CAFE-III norms send ripples across the domestic auto industry 

The Indian automobile industry is witnessing a fresh wave of recalibration as Corporate Average Fuel Efficiency (CAFE)-III norms officially come into force from April 1, 2027. These fuel efficiency standards aim at reducing CO₂ emissions and improving fleet-level fuel economy. 

These norms, introduced in 2017, are applicable to all vehicles weighing under 3,500 kg, including those powered by petrol, diesel, LPG, CNG, hybrids, and electric powertrains.

Under the CAFE-II norms, introduced in 2022, the Bureau of Energy Efficiency (BEE) mandated vehicular emissions restrictions at not more than 4.78 litres per 100 km or 113 g/km for every car. However, the vehicular emissions under the CAFE-III norms have now become more stringent and is capped at 91.7 g/km for four-wheelers. To achieve fuel efficiency, most automakers have introduced electric vehicles in their portfolio. 

Notably, under the weight-based formula, light or small vehicles face tighter vehicular emission norms as compared to heavy vehicles. 

The small car conundrum 

Maruti Suzuki, the country’s largest automobile manufacturer, has urged the government to exclude the small car segment from the CAFE-III norms. The small car segment has witnessed degrowth over the past few years as the large utility vehicles took over the industry. The segment has shrunk 40% from 2,218,489 units in FY19 to 13,53,287 units in FY25, as per SIAM. 

Maruti Suzuki, which currently helms the small car market with models like Alto and WagonR, saw its worst decline for small car production in five years in June.  The company’s small car production witnessed a sharp decline of 23% to 125,392 from 163,037 in June 2021. 

Maruti Suzuki has repeatedly said that the revival of the small car segment is quintessential for the domestic automobile sector and economy. The new CAFE-III norms might further derail the small car segment, warns Maruti Suzuki, owing to costly upgrades such as hybrid and electric vehicles, eroding price advantage and a possibility of a price point that might exclude first-time or budget buyers. 

However, automakers such as Mahindra & Mahindra, Tata Motors and Hyundai have contested Maruti Suzuki’s claim of excluding the small car segment from CAFE-III norms. In a letter to the Ministry of Heavy Industries earlier this month, Mahindra & Mahindra said that the small car segment accounts for 60% of the PV market and contributes to 53% of the industry’s carbon emissions in 2025.

“Granting concessions would not only perpetuate this level of emission but also lock it in for the future by removing the CAFE penalty avoidance incentive for innovation in this segment towards fuel efficiency and lower emissions,” said M&M. 

Notably, the company also said that India’s target of achieving 30% electric vehicle penetration by 2030 could be compromised if EV adoption remains limited to larger cars. 

As per M&M, small cars are classified based on the GST criteria—vehicles shorter than 4 metres with engine capacities up to 1,200 cc for petrol and 1,500 cc for diesel—which also covers compact SUVs such as the Kia Sonet. In contrast, Maruti Suzuki India Limited, has requested exemptions specifically for vehicles weighing under 1,000 kg, a more limited category that mainly includes entry-level hatchbacks and sedans.

A report by Nomura says that the country’s linear-weighted approach penalises lighter vehicles with disproportionately stringent CO₂ targets. “This creates a structural bias where heavier vehicles with higher emissions comply easily, while small cars with lower emissions fail. Lightweighting, a key decarbonisation strategy, is thus disincentivised,” the report says. 

Commercial Vehicle concerns

Meanwhile, manufacturers of light commercial vehicles (LCVs) have also sought relief. The commercial vehicle manufacturers have sought exemption of the N1 (up to 3.5 tonnes) category of small commercial vehicles to be exempted from the CAFE-III norms. 

As per the presentation made to SIAM on June 2, reviewed by Business Today, the commercial vehicle manufacturers have urged that mandating CAFE-III norms for this segment at the point of time would impose additional cost burdens, affect affordability and adversely impact the livelihood of owner-operators and small businesses. 

According to SIAM data, Mahindra & Mahindra accounts for 50% of the N1 category, followed by Tata Motors at 27%. 

Notably, taking cognisance of the differential view for the domestic automotive industry, the union transport minister Nitin Gadkari said that the government is working on a new version of fuel efficiency regulations which will encourage both electric vehicles and flex fuel vehicles.