Auto industry seeks softer fuel-efficiency norms, bigger EV credits under CAFE-3
India’s carmakers are lobbying for easier fuel efficiency rules, more EV credits and softer annual targets, even as policymakers weigh climate goals against industry competitiveness.
NEW DELHI : India’s auto industry is pushing the government to ease fuel efficiency rules and expand incentives for electric vehicles (EVs), even as it remains divided over concessions for small cars. The negotiations could shape the country’s vehicle mix, technology investments, and competitiveness for the next decade.
Carmakers are particularly unsettled by the September draft of the corporate average fuel efficiency (CAFE) rules, which tighten efficiency targets, introduce annual improvement milestones, and revise incentives across powertrains, including EVs, hybrids, and flex-fuel vehicles.
The Society of Indian Automobile Manufacturers (Siam) is preparing to raise these concerns with the Union heavy industries ministry, which oversees India’s EV incentive schemes, according to two people familiar with the discussions.
Stricter fuel-efficiency norms push automakers towards cleaner technologies and help reduce emissions. However, the pace and design of the targets could have implications for vehicle costs, product cycles and the competitiveness of domestic manufacturers during the global transition.
A key industry demand is additional “super-credits" for zero-emission vehicles and a re-examination of annual fuel efficiency targets, which carmakers argue are too steep and operationally unviable, one of the people cited earlier said.
Industry faultlines
The auto industry itself is divided over proposed relaxations for small cars weighing under 909 kg and under four metres in length. These concessions disproportionately benefit Maruti Suzuki, India’s largest carmaker by sales, whose portfolio is dominated by compact models such as the Alto.
Maruti Suzuki has argued that the norms unfairly penalize small cars, which are inherently more fuel-efficient than larger vehicles. Other automakers, however, have resisted special treatment, particularly those that have invested heavily in larger and premium vehicles.
The draft CAFE norms propose a relaxation of 3 grams of carbon dioxide per kilometre for small cars when calculating fleet-wide emissions.
“Small cars is one small issue, there are multiple more topics to be discussed and addressed when it comes to CAFE norms," said the person cited above, speaking on condition of anonymity.
“On the CAFE graph, small cars and even the relaxations proposed to them account for a limited number of vehicles. There are still many heavier and more polluting vehicles which can be more fuel efficient," the person said.
Super-credit debate
Under the CAFE framework, cleaner vehicles are counted as multiples to incentivize their production. In its September CAFE-3 draft, the government proposed counting each electric vehicle sold as three units, strong hybrid flex-fuel and plug-in hybrid vehicles as 2.5 units, strong hybrids as two units, and flex-fuel ethanol cars as 1.5 units.
Earlier, in June 2024, the Bureau of Energy Efficiency (BEE) had suggested more generous credits—five units for hydrogen fuel cell vehicles, four for EVs, two for plug-in hybrids, 1.2 for strong hybrids and 0.95 for flex-fuel ethanol vehicles.
The industry has argued that the revised September proposal significantly lowers incentives for EV adoption.
Email queries to the ministry of heavy industries, minister HD Kumaraswamy’s office, and to Siam remained unanswered.
The second person cited above, also speaking on the condition of anonymity, said a meeting between Siam, ministry officials, and the minister is on the agenda.
Queries sent to Maruti Suzuki, Tata Motors, Mahindra & Mahindra, Hyundai and Kia also remained unanswered.
Annual targets concern
The September draft also introduces annual fuel efficiency improvement targets for the first time, which has emerged as another flashpoint.
“The annual targets will be difficult to implement for the industry, as there is substantial improvement to be made every year. It becomes difficult to manage investments, for all manufacturers using different technologies, if these annual goals are set," said an industry executive, requesting anonymity.
As per the proposal, carmakers will need to reduce fuel consumption per 100 km from 3.726 litres in 2027 to 3.013 litres by 2032.
To be sure, CAFE norms are notified by the Bureau of Energy Efficiency (BEE) within the Union power ministry, with the ministries of heavy industries and road transport and highways providing guidance.
A second industry executive said on the condition of anonymity that the CAFE targets are too steep, and increasing the efficiency of engines is not possible in the given timeframe. Other options, such as increasing the share of electric or hybrid models in a manufacturer's fleet, would depend on the adoption of these emission-reducing technologies by consumers, the executive said.
CAFE 3 norms are set to be implemented from April 2027 for five years. They require carmakers to improve fuel efficiency across their fleets, not just individual models. By setting limits on a company's sales-weighted average CO₂ emissions, the norms push manufacturers to produce and sell more fuel-efficient cars, including electric and hybrid vehicles, to balance out the emissions from larger, less-efficient models.
Expert views
“Steep CAFE targets play an important role in shaping the long-term direction of the automotive sector, but their ultimate effectiveness depends on how well ambition is balanced with market feasibility," said Saket Mehra, partner and auto & EV industry leader at Grant Thornton Bharat.
The proposed norms call for a 63% improvement in fuel efficiency compared to CAFE-2, “which places substantial pressure on product-development cycles, supply chains and capital planning," Mehra said.
“The challenge really is in front of the regulator and the line ministries, and not so much for the industry," said Sharif Qamar, associate director of transport and urban governance at The Energy and Resources Institute (Teri).
“This is particularly true in the light of what is happening in the European market where the policymakers have fallen for the requests of the OEMs - which will have a huge negative impact on their manufacturing competitiveness vis-a-vis non-European OEMs, particularly the Chinese ones," he said. OEMs are original equipment manufacturers.
European regulators loosened their green policy on Tuesday, dropping a proposal to ban all fossil fuel-run cars starting 2035 after pressure from the region’s auto industry, reported news agency Reuters on 16 December.
“This directional rigour is crucial for aligning India’s automotive sector with global decarbonization pathways and for ensuring competitiveness in markets where efficiency standards continue to tighten," Mehra added.
Small-car slowdown
To be sure, India’s compact car segment has shrunk sharply. Sales fell from 4.6 lakh units in FY19 to 1.52 lakh units in FY24 and further to 1.33 lakh units in FY25.
“Given that India’s small-car segment—once the backbone of mass-market mobility—has experienced a steep decline over the past six years, such calibrated regulatory support becomes even more critical," Mehra said.
Still, Qamar argued the framework remains fair. “CAFE regulation has been stringent at the industry level, but accommodative at the individual OEM level… These have, in fact, rewarded the OEMs and improved their overall image in the market through the introduction of efficient cars," he said.
(An earlier version of this story said the proposed relaxation for carbon dioxide emissions for small cars was 9 grams per kilometre.)
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