The government's decision to waive nearly ₹2,700 crore in penalties imposed on some passenger vehicle manufacturers for failing to meet fuel-efficiency targets under the second phase of the Corporate Average Fuel Efficiency (CAFE-2) norms is being viewed as major relief to automakers, including
Hyundai, Kia and Mahindra. But the step has also triggered discussion on whether easing regulatory penalties would weaken India's clean-mobility agenda, or is it a pragmatic policy correction ahead of a more robust CAFE-3 framework.
While the waiver removes a sizeable financial burden from the industry, experts remain divided over whether it undermines the credibility of India's fuel-efficiency regime or simply resets the compliance framework before the next phase of CAFE norms.
The waiver also comes at a time when India is preparing to roll out CAFE-3, which is expected to tighten fleet-wide fuel-efficiency standards while introducing a more flexible compliance framework, including a credit-trading mechanism.
Why were CAFE-2 penalties imposed?
CAFE norms were introduced to improve the average fuel efficiency of passenger vehicle fleets and reduce emissions from the transport sector.
Ajay Mathur, former director general of the Bureau of Energy Efficiency (BEE) and currently a professor at IIT Delhi's School of Public Policy, explained that the norms apply to an automaker's entire fleet of passenger vehicles, including petrol, diesel, CNG, LPG, hybrid and electric models, rather than individual vehicles. Manufacturers that fail to meet the prescribed fleet-average targets are liable to penalties under the Energy Conservation Act.
The framework was intended to encourage manufacturers to improve engine efficiency, introduce hybrid and electric vehicles, adopt lightweight materials and optimise product portfolios to reduce average emissions.
Why did the government waive the penalties?
While the government has not publicly detailed its rationale, the industry had long argued that implementation challenges, changing consumer preferences and evolving market conditions made compliance difficult.
Over the last few years, India's passenger vehicle market has witnessed a sharp shift towards SUVs. While CAFE targets are weight-based, the growing share of larger and heavier vehicles has made it more challenging for manufacturers to improve the average fuel efficiency of their fleets, increasing the need for investments in fuel-efficient technologies, hybrids and EVs. At the same time, EV adoption has remained relatively modest, limiting one of the pathways available to manufacturers to improve fleet-wide emissions performance.
Automakers had also sought a review of the penalty calculations and a more flexible compliance mechanism ahead of CAFE-3.
The government now appears to be moving towards such a system by allowing manufacturers to buy carbon credits under the proposed framework instead of facing immediate monetary penalties for every reporting cycle, experts say.
Does the waiver weaken India's EV push?
For some, the decision risks weakening one of the few regulatory mechanisms that nudged manufacturers towards cleaner technologies.
Mathur believes waiving penalties "weakens the effectiveness and credibility of future CAFE norms". According to him, newer norms no longer provide the same regulatory advantage to smaller cars as earlier versions did. Although the targets continue to be weight-based, SUVs are relatively less disadvantaged, while smaller vehicles lose part of the compliance benefit they previously enjoyed.
An official familiar with the matter backed those concerns. "There is definitely a credibility risk associated with waiving the penalties, particularly when OEMs were well aware of the regulatory requirement of improving efficiency," the official told Business Standard.
The official said upfront waivers of this nature are uncommon internationally and could create the perception that manufacturers have greater negotiating leverage over future regulations.
They also maintained that the penalty calculation mechanism was already clearly laid down under the Energy Conservation Act and that modifying the compliance methodology, rather than waiving penalties altogether, could have been another option.
However, others argue that the waiver is unlikely to majorly alter the industry's long-term electrification trajectory.
Vasudha Madhavan, founder and chief executive of Ostara Advisors, said EV investments today are driven by a much broader set of factors than CAFE norms alone.
"EV investments today are driven by tightening global emissions regulations, corporate decarbonisation commitments, government incentives, advancements in battery technology, improving charging infrastructure and evolving consumer preferences," she said.
According to her, while CAFE norms remain an important regulatory signal, they are only one part of the investment equation. The larger risk lies in policy uncertainty rather than the waiver itself. As long as the government provides a credible roadmap for CAFE-3, manufacturers are likely to continue investing in EVs, hybrids and other low-emission technologies.
Was the waiver a policy correction?
Som Kapoor, partner and leader – Automotive, Future of Mobility at EY-Parthenon India, believes the issue is more nuanced. According to him, such decisions are typically taken after consultations with industry stakeholders and would likely have been guided by the objective of ensuring the success of CAFE-3.
"Their agenda is to ensure that the country moves in a direction where CAFE-3 norms lead to cleaner mobility," he said.
Kapoor nevertheless stressed that CAFE norms remain an important policy instrument because they provide manufacturers with adequate time and direction to transition towards cleaner mobility.
What role could credit trading play?
One of the biggest changes expected under CAFE-3 is the introduction of a credit banking and trading mechanism.
Instead of relying solely on financial penalties, manufacturers exceeding efficiency targets could generate surplus credits, while companies falling short could purchase those credits to meet compliance requirements.
Experts say such a system could provide flexibility without weakening overall environmental objectives, provided it is designed carefully.
"A well-designed credit-trading framework can achieve both objectives," Madhavan said.
Manufacturers investing early in EVs, hybrids and highly efficient internal combustion engine technologies could monetise surplus credits, creating a financial incentive for innovation. At the same time, companies facing temporary technology or product-cycle constraints would gain greater flexibility through credit purchases instead of immediate penalties.
However, Madhavan cautioned that the framework would require strict safeguards, including transparent monitoring, ambitious overall targets and limits on excessive reliance on purchased credits.
Arjun Sinha, partner at AP & Partners, similarly argued that credit trading should complement rather than replace regulatory enforcement.
"The real objective should be to establish a clear national direction of travel—towards lower petroleum dependence and greater energy security—while giving manufacturers flexibility in how they achieve that outcome," he said.
According to Sinha, India should avoid simply replicating either the US or European model and instead develop a framework suited to its own industrial priorities, energy-security goals and stage of economic development.
Industry wants certainty ahead of CAFE-3
The industry's focus now appears to be shifting from CAFE-2 penalties to the design of CAFE-3.
In its FY26 annual report, Hero MotoCorp said it is engaging with policymakers through the Society of Indian Automobile Manufacturers (SIAM) to advocate "realistic and technically feasible targets" for the two-wheeler segment.
The company said while tighter fuel-efficiency norms are necessary to reduce emissions and strengthen energy security, abrupt implementation could force rushed product redesigns, increase compliance costs and expose manufacturers to penalties. It also noted that product development cycles typically span two to four years, making regulatory certainty critical for planning.
Business Standard reached out to Kia and Tata Passenger Electric Mobility for comments. The companies did not respond to queries till the time of publication.
The waiver has undoubtedly eased financial pressure on automakers, but it has also raised questions about how India intends to enforce future fuel-efficiency regulations.
For some experts, the decision risks weakening regulatory credibility by signalling that penalties may ultimately be negotiable. Others view it as a one-time adjustment that, if followed by a transparent and predictable CAFE-3 framework, need not derail India's long-term clean-mobility ambitions.
 "CAFE-2 penalty waiver: Relief for automakers or setback to India's EV push?")
