NEW DELHI: After much consultation, the Ministry of Power notified, late Tuesday, the third phase of the Corporate Average Fuel Economy (CAFE-III), which will come into effect from April 1, 2027 and remain applicable up to March 31, 2032. While the newer norms have no separate concession for smaller cars weighing below 909 kgs, it does set softer fuel efficiency targets for lighter cars and stricter goals for heavier vehicles.
Small cars received a 3 g/ km relaxation in the under 909 kg category in the CAFE III draft of September 2025. Because of this, there was heavy debate in the industry as a section of carmakers, including Tata Motors and M&M argued that the relaxations would primarily benefit Maruti Suzuki which holds over 95% market share for vehicles under 909 kg.
In the new framework, the government has given benefits to small cars by correcting another parameter (slope) instead of 3 g/km. For a small car, the target would have been 54.1 g/km (after including 3 g/km relaxation) as per the September 2025 CAFE III draft. This has now been relaxed to 63.7 g/km (without the 3 g/km relaxation).
The reference weight has also been increased from 1,082 kg under existing norms to 1,229 kg under new CAFE norms, an increase of around 13.6%. The Ministry of Power said that this reflects the evolving characteristics of the passenger vehicle fleet.
“It is a comprehensive regulation arrived at after scientific data calculations and detailed stakeholder and inter-ministerial consultation with ambitious targets for energy efficiency improvement and CO2 reduction. The regulation recognises the contribution of multiple powertrain technologies and fuels encouraging multi-faceted R&D and innovation,” said Rahul Bharti, Senior Executive Officer, Corporate Affairs. The new norms will apply to new passenger vehicles manufactured or imported for sale in India.
The new CAFE norms also seek over 16% improvement in fuel efficiency over five years, stipulating progressive improvements in fuel economy through year-on-year tightening of targets across all five years. The fuel-consumption benchmark is tightened from 3.996 litres/100 km in 2027-28 to 3.3273 litres/100 km in 2031-32, representing an improvement of around 16.7% over the period.
The notification also introduced a credit-debit system, giving carmakers greater flexibility in meeting their targets. Manufacturers whose fleet performance exceeds the prescribed target earn credits, while those falling short accumulate debits. Carmakers with a deficit can buy credits from the Bureau of Energy Efficiency (BEE). The buyout price starts at Rs 2,500 per gram of CO2 per km in FY28 and rises by Rs 500 annually to Rs 4,500 in FY32. The norms provide manufacturers two block periods (3 years and 2 years) to balance any deficit in a particular year.
The final notification also retains a super-credit mechanism, giving additional compliance value to vehicles run on clean energy. Battery electric vehicles and range-extended electric vehicles get a volume derogation factor of 3, meaning one such vehicle can be counted as three vehicles for the purpose of calculating fleet performance. Plug-in hybrid electric vehicles and strong hybrid EVs running on flex-fuel ethanol get a factor of 2.5, while strong hybrid electric vehicles get 1.6 and flex-fuel ethanol vehicles get 1.1. There are carbon-neutrality factors for certain fuels as well. E20 or higher ethanol-blended petrol vehicles, including strong and plug-in hybrids, get an 8% factor, while flex-fuel ethanol vehicles get 22.3%.
Tarun Garg, MD & CEO, Hyundai Motor India (HMIL) said that the norms provide a clear and predictable regulatory roadmap through a 3+2 year compliance block structure, enabling manufacturers to undertake long-term product and technology planning with greater certainty. He added that HMIL has already committed to a green portfolio share of 50% plus over the next 4 to 5 years comprising of cleaner technologies like EVs, Hybrids, CNGs etc.”
Shenu Agarwal, President, Society of Indian Automobile Manufacturers (SIAM) said that CAFÉ III regulation will not only ensure reduction of overall fuel consumption from the new Passenger Vehicle fleet but also provide an opportunity to the industry to work on various technology pathways providing multiple choices to the consumers.
Shailesh Chandra, MD & CEO, Tata Motors Passenger Vehicles said that the continued recognition of zero-emission technologies reinforces the critical role of electrification in achieving India’s long-term decarbonisation objectives. The clarity and predictability provided by the framework will enable the industry to plan investments, accelerate innovation and offer customers an increasingly compelling range of cleaner mobility solutions, added Chandra.
Velusamy R, President - Automotive Business, M&M, “The targets are appropriately ambitious and provide a clear trajectory through 2031-32. We also welcome the inclusion of a compliance block, technology credits, cleaner-fuel benefits and super credits for EVs and other advanced technologies. At Mahindra, we are confident in our ability to meet these norms, backed by our sustained investments in technology, electrification and cleaner mobility.”
The CAFE norms, started from 2017, set a limit on average fuel consumption and CO2 emissions of a manufacturer's overall fleet with an aim to push carmakers to improve their overall fuel efficiency and reduce emissions. CAFE 2 began in 2022 and the next phase CAFE 3 is all set to start from April 2027.
