India's auto sector is expected to witness demand recovery over the next two to three years, driven by robust macroeconomic stimulus measures such as the upcoming Pay Commission salary revision, income-tax rate reduction, and interest rate cuts, according to a report by Incred Research.

The report said that the Nifty Auto Index saw a sharp 9% rally immediately after the GST rate cut in August-September 2025, but has since paused and underperformed. Analysts, however, expect a positive turnaround ahead, ANI reported.

"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.

Auto sector's growth

Original Equipment Manufacturers (OEMs) posted double-digit year-on-year net sales growth in Q2 FY26, aided by festive demand and the Goods and Services Tax (GST) rate cut.

Rising raw material costs pressured margins, but operating leverage supported and sustained the overall EBITDA margins, ANI reported.

Segment-specific sales report

Industry management commentary highlighted varied growth across different vehicle segments during the festive period, which ran from August to mid-November 2025.

Segment-wise, two-wheeler sales grew in the mid-teens, while passenger cars recorded only mid-single-digit growth, the report said.

What can further drive this growth?

Policy support is expected to further boost demand. 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 lead to an increase in disposable income, which often translates into greater consumer spending on big-ticket items, including automobiles.

Additionally, in September, the government implemented the second generation of Goods and Services Tax (GST) reforms, lowering tax slabs on several categories of automobiles.

The government reduced taxes primarily on small cars, two-wheelers (up to 350cc), as well as commercial vehicles, by changing the rate from 28% (plus applicable cess) to a uniform 18%.

This reduction, which took effect on 22 September following the 56th GST Council meeting, was intended to benefit consumers.

According to the report, these combined policy actions could provide sustained support to demand and strengthen the growth outlook for the auto industry over the medium term, ANI reported.