Almost a yr after Indian Prime Minster Narendra Modi and Tesla CEO Elon Musk met in New York, India introduced a brand new tariff deal opening the door for Tesla to develop its presence in India. Indian Press Information Bureau/Anadolu Agency/Getty Images

New tax cuts from India may very well be the important thing Tesla and its EV rivals must unlock the world’s third-largest auto market—however provided that the federal government backs off on limiting gross sales.

For years, India has levied prohibitively excessive tariffs—as a lot as 100%—on imported international EVs. That means automobiles corresponding to Tesla’s Model 3, which retails for $38,990 in the U.S., would value almost $80,000 in India. (Largely due to the tariffs, Tesla currently doesn’t sell any vehicles in the country.) 

But final Friday, India’s Ministry of Heavy Industries announced it would be rolling back tariffs for international EV producers who decide to organising manufacturing operations in India. If automakers make investments a minimal of $500 million in India-based manufacturing, taxes on their vehicles will drop to just 15%, and right down to zero if the automobile retails for lower than $35,000.

However, underneath the brand new guidelines, international EV makers’ gross sales are capped at 8,000 automobiles per yr in the event that they make the most of this system. Tesla’s declining gross sales in China have made headlines just lately, however it still sold almost 100,000 cars in China last December alone. Selling 8,000 automobiles per yr in India doesn’t imply a lot for Tesla in and of itself—nevertheless it does characterize a shift that might yield greater outcomes afterward if the Indian authorities relaxes these gross sales limits sooner or later. And even getting permission to construct factories in India is an enormous win for Tesla, which announced it was ready to commit up to $2 billion towards Indian manufacturing late last year.

“While this policy can be availed by global companies already present in India, Tesla is widely seen as the company which the Government wants to set up a plant in India,” wrote UBS India autos analyst Pramod Kumar in a remark to Fortune.

Tesla has been courting India for some time: Elon Musk met with Prime Minister Narendra Modi in New York final June, the place they reportedly discussed a potential Indian Tesla factory. Musk said he was a “fan” of Modi after the two met, including that he was “incredibly excited about the future of India,” which had “more promise than any large country in the world.” 

India’s automobile market is big, and largely untapped—not only for Tesla, but in addition for different international automakers. India is the world’s largest third-largest auto market at $151 billion, in accordance with data from its Ministry of Heavy Industries. But it’s nonetheless within the very early levels of the EV adoption cycle: In 2021, a BCG report discovered that EVs comprised lower than 1% of the market, and private automobiles corresponding to scooters made up virtually half of that share. There’s room for large progress: BCG estimated that EVs may comprise as much as 35% of all automobile gross sales by 2030.

UN data confirmed that India overtook China because the world’s largest nation final yr, and its 1.4 billion residents characterize an enormous alternative for EV producers. Currently, the market is dominated by home producer Maruti, which accounted for a full one-third of all Indian car sales in 2022. 

In the quick time period, analysts count on minimal impacts for home producers because of the new tariff guidelines. Share costs for M&M and Tata Motors, two Maruti rivals, fell by 5% and a couple of% respectively after the tariff announcement, which UBS analyst Kumar known as an “overreaction.”

“We view the new EV policy to not have meaningful impact in the near to medium term on the listed Indian [original equipment manufacturers] due to lower volume limits on imports and higher price hurdle of US$35k per car,” wrote Kumar.