Tesla (TSLA.US) has finally turned its gaze toward India. After years of deliberation, Elon Musk's electric vehicle giant will inaugurate its inaugural showroom in Mumbai this Tuesday (July 15), marking its entry into the world's third-largest automotive market. Despite challenges posed by steep import tariffs and constrained household incomes potentially limiting sales volume, India represents a strategic opportunity that cannot be overlooked for Musk.

Current market dynamics present hurdles. While India recorded passenger vehicle sales of 4.3 million units in the 12 months ending March, electric vehicles constituted a mere 111,000 units (2.5%) according to JMK Research & Analytics data. Domestic automaker Tata Motors leads with 53% market share, followed by Mahindra and MG. Crucially, the average selling price for local EVs remains under $20,000—a stark contrast to Tesla's Model Y, which carries a landed price of approximately $70,000 inclusive of 70% import duties.

Seeking to attract Tesla's investment and advance US-India trade relations, New Delhi recently introduced a policy offering reduced import tariffs of 15% for foreign automakers committing over $500 million in investment and establishing localized production within three years. However, India's domestic demand currently appears insufficient to justify Musk's preferred 500,000-unit annual production target for a potential "gigafactory." Existing Tesla facilities in Shanghai already serve broader Asian markets, while its European and American plants currently grapple with idle capacity.

Yet emerging signs suggest Tesla could carve a niche in India. Though nascent, the country's EV sector is expanding rapidly. Electric vehicles, virtually non-existent five years ago, captured 4.4% of passenger vehicle sales in June per the Federation of Automobile Dealers Associations. Affluent consumers are progressively incorporating EVs into their consideration sets alongside conventional vehicles. Analysis indicates that should India reach 5 million annual passenger vehicle sales by 2030 with EVs constituting 10% share, Tesla capturing 10% of that EV segment would yield 50,000 annual sales. While this would surpass India's entire 2023 luxury vehicle market volume, it remains modest compared to Tesla's global sales of 1.8 million units last year. Still, establishing an early foothold in the world's most populous nation could prove strategically vital as its economy evolves.