India is preparing to tighten fuel-efficiency norms for passenger vehicles once again. The Ministry of Power has released the latest draft of the Corporate Average Fuel Economy (CAFE) III regulations, which will govern fuel-consumption standards for passenger vehicles from 2027-28 to 2031-32. The draft is now open for public consultation before it is finalised.
While the latest notification introduces several refinements, the overall framework remains largely unchanged from the draft circulated to industry stakeholders in April this year. That April draft, however, was not placed in the public domain. Autocar Professional had reported on its key proposals, including the introduction of a market-based compliance mechanism, incentives for fuel-saving technologies and benefits for alternative fuels. The latest July draft largely retains those proposals while adding technical details, implementation timelines and an explanatory note.
Unlike the April draft, both the September 2025 draft and the July 2026 draft have been officially released for public consultation, allowing automakers, industry bodies and research organisations to study the proposals in detail and submit feedback before they are notified.
The new norms come at a time when India's passenger vehicle market is changing rapidly. SUVs account for a growing share of sales, hybrid technology is gaining acceptance, flex-fuel programmes are gathering pace, and electric vehicles continue to expand, although at a slower pace than initially expected. Instead of promoting one technology over another, the proposal looks to reward solutions that can reduce fuel consumption and carbon dioxide (CO2) emissions.
The objective of CAFE III remains the same as the earlier phases—to reduce the amount of fuel consumed by the country's passenger vehicle fleet. Lower fuel consumption not only reduces carbon emissions but also helps lower crude oil imports, an important objective for a country that depends heavily on imported petroleum.
Unlike emission regulations such as Bharat Stage (BS) norms, which control pollutants such as nitrogen oxides and particulate matter from individual vehicles, CAFE focuses on the average fuel efficiency of an automaker's entire passenger vehicle portfolio. That distinction is important because manufacturers are free to decide how they meet the targets, whether through better engines, lighter vehicles, hybrids, alternative fuels or electric vehicles.
Understanding CAFE and how the system works
CAFE stands for Corporate Average Fuel Economy. Rather than prescribing a fuel-efficiency target for every model, it calculates the average fuel consumption of all passenger vehicles sold by a manufacturer during a financial year.
In simple terms, every manufacturer receives an annual fuel-consumption target based on the average weight of the vehicles it sells. If the company's fleet performs better than the prescribed target, it complies with the regulation. If not, it must make up the shortfall using the compliance mechanisms available under the framework.
India introduced the first phase of CAFE norms in 2017-18, followed by CAFE II from 2022-23. The proposed CAFE III framework will cover the period from 2027-28 to 2031-32. Each successive phase has tightened fuel-efficiency requirements while allowing manufacturers flexibility in choosing the technologies needed to achieve them.
The calculation is based on an equation:
Annual Average Fuel Consumption Standard = a × (W – b) + c
Here:
- 'a' is the slope or constant multiplier.
- 'W' is the weighted average unladen mass of all passenger vehicles sold by a manufacturer.
- 'b' is the industry's reference average vehicle weight.
- 'c' is another constant that changes every year.
The formula recognises that heavier vehicles naturally consume more fuel than lighter ones. Instead of giving every manufacturer the same target, CAFE adjusts the target according to the average weight of the vehicles sold.
According to an analysis of the latest draft by The Energy and Resources Institute (TERI), the proposed framework reduces the value of the slope (a) from 0.002 under CAFE II to 0.00158 in 2027-28, gradually declining to 0.00131 by 2031-32. At the same time, the industry's average weight (b) increases from 1,082 kg under CAFE II to 1,229 kg under CAFE III.
TERI also estimates that the corresponding corporate average CO2 emissions at the reference weight tighten from 94.76 gCO2/km in 2027-28 to 76.77 gCO2/km by 2031-32, before applying Carbon Neutrality Factors. According to the institute, this represents roughly a 21% increase in stringency over CAFE II in the first year, rising to nearly 34% by 2031-32.
Meanwhile, rating agency ICRA estimates that the target will begin at 94.8 g of CO2 per km in 2027-28 and tighten steadily to 78.9 g/km by 2031-32.
ICRA expects the progressively tighter CAFE III emission targets to steadily reduce fleet-average fuel consumption over the five-year compliance period. The rating agency said the stricter norms would lead to higher annual fuel savings even as passenger vehicle sales continue to grow.
It estimates that the improved fuel-efficiency standards could generate cumulative fuel savings worth around Rs 38,000 crore during the CAFE III period, highlighting the potential economic benefits of lower fuel consumption alongside reduced emissions.
What's new in the latest draft?
At first glance, the July 2026 draft looks very similar to the version circulated to stakeholders in April. That is because most of the key proposals—including the fuel-efficiency targets, Carbon Neutrality Factors (CNFs), super credits and the new compliance mechanism—have been retained.
The latest draft mainly builds on the April proposal by adding detailed technical criteria for fuel-saving technologies, refining definitions, advancing compliance timelines and including an explanatory note on the intent behind the regulations.
The bigger comparison, however, is with the September 2025 draft, which was the last version available in the public domain before the latest notification. One of the most significant changes is the way fuel-efficiency targets are calculated for vehicles of different weights.
The September 2025 proposal used a single slope value of 0.002 throughout the five-year period and a reference vehicle weight of 1,170 kg. The revised draft lowers the slope every year, beginning at 0.00158 in FY2027-28 and reaching 0.00131 by 2031-32, while increasing the reference weight to 1,229 kg.
According to TERI, these changes make the proposed regulation relatively less stringent for manufacturers whose portfolios are dominated by lighter passenger vehicles, while increasing compliance pressure on companies with heavier fleets, particularly those with a larger share of SUVs. In other words, the target line becomes flatter, reducing the advantage that heavier vehicles previously enjoyed under the weight-based formula.
The revised draft also reflects the government's effort to move away from a purely penalty-based approach to one that offers manufacturers multiple compliance options.
Earlier CAFE regulations largely required companies to meet their prescribed fleet-average fuel-consumption targets. CAFE III introduces a market-based mechanism under which manufacturers that outperform their targets generate credits, while those falling short accumulate debits. These are recorded in a digital compliance account, or "passbook," maintained for every manufacturer.
Manufacturers with surplus credits can retain them for future compliance periods or exchange them with other manufacturers through voluntary pooling. If a company is still left with a compliance deficit after using available credits, it can buy credits from the Bureau of Energy Efficiency (BEE) at government-notified prices. The buyout price starts at Rs 2,500 per gram of CO2 per kilometre in FY2027-28 and gradually rises to Rs 4,500 by FY2031-32.
Carbon Neutrality Factors & Super Credits
One of the defining features of the proposed CAFE III framework is that it recognises multiple technology pathways instead of focusing only on pure electric vehicles.
This is where the Carbon Neutrality Factor (CNF) comes in. The draft allows manufacturers to discount a portion of a vehicle's declared CO2 emissions while calculating compliance.
Under the proposal, vehicles running on E20 or higher ethanol-blended petrol, including strong hybrids and plug-in hybrids using such fuel, qualify for an 8% Carbon Neutrality Factor. Flex-fuel ethanol vehicles and flex-fuel strong hybrids receive a much larger 22.3% benefit.
CNG vehicles receive a 5% CNF, or the prevailing compressed biogas blending percentage notified by the government, whichever is higher. Diesel vehicles will also receive a benefit linked to future biodiesel blending levels.
Alongside CNFs, the draft retains the system of super credits, which gives additional weight to cleaner vehicle technologies while calculating a manufacturer's fleet average.
Instead of counting each vehicle only once, certain vehicle categories are multiplied by a specified factor. Battery electric vehicles and Range Extended Electric Vehicles (REEVs) receive the highest multiplier of 3.0. Plug-in hybrids and flex-fuel strong hybrids receive a multiplier of 2.5, strong hybrids receive a multiplier of 1.6, while flex-fuel ethanol vehicles receive a multiplier of 1.1.
Together, CNFs and super credits underline one of the government's key policy messages. Rather than backing a single technology, CAFE III seeks to promote a mix of battery electric vehicles, hybrids, ethanol-based fuels, flex-fuel vehicles, CNG and other low-carbon options, allowing manufacturers to choose the most suitable path for improving fleet fuel efficiency.
Push for Fuel-saving Tech
One of the biggest additions in the latest CAFE III draft is the emphasis on technologies that improve fuel efficiency, even in conventional petrol and diesel vehicles. The draft allows manufacturers to claim compliance benefits for introducing certified fuel-saving technologies across their model range.
Under the proposal, each eligible technology can earn a benefit equivalent to 1 gram of CO2 per kilometre, subject to an overall cap of 9 gCO2/km for a vehicle until detailed government-approved certification procedures are put in place.
The list is extensive. It includes automatic start-stop systems that switch off the engine while idling, regenerative braking systems that recover energy during deceleration, tyre-pressure monitoring systems, six-speed or higher transmissions, efficient alternators, motor-generators used in mild hybrids, LED lighting, advanced glazing, electric water pumps, high-efficiency air-conditioning systems, solar-reflective paint and pulse-width-modulated radiator fans.
Some experts, however, believe the list may evolve before the regulations are finalised. TERI, in its assessment of the draft, notes that technologies such as automatic start-stop systems have already become common in many passenger vehicles. It argues that future incentives should increasingly reward newer technologies capable of delivering additional efficiency gains rather than those that are already widely adopted.
Preparing for the shift to WLTP
Another important feature of the proposed framework is the gradual transition to the Worldwide Harmonised Light Vehicles Test Procedure (WLTP).
At present, India's fuel-efficiency standards are based on the Modified Indian Driving Cycle (MIDC). Under the new draft, manufacturers will continue to comply using MIDC, but they will also have to report the fuel consumption and CO2 emissions of every model under WLTP. The government will later notify a conversion factor that will allow future compliance to move to the global test cycle.
The dual-reporting requirement is intended to help regulators collect real-world data before making a complete transition. It also aligns India more closely with international testing practices, which many global automakers already use in other markets.
What next?
The draft notification is currently open for stakeholder comments before it is finalised. While some provisions may still be refined following industry feedback, the broad direction of policy appears settled.
The proposal indicates that the government wants the industry to move towards tighter fuel-efficiency standards without mandating a single technology pathway. Instead, it looks to reward manufacturers that improve efficiency through cleaner fuels, hybrid technologies, battery electric vehicles and a growing range of fuel-saving engineering solutions.
For automakers, compliance will become progressively more demanding over the next five years. At the same time, the introduction of credits, trading, pooling and incentives for multiple technologies gives companies greater flexibility in deciding how they meet those targets.
Brokerage Nomura believes the proposed CAFE III targets are achievable for most major passenger vehicle manufacturers, although the level of electrification required will vary widely across companies. Based on its estimates for the financial year 2027-28, Maruti Suzuki would need electric vehicles to account for around 1-3% of its sales to meet the norms, while Hyundai and Tata Motors Passenger Vehicles would require an EV mix of 4-7% each. Mahindra & Mahindra, given its product portfolio, would need a significantly higher EV penetration of 13-15%, according to the brokerage.
Nomura, however, expects automakers such as Nissan, Renault and Volkswagen to accelerate their EV launches to comply with the proposed standards. It also estimates that the required EV share for all manufacturers is likely to increase by around 1-2 percentage points every year over the five-year CAFE III period as emission targets become progressively more stringent.