CAFE III Eases Small-Car Burden Through Flatter Target Curve

India's final Corporate Average Fuel Economy norms have dropped a proposed special concession for small cars, but changes to the formula could still make compliance easier for manufacturers with lighter vehicles.

The CAFE III framework notified by the Ministry of Power today continues to link a carmaker's fuel-efficiency target to the average weight of the vehicles it sells. The government has now made this target curve flatter, which means lighter vehicles get relatively softer targets than under the earlier proposal, while heavier vehicles are required to improve efficiency more.

This is different from the September 2025 draft, which had proposed a direct benefit for certain small petrol cars. Cars under 4 metres in length, with engines of up to 1,200cc and weighing less than 909kg, could have received an additional 3g CO2/km relaxation. The proposal had divided the auto industry.

The final norms do not create a separate category for small cars. Instead, the government has changed the formula itself. A small car that would have faced a target of 54.1g CO2/km after the 3g/km relaxation under the September 2025 draft would now face a target of 63.7g/km, even without the separate concession.

In simple terms, the government has removed the special small-car benefit but made the overall formula more favourable to lighter vehicles. CAFE III also does not set a separate target for every model.

Compliance is calculated for a manufacturer's entire vehicle portfolio, based on the average weight and fuel consumption of the cars it sells.

From Special Relief to a Softer Formula

The treatment of small cars was one of the biggest points of disagreement during the CAFE III consultations.

Maruti Suzuki and Toyota had supported additional relief for small cars, arguing that lighter vehicles consume less fuel and should not be treated in the same way as heavier vehicles. Tata Motors, Mahindra & Mahindra, Hyundai and Kia had opposed a separate benefit for small cars.

The September 2025 proposal was particularly relevant for Maruti Suzuki, which accounted for about 95% of cars that met the proposed definition of under 4 metres, below 1,200cc and under 909kg.

That dedicated benefit was dropped in subsequent drafts. Instead, the government reduced the slope of the CAFE target curve, increased the reference vehicle weight and raised the baseline fuel-consumption constants. 

For FY28, the slope of the target curve was reduced to 0.00158 from 0.002 in the September proposal. The reference vehicle weight was raised to 1,229kg from 1,170kg, while the base fuel-consumption number was also increased. The effect is a flatter curve, which gives relatively more relief to lighter vehicles than the earlier proposal.

This also means the impact will vary across carmakers. A company that sells more hatchbacks and compact cars could see a different compliance burden from one whose sales are dominated by larger SUVs. However, actual compliance will also depend on fuel efficiency, powertrain mix and sales volumes.

Small Cars Begin to Recover

The regulatory change comes at a time when India's entry-level car market is showing early signs of recovery after several years of decline.

Entry-level hatchbacks accounted for 3.3% of passenger vehicle sales in the first five months of FY27, up from 2.3% in the first half of FY26 before the GST reduction took effect in September last year, according to JATO Dynamics.

The broader hatchback segment, however, remained at around 21%, while SUVs increased their share to 58% from 56%.

The recovery followed a sharp GST cut on small cars last September. The tax rate on eligible small cars fell to 18% from 28%, making them more affordable.

Maruti Suzuki, which has the largest presence in the segment, said its small-car sales increased 58% this year, while entry-car volumes grew 96%. Even so, the recovery is coming from a much smaller base.

Entry-level hatchbacks had a share of nearly 8% five years ago, according to JATO data. At the broader level, hatchbacks accounted for about 46% of India's passenger vehicle market in FY19, but their share had fallen to roughly 23% by FY26. Utility vehicles, meanwhile, had risen to around 68%.

So while CAFE III may reduce one source of regulatory pressure, it does not change the broader shift in customer preference towards SUVs and crossovers.

Affordability Remains the Bigger Test

The debate over small cars and CAFE rules is closely linked to affordability. Small cars are more sensitive to additional regulatory and technology costs because they sell at much lower prices than larger SUVs.

Maruti has repeatedly argued that rising regulatory costs and input prices contributed to the decline in entry-level demand. The company has said that small-car prices increased faster than the income levels of buyers because of higher commodity costs and new regulatory requirements.

CAFE III gives manufacturers several ways to improve fuel efficiency without relying only on expensive hybrid or electric technology.

Carmakers can claim benefits for technologies such as start-stop systems, tyre-pressure monitoring, regenerative braking, six-speed transmissions, efficient alternators, 12V and 48V systems, LED lighting, and more efficient air-conditioning systems. The total benefit from these technologies can go up to 9g CO2/km.

For small-car makers, however, the key question is how many of these features can be added without making the vehicle too expensive. A ₹20,000-₹30,000 cost increase may be easier to absorb on a premium SUV than on an entry hatchback.

The flatter CAFE curve could therefore give manufacturers more room to improve small cars gradually without adding too much cost.

CNG and E20 Offer Other Routes

The final rules also give manufacturers other ways to improve their fleet performance.

E20 petrol vehicles receive an 8% carbon-neutrality benefit, while CNG vehicles get a 5% benefit or the notified CBG blending percentage, whichever is higher. Flex-fuel ethanol vehicles receive a 22.3% benefit. This could make CNG particularly relevant for small cars, given its strong presence in the mass market.

Battery electric vehicles receive a 3x super-credit, strong hybrids 1.6x, and plug-in hybrids or flex-fuel strong hybrids 2.5x.

This means manufacturers do not have to depend on one technology to meet CAFE targets. They can combine lighter petrol cars, CNG, ethanol, fuel-saving technologies, hybrids and EVs across their portfolios.

For Maruti Suzuki, which has a large small-car portfolio and is also expanding CNG, hybrid and electric offerings, this creates several ways to improve its overall fleet performance.

Relief Does Not Mean an Easy Target

The change in formula should also not be interpreted as small cars being allowed to become less efficient.

CAFE III still tightens the overall fuel-consumption benchmark every year. At the reference fleet weight of 1,229kg, the standard declines from 3.996 litres/100km in FY28 to 3.3273 litres/100km in FY32, an improvement of about 16.7%, according to the government's summary. 

The rules also remain weight-sensitive. A lighter fleet receives a lower absolute permitted fuel-consumption target than a heavier fleet because the formula's slope remains positive.

What has changed is the degree of stringency relative to the earlier CAFE III proposal, with the flatter curve giving comparatively greater easing to lighter vehicles.

That nuance matters because the final framework does not simply reward manufacturers for selling small cars. It reduces the difference in stringency that had become a source of disagreement during the consultation process.