shows signs of moderation after three years of strong growth.
The industry awaits clarity on GST rate rationalization, with expectations that rate cuts could provide demand stimulus. However, the timing remains uncertain, creating a wait-and-watch scenario among potential buyers.
Investments in electric vehicle development, compliance with stricter emission norms, and integration of advanced safety features add to vehicle costs, potentially impacting affordability for price-sensitive segments.
While exports grew 9% in July 2025, this comes from a low base following global economic challenges in FY2025. Key export markets in Africa, Latin America, and Southeast Asia face their own economic pressures, limiting potential for significant export-led growth.
ICRA’s projection assumes potential GST rate cuts materializing in the second half of FY2026. Without policy support, even the modest 1-4% growth projection could be at risk. The industry particularly seeks GST reduction from 28% to 18% for vehicles below certain engine capacities, which could improve affordability for mass-market segments.
Festive Season
The upcoming festive season (October-November 2025) will be crucial in determining whether FY2026 can achieve even the modest projected growth. Historical data suggests festive months account for 30-35% of annual sales, making this period critical for clearing accumulated inventory and achieving full-year targets.
Industry stakeholders remain cautiously optimistic that a combination of new model launches, potential policy support, and festive season demand could help achieve the upper end of ICRA’s 1-4% growth projection. However, the stark contrast with recent years’ performance underscores the structural challenges facing India’s passenger vehicle industry as it navigates a more mature and competitive market landscape.