CAFE III Norms Tighten India’s Fuel Economy Rules From 2027

India Notifies Final CAFE III Framework

India has notified the final third phase of its Corporate Average Fuel Economy framework, introducing progressively tighter fuel-efficiency requirements for passenger vehicle manufacturers from April 1, 2027. The CAFE III regime will cover M1 category vehicles manufactured or imported for sale in India through March 31, 2032. Under the rules, compliance will continue to be assessed at the manufacturer level using the sales-weighted average fuel consumption of its eligible vehicle portfolio. The framework provides several compliance pathways, including enhanced treatment for electric and hybrid vehicles, alternative-fuel benefits, efficiency-technology credits, and trading mechanisms for compliance credits.

The final notification follows a revised draft circulated by the Ministry of Power in July for stakeholder consultation, with comments invited through August 6. The government had proposed applying the framework across FY28 through FY32. One notable change from an earlier proposal is the removal of a dedicated small-car concession. A September 2025 proposal had considered an additional 3g CO2/km benefit for certain sub-4-meter gasoline cars, but that provision was subsequently dropped. The issue had been contested during consultation, with Maruti Suzuki and Toyota supporting small-car concessions while Tata Motors, Mahindra & Mahindra, Hyundai and Kia opposed special treatment.

CAFE III Targets Tighten Through FY32

CAFE III retains a weight-linked methodology in which the annual fuel-consumption target varies according to the sales-weighted average unladen mass of an automaker’s eligible fleet. The prescribed formula is a×(W−1,229)+c, where W represents the weighted average unladen mass of all eligible vehicles manufactured or imported for sale by an OEM. For a manufacturer with a reference fleet weight of 1,229kg, the permitted average fuel consumption declines from 3.996 liters of gasoline equivalent per 100km in FY28 to 3.860 liters in FY29, 3.7585 liters in FY30, 3.5313 liters in FY31 and 3.3273 liters in FY32.

Using the government’s conversion methodology, the reference-weight target corresponds to approximately 94.8g CO2/km in FY28 and tightens to about 78.9g/km by FY32. The July draft contained the same progression. Compared with the September 2025 proposal, the revised framework eased the overall target curve by reducing the slope, increasing the reference vehicle weight and raising the baseline fuel-consumption constants. The effect will nevertheless vary according to each manufacturer’s fleet-weight profile. Because compliance is calculated across the entire eligible fleet rather than separately for every model, sales of more efficient vehicles can offset higher-consuming vehicles within the same portfolio.

Electric and Hybrid Vehicles Receive Higher Super Credits

The CAFE III super-credit system assigns additional compliance weight to selected alternative powertrains. Battery electric vehicles and range-extended electric vehicles receive the highest multiplier at 3.0. Plug-in hybrids and flex-fuel strong hybrids receive a 2.5 multiplier, while conventional strong hybrids receive 1.6 and flex-fuel ethanol vehicles receive 1.1. This structure means an electric vehicle has a disproportionately large effect on the manufacturer’s compliance calculation compared with an equivalent conventional vehicle, strengthening the regulatory incentive to increase sales of lower-emission technologies without requiring manufacturers to follow a single powertrain pathway.

The treatment of strong hybrids remains favorable but is less generous than an earlier version of the framework, which had considered a 2.0 multiplier. The flex-fuel multiplier was also reduced from 1.5 to 1.1 during the evolution of the rules. The resulting structure may influence portfolio strategies differently across manufacturers. Tata Motors, Mahindra and JSW MG have been increasing their electric vehicle presence, while Toyota and Maruti Suzuki have placed greater emphasis on strong hybrids alongside other technologies. Hyundai and Kia are expanding their electric portfolios while retaining substantial internal-combustion-engine businesses. Actual compliance, however, will depend on sales mix, vehicle weights, fuel consumption and volumes.

Alternative Fuels Add More Compliance Pathways

CAFE III also provides compliance benefits for vehicles using alternative fuels through a Carbon Neutrality Factor. Vehicles operating on E20 or higher notified ethanol-petrol blends, including strong hybrids and plug-in hybrids, receive an 8% carbon-neutrality factor on tailpipe CO2. Flex-fuel ethanol vehicles receive 22.3%, while CNG vehicles receive 5% or the notified CBG blending percentage, whichever is higher. Diesel vehicles receive a benefit linked to the actual biofuel blending level notified by the petroleum ministry. These provisions broaden the available compliance routes beyond battery electrification and are particularly relevant to manufacturers with substantial CNG exposure or plans involving flex-fuel vehicles.

The alternative-fuel provisions also reinforce the government’s broader multi-fuel approach to reducing oil consumption and transport emissions. Rather than making battery-electric vehicles the only route to improved corporate efficiency performance, the framework recognizes multiple technologies and fuel pathways. For automakers, that creates additional room to combine powertrain choices, fuel strategies and efficiency improvements according to their existing portfolios. The practical value of each pathway will depend on the vehicles sold, their certified performance, applicable multipliers and the manufacturer’s overall sales-weighted fleet calculation during each compliance period.

Compliance Credit Trading Gains a Formal Role

Another important structural feature of CAFE III is the formalization of a credit-and-debit mechanism that gives compliance performance financial value. Manufacturers whose actual fleet fuel consumption performs better than their prescribed target will generate credits, while companies exceeding their permitted fuel-consumption level will accumulate debits. These positions will be maintained in a manufacturer-specific compliance passbook. The rules allow manufacturers to exchange or trade credits with other automakers on mutually agreed terms, enabling companies with surplus compliance performance to transfer credits to manufacturers that fall short of their applicable targets.

Manufacturers can also offset outstanding debit balances by purchasing credits from the Bureau of Energy Efficiency. The prescribed buyout price increases throughout the CAFE III period, beginning at ₹2,500 per g CO2/km in FY28, followed by ₹3,000 in FY29, ₹3,500 in FY30, ₹4,000 in FY31 and ₹4,500 in FY32. The rising price makes reliance on purchased credits progressively more expensive as the framework advances. The credit mechanism was also included in the revised July draft, which permitted manufacturers to carry forward credits, trade them with other OEMs or purchase credits from the Bureau of Energy Efficiency.

Efficiency Technologies Can Deliver Up to 9g/km

CAFE III extends compliance opportunities beyond vehicle powertrains by allowing manufacturers to claim a reduction of 1g CO2/km for each eligible efficiency technology installed in a vehicle, subject to a maximum combined benefit of 9g/km. The government has identified 12 eligible technologies, including start-stop systems, tire-pressure monitoring systems, regenerative braking, six-speed or higher transmissions, efficient 12V or 48V alternators, 12V/48V motor-generators, LED exterior lighting, advanced glazing, electric water pumps, high-efficiency air-conditioning systems, solar-reflective paint and PWM-controlled radiator fans.

The technology-credit provisions create an additional compliance route for manufacturers with portfolios that remain heavily dependent on internal-combustion engines. They may also increase demand for suppliers involved in mild-hybrid systems, automotive electronics, thermal management, glazing, lighting and transmission technologies. During the first compliance block, manufacturers can claim savings associated with these technologies through self-declaration. In the second block, the claims must be supported by validated tests using methodologies and procedures specified by the Ministry of Road Transport and Highways. This introduces a progressively stronger validation requirement as the framework moves into its later years.

Two Compliance Blocks Provide Portfolio Flexibility

The five-year CAFE III period is divided into two compliance blocks. The first covers FY28 through FY30, while the second covers FY31 and FY32. Credits and debits will be assessed annually and may be carried forward within the applicable compliance block, but unused credits remaining when a block ends will lapse. This structure gives manufacturers some flexibility in the timing of vehicle launches and technology deployment. An automaker could accumulate credits during years when its fleet performs better than the required target and use those credits against deficits later within the same compliance block.

Small-volume manufacturers with annual eligible vehicle volumes below 1,000 units are exempt from meeting the specific CAFE target, although they remain required to report their average fuel-consumption performance. For larger manufacturers, the block structure makes the timing and composition of product portfolios increasingly relevant. Changes in vehicle mix, sales volumes, powertrain availability and certified efficiency can affect annual compliance performance, while the ability to carry credits within a block provides a mechanism for managing differences between individual model cycles and the progressively tightening corporate targets.

WLTP Reporting Begins in April 2027

CAFE III also begins India’s transition toward using the Worldwide Harmonised Light Vehicles Test Procedure for corporate efficiency calculations. Manufacturers will have to declare the CO2 performance of models sold from April 1, 2027, under both the existing Modified Indian Driving Cycle and WLTP. The transition introduces an additional reporting requirement during the start of the new framework. It also means that manufacturers and testing agencies will need to account for the relationship between the two test procedures when assessing corporate efficiency performance under the new regulatory regime.

The conversion factor required to translate the corporate CAFE target from MIDC to WLTP will be notified separately by the Ministry of Power in consultation with the Bureau of Energy Efficiency. The factor will be based on data reported by designated testing agencies. Consequently, an important part of the implementation framework remains to be finalized even though the five-year CAFE III compliance regime has now been formally notified. The eventual conversion methodology will determine how the corporate targets are represented under WLTP and will therefore remain an important implementation detail for manufacturers preparing their compliance systems.

Industry Impact & Outlook

CAFE III will make fleet composition, certified efficiency, alternative-fuel deployment and compliance-credit management increasingly important elements of passenger vehicle planning in India. The higher super credits for electric and selected hybrid vehicles create stronger regulatory value for those technologies, while CNG, ethanol and efficiency technologies preserve additional routes for manufacturers with different product strategies. The rising cost of purchased credits increases the financial importance of improving underlying fleet performance, and the transition to WLTP adds another implementation consideration. Manufacturers, suppliers and testing agencies will therefore need to align product planning, technology deployment, reporting and compliance management ahead of the April 2027 start.

Frequently Asked Questions

What are CAFE III norms in India?
CAFE III norms are India’s third-phase corporate fuel-economy requirements for eligible passenger vehicles manufactured or imported for sale. The framework applies from April 1, 2027, through March 31, 2032, and measures compliance using a manufacturer’s sales-weighted average fuel consumption. It provides multiple compliance mechanisms, including powertrain super credits, alternative-fuel benefits, efficiency-technology reductions and credit trading. The rules also introduce WLTP reporting alongside the existing Modified Indian Driving Cycle and divide the five-year period into two compliance blocks for managing credits and debits.