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April 26, 2026 — Nine months after India published the final phase of its Corporate Average Fuel Economy (CAFE-III) rules, the implications are still rippling through product-planning departments. On September 29, 2025, the Ministry of Power notified a framework that applies to M1-category passenger vehicles from April 1, 2027 to March 31, 2032. The final text keeps a formula based on the weighted average mass of each maker’s fleet and drops a proposed CO2 benefit for small cars — a concession that Maruti Suzuki had lobbied for and rivals had opposed. As of late April 2026, manufacturers are still mapping out how the new targets will shape future vehicle architectures.
India introduced its first fuel-efficiency targets under CAFE-I in 2017, with CAFE-II following in 2022. CAFE-III now becomes the longest and most demanding tranche yet, stretching across five fiscal years. The M1 category it covers includes passenger cars and SUVs designed for personal transport, seating up to eight people plus a driver. For American readers, that is roughly the equivalent of a mainstream car or light-duty SUV segment, although the Indian market tilts toward much smaller dimensions.
The fight over small cars had been the most visible flashpoint. A draft version floated during consultations proposed a 3-gram CO2/km allowance for petrol vehicles weighing up to 909 kg, with engines of 1,200 cc or less and a body length under four metres. If that measure had survived, Maruti Suzuki – India’s largest carmaker and a subsidiary of Japan’s Suzuki Motor – would have gained a compliance advantage on its home turf. The company argued that small cars are the backbone of India’s first-time buyer market and that extra regulatory pressure would raise entry-level prices. Rival manufacturers, however, saw the carve-out as a backdoor subsidy for one company’s product strategy. The pushback was strong enough that the clause disappeared from the final notification, ending the speculation.
The government made its choice clear: continue with the same architectural principle as earlier CAFE phases. Each automaker’s target is computed off the weighted average unladen mass of all new vehicles it sells or imports in a compliance year. The reference point is 1,229 kg, and from FY28 onward the allowable fleet-average CO2 output drops in annual steps through FY32. What that means in practice is that a company selling mostly light hatchbacks will be assigned a tougher numeric target than one selling heavy SUVs, since lighter vehicles are expected to use less fuel. But no additional discount is offered specifically for small cars. In other words, the mass-based system already creates an advantage for firms with light portfolios; the failed proposal would have created a second one.
Recognising that engineering lead time is short, the Ministry of Power has kept the credit menu broad. Each eligible efficiency technology earns 1 gram of CO2/km in compliance credits, up to an overall cap of 9 grams. The qualifying list includes start-stop systems, tyre-pressure monitoring, regenerative braking, transmissions with six or more speeds, efficient alternators, micro-hybrid systems, LED lighting, advanced glazing, electric water pumps, and higher-efficiency air conditioning. For a maker with a strong entry-level lineup, fitting a handful of these technologies on high-volume models could offset a meaningful share of the tightening. The credit cap alone may, for some manufacturers, cover a significant portion of the five-year reduction in allowable CO2.
The incentives for powertrain electrification remain generous. Battery-electric and range-extended electric vehicles receive a volume factor of 3.0, meaning each unit is multiplied by three in the fleet average denominator. Plug-in hybrids and flex-fuel strong hybrids receive 2.5; strong hybrids 1.6; flex-fuel vehicles 1.1. Beyond volume credits, the rules include carbon-neutrality factors that lower reported tailpipe CO2 based on fuel. Petrol vehicles running on E20 or higher ethanol blends, including strong and plug-in hybrids, get an 8 percent factor; flex-fuel vehicles get 22.3 percent; CNG vehicles get at least 5 percent, or the higher CBG blending percentage if the government has notified one. These tweaks matter because they allow a carmaker to keep selling internal-combustion vehicles while shifting the fleet’s accounting position through fuel formulation and integrated powertrain choices.
Compliance is no longer a one-year test. CAFE-III creates a credit-and-debit ledger for each manufacturer. If a company beats its target in a year, it can bank the surplus and use it in a later year within a compliance block, or sell the credits to another manufacturer. If a company falls short, it can purchase credits directly from the Bureau of Energy Efficiency at a price that climbs from Rs 2,500 per gram of CO2/km in FY28 to Rs 4,500 in FY32. That backstop price is a deliberate signal: the cost of missing the target will rise by 80 percent over five years, making technology investments increasingly attractive compared to paying penalties. One nuance often missed: the small-volume manufacturer exemption is based on production/import volumes of fewer than 1,000 vehicles per reporting period, not on car size. So a boutique maker of sports cars could be exempt, while a high-volume producer of small cars would not be.
While CAFE-III is an Indian policy, it carries global relevance. The US Corporate Average Fuel Economy program relies on a vehicle’s footprint – track width multiplied by wheelbase – to set target fuel consumption. India uses mass instead. Both approaches reward lighter vehicles, but they pull product design in different directions. A lightweight compact with a large footprint could do well under US footprint-based rules but relatively worse under a mass-based regime, and vice versa. For multinational engineering teams, that means a single global vehicle platform will not automatically optimise for both markets. The Indian rule also creates demand for the same efficiency hardware used in American cars – belt-alternator starters, 48-volt micro-hybrid components, electronic water pumps, and low-friction technologies. Suppliers that already serve US and European markets may find India to be a natural expansion target.
India has committed to a broad decarbonisation framework that includes an EV acceleration agenda and a 20 percent ethanol-blending goal. CAFE-III complements those targets by making it easier to count electric and ethanol-fuelled vehicles in the compliance math. For carmakers like Maruti Suzuki, the lesson is straightforward: the future of entry-level motorisation in India will be defined not by regulatory exemptions, but by how quickly affordable hybrid and electric variants can be scaled. In the near term, consumers may see more small cars equipped with start-stop, better transmissions, and mild-hybrid systems as automakers work the credits rather than simply cutting vehicle weight. That could nudge the average entry-level car’s price upward in a market where every rupee matters.
