Proposed new CAFE norms spark a big vs small car debate in India

Throw tax rates, complex regulations and shifting demand into the mix, and things start to get complicated for automakers

When new emission norms came into force in April 2020, many automakers took older models off the market, realising that upgrading these ageing cars to new lower-emission engines would put them beyond the pockets of buyers.

 

Back in 2020 it was the Bharat Stage-6 or BS6 norms that got carmakers worried. This time around, the proposed introduction of new Corporate Average Fuel Efficiency or CAFE norms — particularly a proposed weight-based carve-out for smaller cars — has sparked an industry-wide debate.

 

While BS-6 caps pollutants per vehicle, CAFE limits average carbon dioxide emissions across a manufacturer’s entire fleet. Both have the power to reshape a company’s product lineup in India. The third edition of CAFE, or CAFE-3, is set to be introduced within the next few weeks.

 

CAFE debate

 

The CAFE framework sets average carbon-dioxide emission targets that each automaker’s fleet must meet, measured in grams of carbon dioxide emitted per kilometre (g/km) for every model sold. Failure to meet the target can invite stiff penalties.

 

The Bureau of Energy Efficiency (BEE) published the first draft of CAFE-3 norms in June last year, saying they would apply between FY28 and FY32. The Society of Indian Automobile Manufacturers (Siam), after discussions with its members, submitted its initial comments in December 2024, seeking several changes. A few months later, Maruti Suzuki, India’s largest carmaker and the biggest small-car seller, independently approached the BEE asking it to exempt small cars from the norms, on the basis of their lower weight. This move sharply divided the industry.

 

The BEE on September 25 this year issued a second draft, incorporating weight-based exemption for the first time. According to this draft, petrol vehicles weighing up to 909 kg, with an engine capacity below 1,200 cc and a length under 4,000 mm, would receive an additional 3g/km deduction in their declared carbon-dioxide emission.

 

Under CAFE-2, a 900-kg car — typically a small four-wheeler — gets a target of about 104 g/km, while a 1,500-kg car gets about 133g/km. Under CAFE-3 (for the year FY28), the same cars face tougher targets of about 76g/km and 104g/km, respectively.

 

In absolute terms, both types of cars must cut emissions by about 28-29 g/km. But in percentage terms, the lighter 900-kg car must reduce emissions by 27 per cent, while the 1,500-kg car needs a 22 per cent cut. And the target becomes progressively stringent for both — but, once again, the tightening is sharper for the

900-kg car than for the 1500-kg car.

 

“You cannot discriminate against smaller and lighter cars, which are affordable and are for the masses, vis-à-vis heavier, expensive cars, which are for the rich,” Maruti Suzuki Chairman R C Bhargava said on November 11. Moreover, in regions like Europe, the CAFE targets for cars under 1,100 kg were actually relaxed in the 2025-2029 period compared to 2021-2024, rather than made stricter.  

 

Small vs big

 

However, most carmakers in India don’t like weight-based exemption for small cars under CAFE-3. Executives cite several reasons, but the core concern is that such a carve-out could set a legal precedent for other demands.

 

The chief legal counsel of a major carmaker argued, “If a weight-based exemption is granted under CAFE-3, what stops a company from going to the GST Council next and asking for all cars under 909 kg to be put under the 5 per cent GST bracket? And then going to state governments asking for full road tax relief for the same category, because CAFE-3 has now legally defined it?”

 

The counsel also pointed to Europe: “In Europe, for the 2025-29 period, the main formula was changed in a way that eased the target for lighter cars. It did not come from separate exemption or carve out for small cars. Those who want relief for small cars in India should have similarly asked for a complete overhaul in the formula itself instead of asking for a carve out on the basis of weight.”

 

Making things more complicated, the current GST regime defines a “small car” not by weight but by length and engine capacity. By this definition small cars should be up to 4,000 mm in length, with engines up to 1,200 cc (petrol/LPG/CNG) or 1,500 cc (diesel). These attract 18 per cent GST.

 

Concern over setting a legal precedent was evident when Shailesh Chandra, managing director and chief executive officer of Tata Motors Passenger Vehicles and Tata Passenger Electric Mobility, strongly opposed the proposal on November 12. “There has been an effort to define a category of small passenger vehicles based on weight, which is arbitrary. We do not support this,” he said at a press conference.

 

Chandra added a safety dimension as well. “Such a criterion (weight-based exemption for small cars) would conflict with one of the core objectives of the policy and undermine the significant progress the industry has made in improving safety standards and protection.”

 

Weight is closely linked to safety because the features that make cars safer — stronger body structures, side-impact beams, larger crumple zones, and additional airbags — also add mass. As a result, cars that meet higher safety standards tend to be heavier. All cars approved by India’s crash-test rating programme weigh more than 909 kg — hence the reference to this particular weight by the legal counsel cited above.

 

Chandra, who also heads Siam, questioned the assumption that a car’s weight is directly related to its price, noting that several models near the proposed 909-kg threshold were already priced around ~10 lakh. With minor reductions in weight — by cutting safety-related components, for instance — these pricier vehicles could still fit within the proposed CAFE-3 limit, meaning higher-cost cars could end up qualifying for the exemption.

 

Enter SUVs

 

The debate comes against the backdrop of first-time buyers reportedly ditching small cars for compact SUVs.

 

Sales of sedans and hatchbacks had been falling for years until the government cut the goods and services tax (GST) on them. From September 22, the GST on cars under four metres in length with petrol engines up to 1,200 cc or diesel engines up to 1,500 cc was reduced from 29-31 per cent to a flat 18 per cent. As a result, the fall in sales of sedans and hatchbacks was arrested in October, with 116,601 units sold, a year-on-year (YoY) rise of 8.4 per cent.

 

However, utility vehicles (UVs) — they include SUVs — remain more popular. In October, UV sales reached 269,467 units, up 19.3 per cent YoY.

 

The GST on cars over four metres long was also cut from 45–50 per cent to a 40 per cent.

 

The rising popularity of SUVs — especially compact SUVs priced close to small cars — has raised a new debate among automakers: is the shift from hatchbacks to compact SUVs by first-time buyers now decisive, despite the GST cut on small sedans and hatchbacks?

 

On October 31, Maruti Suzuki’s Bhargava said that small car sales had surged sharply after the GST rate cuts, adding that the rebound could even push other carmakers to bring hatchbacks back into their product line-ups.

 

Just four days later, Hyundai Motor India’s chief operating officer Tarun Garg stated that GST reforms had given a fillip to SUV sales while the share of hatchbacks and sedans in overall passenger vehicle (PV) sales in India continued to shrink. Hyundai is India’s second biggest seller of hatchbacks and sedans after Maruti Suzuki.

 

“India will always have a market for hatchback cars. However, the new growth will only come from SUVs. We are a full range OEM (original equipment maker) right now and we will remain so in the coming years, but the majority of our launches in the coming years would be in the SUV segment,” Garg noted. He added that the share of first-time buyers choosing compact SUVs such as the Hyundai Exter or Venue over hatchbacks has continued to rise even after the GST rate cut for small cars.

 

Chandra said CAFE-3 should not be at odds with the evolving consumer preference for SUVs. Even within the sub 4-metre segment — small cars as defined under GST — buyers are increasingly choosing compact SUVs. “This shift reflects evolving customer aspirations and their clear preference for safer, feature-rich vehicles at nearly the same price,” he said.

 

This debate over consumer preference — whether first-time buyers are naturally gravitating toward compact SUVs for their space and features, or whether two-wheeler owners are simply not moving to cars because hatchbacks remain unaffordable — is also weighing on BEE officials as they prepare the final notification for the CAFE-3 norms, sources said.

 

This is not an easy task, as is evident from the sharp differences of opinion within the car industry.

 

It is also clear that whatever the final notification says, it won’t satisfy everyone.