India’s domestic automobile sector may witness a sustained demand recovery over the next two to three years, driven by strong macroeconomic stimulus measures including the upcoming Pay Commission salary revision, income-tax rate reductions and expected interest rate cuts, according to a report by InCred Research. The report noted that after a sharp rise of 9 per cent in the Nifty Auto Index following the GST rate cut in August–September 2025, the index has cooled off and underperformed in recent months. However, analysts anticipate a positive turnaround. “We believe macroeconomic stimulus measures such as income-tax rate reduction, interest rate cuts and the Pay Commission salary revision will drive a two-to-three-year demand cycle recovery. We therefore reiterate our Overweight stance on the sector, as forward P/E valuation remains only slightly above the 10-year mean,” the report stated. In the second quarter of FY26, original equipment manufacturers (OEMs) posted strong double-digit year-on-year net sales growth, supported by an early festive season and increased customer footfall following the GST reduction. Although rising raw material costs put pressure on gross margins, operating leverage helped sustain EBITDA margins. Industry commentary highlighted that two-wheeler retail volumes recorded mid-teen growth during the festive period from August to mid-November 2025. By contrast, the passenger vehicle segment grew at only a mid-single-digit pace. A supportive policy environment is also expected to enhance 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 allowances for central government employees — a move that typically boosts disposable income and spending on high-value goods such as automobiles. Further stimulus came in September when the government implemented the second generation of Goods and Services Tax reforms. Tax slabs for small cars, two-wheelers up to 350cc and commercial vehicles were reduced from 28 per cent (plus cess) to a uniform 18 per cent. The new GST structure took effect on 22 September after the 56th GST Council meeting. According to InCred, these combined measures are likely to provide durable support to consumer demand and strengthen the auto industry’s medium-term growth outlook.