The Indian Ministry of Power has notified the final third phase of Corporate Average Fuel Economy (CAFE III) norms for passenger vehicles, covering the period from April 1st, 2027 to March 31st, 2032.

The norms apply to M1 category vehicles under the Central Motor Vehicle Rules, 1989, with progressively tighter manufacturer-level fuel-efficiency targets.

Battery electric vehicles (BEVs) and range-extended electric vehicles (REEVs) receive the highest volume derogation, or super credit, of 3.0, meaning that each counts as three vehicles for fleet-average calculations. Plug-in hybrids (PHEVs) and eligible flex-fuel strong hybrids receive a credit of 2.5, strong hybrids (SHEVs) receive 1.6, and flex-fuel ethanol vehicles receive 1.1.

The final framework removes the separate small-car concession proposed in the September 2025 draft, which would have provided a 3g CO2/km relaxation for petrol cars shorter than 4 metres, with engines of up to 1,200cc and an unladen weight below 909 kg. Instead, the target formula has been revised to create a flatter curve, giving lighter vehicles relatively softer targets while requiring heavier vehicles to achieve greater efficiency improvements.

Fuel-efficiency targets

Annual average fuel consumption is calculated using the Modified Indian Driving Cycle (MIDC) in petrol-equivalent litres per 100km, according to "a x (W - b) + c", where W is the manufacturer's weighted average unladen mass and b is fixed at 1,229 kg. The value of "a" falls from 0.00158 in 2027-28 to 0.00131 in 2031-32, while "c" declines from 3.9960 to 3.3273 litres per 100 km.

For a 1,229 kg fleet, the target therefore improves by about 16.7%, from 3.996 litres per 100 km in 2027-28 to 3.3273 litres per 100km in 2031-32. This is equivalent to a reduction in the reference-weight target from about 94.8g to 78.9g CO2/km.

Compared with the September 2025 proposal, the FY28 slope has been reduced from 0.002 to 0.00158, the reference weight has increased from 1,170 kg to 1,229 kg, and the base fuel-consumption number has been raised. Consequently, a small car that would have faced 54.1g CO2/km after the proposed concession will instead face 63.7g/km under the final formula.

CAFE III assesses manufacturers across their entire portfolios rather than setting individual targets for every model. The impact will therefore vary according to vehicle weight, fuel efficiency, powertrain mix and sales volumes.

Small cars and efficiency technologies

Maruti Suzuki and Toyota had sought additional relief for small cars, arguing that lighter vehicles consume less fuel, while Tata Motors, Mahindra & Mahindra, Hyundai and Kia opposed a separate benefit. The September proposal particularly affected Maruti Suzuki, whose vehicles accounted for about 95% of cars meeting the proposed small-car definition.

The final framework instead recognises 12 fuel-saving technologies, with each eligible technology providing a claimed benefit of 1.0g CO2/km, equivalent to 0.0422 litre per 100 km, subject to an overall cap of 9.0g CO2/km or 0.3795 litre per 100 km. These include start-stop systems, tyre-pressure monitoring, regenerative braking, six-speed-or-higher transmissions, efficient alternators, motor-generators or micro-hybrid systems, LED lighting, advanced glazing, electric water pumps, high-efficiency air-conditioning, solar-reflective paint and PWM-controlled radiator fans.

MoRTH will establish the certification methods. During the first compliance block, manufacturers can self-declare savings, while the second block requires validated test results. The benefits associated with air-conditioning and solar-reflective paint will also initially be self-declared.

Fuel consumption and alternative fuels

Actual consumption is calculated from type-approved tailpipe CO2. The specified multipliers are 0.04217 for petrol, 0.03776 for diesel, 0.06150 for LPG and 0.03647 for CNG, with electric vehicles measured in kWh per 100 km. Diesel, LPG, CNG and electric consumption is converted to petrol equivalent using factors of 1.1168, 0.6857, 1.1563 and 0.1028, respectively. Petrol-equivalent consumption is based on CO2 divided by 23.7135.

CAFE III also provides carbon-neutrality factors of 8% for E20-or-higher ethanol-blended petrol vehicles, including hybrids; 22.3% for flex-fuel ethanol vehicles; 5% or the notified CBG blending percentage, whichever is higher, for CNG; and the notified biofuel blending percentage for diesel.

The framework therefore provides compliance pathways through BEVs, REEVs, PHEVs, hybrids, flex-fuel vehicles, CNG and fuel-saving technologies.

Credits and compliance

Credits or debits are calculated from the difference between actual fuel consumption and the applicable standard and recorded in a manufacturer-level passbook. The first compliance block covers FY2027-28 to FY2029-30, while the second covers FY2030-31 to FY2031-32. Credits can be pooled, traded between manufacturers or purchased from the Bureau of Energy Efficiency (BEE).

The BEE credit price rises from Rs. 2,500 (US$ 26.01) per g CO2/km in 2027-28 to Rs. 4,500 in 2031-32. Trading is permitted from October 1st to October 31st, while the Designated Agency must submit the final passbook by November 30th. Non-compliance is assessed at the end of each block under Sections 26 to 28 of the Energy Conservation Act.

From April 1st, 2027, manufacturers must report model-level CO2 performance under both MIDC and WLTP, along with state-wise sales data. The Ministry of Power will separately notify the MIDC-to-WLTP conversion factor.

Manufacturers producing or importing fewer than 1,000 eligible vehicles during a reporting period are exempt from the specific target but must continue reporting their actual average fuel consumption.

Market context and industry response

The removal of a dedicated small-car concession comes as the segment shows some recovery. Data from a research company indicates that entry-level hatchbacks represented 3.3% of passenger vehicle sales in the first five months of FY27, compared with 2.3% in the first half of FY26, while SUVs increased their share from 56%-58%. The broader hatchback share remained at about 21%. The recovery followed the September 2025 GST reduction on eligible small cars from 28%-18%.

Maruti Suzuki reported small-car sales growth of 58% and entry-car growth of 96%, although the segment remains smaller than previously. Entry-level hatchbacks represented nearly 8% of the market five years ago, while hatchbacks overall fell from about 46% in FY19 to roughly 23% in FY26 as utility vehicles increased to around 68%.

Industry responses broadly recognised the multi-pathway approach. AIDA, ISMA and GEMA highlighted the recognition of ethanol and flex-fuel vehicles, while Toyota, Mahindra and JSW Motors highlighted the recognition of multiple powertrains, super credits and credit trading. Maruti Suzuki, Hyundai, Tata Motors and M&M emphasised the consultation process, technology neutrality and flexibility. Spark Minda highlighted opportunities for component suppliers in electronics, power management, controls and lightweighting, while Deloitte and EY-Parthenon said the rules would influence product planning, investment and the adoption of electrification, hybrids and alternative fuels.

The final framework therefore combines progressively tighter targets with super credits, alternative-fuel recognition, efficiency-technology benefits, credit trading and BEE credit purchases. While the dedicated small-car concession has been removed, the flatter target curve gives lighter vehicles comparatively softer targets, allowing manufacturers to pursue compliance through a combination of efficiency improvements, electrification, hybrids, alternative fuels and other technologies.