CAFE-III norms locked, may make EVs cheaper but ICE vehicles costlier

Threefold sales weightage for battery EVs could encourage affordable models, while carmakers may price some higher-emission petrol and diesel vehicles higher to meet targets

India’s new fuel-efficiency norms could push carmakers to introduce smaller and cheaper electric vehicles (EVs), while potentially making larger, higher-emission petrol and diesel vehicles more expensive, as manufacturers rejig product and pricing strategies to meet tighter fleet-average targets. 

The Corporate Average Fuel Economy (CAFE)-III framework, notified late on Tuesday, will apply from April 2027 to March 2032.

Industry executives said the framework strengthens the case for affordable EVs that can generate higher volumes. Battery EVs (BEVs) receive three times the sales weightage in fleet-average compliance calculations, making EV volumes particularly valuable for manufacturers seeking to offset emissions from their internal-combustion engine (ICE) portfolios. 

Affordable EVs could gain 

Executives at two automakers said this could encourage manufacturers to look more closely at sub-₹10 lakh EVs, where lower prices could help drive volumes. Around 65 per cent of India’s passenger vehicle market is below ₹12 lakh, but EV penetration in this segment is only around 1.5-2 per cent. Affordable options remain limited to models such as the Tata Tiago.ev and Punch.ev, and JSW MG Motor India’s Comet EV. JATO Dynamics data for FY26 showed that sub-₹10 lakh models accounted for just 6 per cent of electric passenger-vehicle sales, against 35.7 per cent for the ₹20-30 lakh segment. 

“Entry-level EVs are likely to receive particular attention, as their affordability could make them easier to sell in larger volumes and cross-subsidise,” said Anurag Singh of Primus Partners. 

Ravi Bhatia, president, JATO Dynamics, also pointed to the affordability constraint. “A regulation that assumes EVs are already the mass product is ahead of the showroom,” he said. A harder rule, Bhatia argued, could have pushed up prices of small petrol cars, hurt first-time buyers and still not created cheap EVs “by decree”. 

The other side of the equation could be higher prices for some ICE vehicles.  

Singh said manufacturers seeking to avoid penalties could reduce the number of high-emission vehicles, price them higher and cross-subsidise EVs. “Petrol and diesel enthusiasts may have to pay more for their preferred cars,” he said. 

Multiple routes to compliance 

CAFE-III seeks a 16.7 per cent improvement in fleet fuel efficiency over five years. The fuel-consumption benchmark tightens from 3.996 litres per 100 km in 2027-28 to 3.3273 litres per 100 km in 2031-32. 

The framework provides multiple routes to compliance, including electrification, alternative fuels, fuel-saving technologies and compliance credits. 

EY-Parthenon partners Som Kapoor, Pratik Shah, and Aneesh Ajayan said manufacturers were likely to increase fuel-efficiency technologies in conventional ICE vehicles while expanding hybrid, flex-fuel and electric offerings. For predominantly ICE-led manufacturers, electrified and alternative-fuel powertrains would become increasingly important to their portfolio mix, they said.

The broader industry welcomed the framework. Society of Indian Automobile Manufacturers (Siam) President Shenu Agarwal described the annual targets as “aggressive”, while saying the multiple technology pathways provided manufacturers greater predictability for investment and innovation. 

Tata Motors Passenger Vehicles Managing Director (MD) and Chief Executive Officer (CEO) Shailesh Chandra said the recognition of zero-emission technologies reinforced the role of electrification in India’s long-term decarbonisation objectives. M&M’s Automotive Business President R Velusamy called the framework a “pragmatic balance” between environmental requirements and what the industry can achieve.

 

Maruti Suzuki stressed the technology-neutral approach. Rahul Bharti, senior executive officer, corporate affairs, said the regulation recognises multiple powertrains and fuels, encouraging “multi-faceted R&D and innovation”. Toyota Kirloskar Motor Country Head and Executive Vice-President Vikram Gulati similarly backed the multi-pathway approach.

 

For Škoda Auto Volkswagen India, CAFE-III will make fleet-wide efficiency “an even sharper focus”, MD and CEO Piyush Arora said. Hyundai Motor India MD and CEO Tarun Garg said the company has already committed to having more than 50 per cent of its portfolio from greener technologies such as EVs, hybrids and CNG over the next four to five years.

 

Is the EV push enough? 

The flexibility in the framework has also drawn criticism from those who believe the regulations should have pushed the industry more decisively towards EVs. Former NITI Aayog CEO Amitabh Kant called the final norms a “huge missed opportunity” and said they were “backward looking at worst and status quoist at best”.

 

“The regulation follows the industry instead of leading it. EVs become one option among many, when they should be the destination,” Kant said in a social media post.

 

He argued that an 11 per cent electric-car target by 2032 lacked ambition when EVs were already close to 8 per cent of car sales this financial year. Kant also questioned the provision allowing the Bureau of Energy Efficiency (BEE) to sell compliance credits, saying: “A regulator can’t be a player in the market it regulates.”

 

REEVs get a leg-up 

The framework could also create an opening for technologies that have so far had little presence in India’s passenger vehicle market.

 

BEVs and range-extended EVs (REEVs) receive a volume derogation factor, or super credit, of 3.0, while plug-in hybrids (PHEVs) and eligible strong hybrids receive 2.5. This gives manufacturers an incentive to deploy these technologies as they manage their fleet averages.

 

JSW Motors CEO Ranjan Nayak said the higher factor for BEVs and REEVs “appropriately recognises the greater contribution of battery-led technologies”.

 

The regulatory support comes as the JSW group is already looking at range-extended technology. JSW MG Motor India Chairman Parth Jindal recently said: “EREV is definitely something that we would like to bring. We can bring it, and we want to bring it.”

 

In a REEV, the wheels are driven by an electric motor, while a smaller ICE acts as a generator to recharge the battery, addressing concerns around driving range. 

 

Other pathways get support 

EV penetration is already higher in the luxury segment. At Mercedes-Benz India, BEVs accounted for 14 per cent of overall sales in Q2 2026 and 25 per cent of top-end vehicle sales in the first half of the calendar year. MD and CEO Santosh Iyer said CAFE-III’s recognition of BEVs and PHEVs would further support adoption of new-energy vehicles as the company expands its portfolio across both technologies.

 

CAFE-III also introduces a Carbon Neutrality Factor recognising renewable and low-carbon fuels, including ethanol-blended petrol, biofuels and compressed biogas, while expanding the number of recognised fuel-conservation technologies from four to 12.

 

All India Distillers’ Association President Vijendra Singh said recognition of ethanol and flex-fuel vehicles would provide greater policy visibility for biofuels and give manufacturers a clearer framework to plan flex-fuel technologies.

 

Manufacturers beating their targets can generate credits, while those with a compliance gap can use eligible carry-forwards, trade credits with other manufacturers or purchase them through a BEE-administered buyout mechanism. 

Fresh road map for automakers 

• The Corporate Average Fuel Economy (CAFE)-III framework, notified by the Ministry of Power late Tuesday, will apply from April 2027 to March 2032
• Small-car carve-out for CO₂ target calculations dropped
• Lighter cars get softer target, a key demand by Maruti Suzuki
• Heavier fleets face higher permitted fuel consumption
• EVs retain super-credits, giving additional compliance value to cleaner vehicles 
• Credit trading allowed, to help carmakers meet targets