At the heart of the dispute was a seemingly simple question: Should India’s fuel-efficiency rules provide additional relief to small and light cars, or should all vehicles be governed by the same framework? The answer changed quite a few times between the first draft of the Corporate Average Fuel Economy (CAFE)-3 norms in June 2024 and the final notification on September 29.
The government has now settled the issue by dropping a special concession for cars weighing up to 909 kg — a strong demand by leading small carmaker Maruti Suzuki India Ltd (MSIL) — while changing the main CAFE formula itself to give relatively softer targets to lighter fleets and tougher targets to heavier ones. The outcome is important because the government has effectively addressed the small carmakers’ argument without creating a separate regulatory category for them.
What is CAFE?
CAFE regulates the average carbon dioxide (CO2) emissions across an automaker’s entire passenger vehicle (PV) fleet.
The target is measured in grams of CO2 per kilometre. A manufacturer does not have to make every model meet the same limit. Its target is calculated using the weighted average weight of the vehicles it sells — the manufacturer’s average emissions across its entire fleet must remain within that target.
This formula means heavier fleets get a higher permitted CO2 emission level than lighter fleets. The system, therefore, has a direct impact on product planning. Manufacturers can comply by improving engine efficiency, increasing sales of electric and hybrid vehicles, or changing the composition of their fleet. CAFE-3 will apply from April 2027 to March 2032.
The fight starts
The Bureau of Energy Efficiency (BEE), under the Ministry of Power, released the first CAFE-3 draft in June 2024.
The proposal envisaged a tougher fuel-efficiency regime, including a 1,170-kg reference weight and a CAFE target of 91.7 grams of CO2 per km under the Worldwide Harmonised Light Vehicles Test Procedure (WLTP). The Society of Indian Automobile Manufacturers (Siam) submitted its initial comments in December 2024.
But the debate changed direction when Maruti Suzuki, India’s largest carmaker and dominant seller of small cars, separately approached the BEE seeking relief for lighter vehicles.
Maruti’s argument was that the structure of the CAFE formula placed a disproportionate burden on small cars. Lighter vehicles had lower permitted emissions in absolute terms and, therefore, a tightening of the target could require a larger percentage reduction for them than for heavier vehicles, it argued.
The company also pointed out that small cars remain important for affordability and first-time buyers. That marked out a major faultline in the debate.
The 909 kg proposal
The dispute escalated sharply when the government issued a revised draft in September 2025. For the first time, the BEE proposed a specific concession for small petrol cars. A petrol vehicle weighing up to 909 kg, with an engine below 1,200 cc and length below 4,000 mm, would receive a 3 g/km deduction in its declared CO2 emissions for CAFE calculations.
The proposal effectively created a new regulatory category based partly on weight. That, in turn, alarmed several automakers. The principal objection was that the proposed threshold would disproportionately benefit Maruti, which dominates the market for the lightest cars.
The opponents also questioned why weight should be used to create a new definition of small cars. Under the GST system, for example, a small petrol car is defined by a length of up to four metres and an engine capacity of up to 1,200 cc. Weight is not part of that definition.
There was also the safety argument. Automakers such as Tata Motors, which has been leading India’s shift towards safer cars, argued that stronger body structures, additional airbags and other safety equipment can add weight. A regulatory incentive tied to keeping a vehicle below a particular weight could therefore create unintended consequences.
Tata Motors Passenger Vehicles Managing Director Shailesh Chandra, who was also the then Siam president, said his company did not support defining small passenger vehicles on the basis of weight.
The company also stated that several vehicles around the proposed weight threshold were already priced relatively high, so a weight-based concession would not necessarily translate into benefits for the lowest-income buyers.
Many divides
The disagreement eventually became visible within Siam itself. In November 2025, 19 carmakers voted on the proposed 3 g/km concession. Fifteen voted against it, while Maruti Suzuki and Renault supported it. Mercedes-Benz remained neutral and Toyota backed a consensus approach.
The arguments also acquired a broader policy dimension. Opponents informally said a weight-based concession could establish a precedent for other regulations: Manufacturers of
909 kg cars could later seek special relief under GST, road tax or other regulations.
EV manufacturers had their own concern: Giving a concession to petrol cars could reduce the incentive for automakers to shift to cleaner technologies.
Matter moves to PMO
The dispute eventually moved beyond the Ministry of Power. Tata Motors and JSW MG Motor approached the Prime Minister’s Office (PMO) opposing the proposed concession; Kia made its own representation; Maruti continued to push for relief.
The issue now evolved from a technical disagreement over grams of CO2 into a wider argument over industrial policy: How much should regulations protect affordable cars, and how much should they push the industry towards cleaner technologies and higher safety standards?
Govt changes formula
The government’s eventual solution was to revise the main CAFE formula instead of retaining the special 909 kg concession.
In effect, the government moved from a steep weight-based formula to a finely calibrated, year-specific formula without a separate small-car concession. The final structure reduces the advantage that heavier fleets get from their weight, while giving lighter fleets relatively more headroom.
The September 2025 draft had used 1,170 kg as the reference weight and a relatively steep weight adjustment, alongside the separate 3 g/km benefit for qualifying sub-909 kg petrol cars.
The final framework removes that concession and shifts the reference weight to 1,229 kg. It also uses a flatter weight adjustment, with the annual multiplier on a declining trajectory from financial year 2027-28 (FY28) to FY32.
The effect is significant.
Using the final formula, a 909 kg car has an FY28 emissions target of about 82.8 g/km. Under the September 2025 proposal, the target would have been about 76 g/km.
At the other end, a 2,500-kg vehicle gets an FY28 target of about 142.4 g/km under the final formula, compared with about 151.4 g/km earlier. So the final framework is relatively softer for lighter vehicles, which have more headroom for emissions, and tougher for very heavy ones.
In effect, the government has provided some of the relief sought by the small-car camp, but through the general CAFE formula rather than a special exemption. That distinction was crucial to resolving the industry’s legal and competitive concerns.
EVs and flexibility
The small-car dispute was only one part of CAFE-3. The final rules also retain substantial incentives for cleaner technologies through a “super-credit” mechanism.
Under this system, a battery electric vehicle (BEV) is given three times the weightage of a conventional vehicle when the company’s fleet-average CO2 emissions are calculated. This means each EV has a disproportionately large impact in bringing down the manufacturer’s reported fleet-average emissions, making it easier for the company to meet its CAFE target. The same 3x benefit also applies to range-extended electric vehicles (REEVs).
Plug-in hybrids and strong hybrids running on flex-fuel receive a 2.5x factor. Strong hybrids get a 1.6x factor and flex-fuel vehicles a 1.1x factor.
However, the final EV incentive is lower than the 4x super-credit proposed in the June 2024 draft.
CAFE-3 also introduces a credit-debit system. Manufacturers that perform better than their target earn emission credits, while those falling short accumulate debits. Credits can be carried forward within compliance blocks, traded between manufacturers or used through the BEE’s buyout mechanism.
The end of the battle
The final CAFE-3 framework does not represent a straightforward victory for either side of the dispute.
For carmakers, the debate will now move from defining a small car to a more fundamental question: How they redesign their portfolios and adopt cleaner technologies to meet progressively tighter emission targets from April 2027.
