The government has proposed new Corporate Average Fuel Efficiency (CAFE) standards that will reshape how carmakers in India manage vehicle emissions. The draft, known as CAFE 3, was released by the Bureau of Energy Efficiency (BEE) on September 28 for public consultation.
The new rules will apply to all M1 category passenger vehicles, which include cars with seating for up to nine people, including the driver, and weighing no more than 3,500 kilograms. Every car manufacturer will be required to meet the prescribed efficiency targets. Companies that fail to do so will face penalties.
New emission rules for cars
One of the most notable features of the draft rules is relief for small, lightweight cars. These vehicles will be subject to more lenient emission limits, a provision already followed in the United States, China, Japan, and the European Union. Industry groups have long argued that India’s framework favored larger vehicles, as heavier models were allowed more relaxed carbon dioxide limits under the existing calculation method.
A research note from Nomura earlier this year highlighted this imbalance. It said that without reform, India’s rules effectively placed a heavier compliance burden on small cars while giving SUVs and premium vehicles easier targets.
The new draft seeks to address this by adjusting the efficiency formula to better account for vehicle weight. The formula proposed under CAFE 3 is: [0.002 × (W − 1170) + c], where W represents the average weight of a manufacturer’s fleet. Efficiency is measured in petrol-equivalent litres per 100 kilometres.
Another major change is the introduction of “pooling.” Under this system, multiple carmakers will be allowed to combine their fleets and jointly meet average efficiency targets. This system already operates in other global markets and is expected to offer flexibility, especially for smaller manufacturers.
Boost for small cars, EVs
The draft rules also provide incentives for carmakers that sell electric vehicles. These companies would receive emissions discounts, which can lower their fleet average and help them comply with the overall targets.
Industry observers say these measures are aimed at reviving the small car segment. Sales of compact cars have dropped sharply in recent years, declining by 71 percent over six years. At the same time, larger SUVs have gained popularity.
“The draft norms are designed to revive the small car segment,” said Saket Mehra, partner and Auto & EV Industry Leader at Grant Thornton Bharat. “This is in line with other government steps such as GST 2.0 reforms, where the GST rate on small cars was reduced from 28 percent to 18 percent.”
The draft norms come as the government is also pushing ahead with its electric mobility program. Separately, the Centre has issued guidelines for setting up 72,300 public EV charging stations under the PM E-DRIVE scheme. The plan has an outlay of Rs 10,900 crore, with Rs 2,000 crore earmarked for charging infrastructure.
Public input sought on draft
The guidelines propose a tiered subsidy system. Government premises such as offices, residential complexes, hospitals, and educational institutions will be eligible for 100 percent subsidy on both upstream infrastructure and charging equipment, as long as the chargers are accessible to the public at no cost.
Together, the new CAFE 3 draft and EV charging guidelines show a dual approach: tightening emissions standards while making space for small vehicles and expanding support for electric mobility.
The BEE has invited public comments on the draft, after which the final rules will be notified. Once in place, the CAFE 3 norms are expected to directly shape car design, pricing, and manufacturing choices in the Indian auto sector over the coming decade.
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