Indian automobile industry is at a pivotal turning point with the Corporate Average Fuel Efficiency (CAFE)-III regulations—India’s stiffest vehicular emission guidelines so far—scheduled to be implemented from April 1, 2027. These regulations are intended to reduce carbon emissions while nudging automakers toward a greener, cleaner fleet. That said, their enforcement has initiated an across-the-industry debate, predominantly regarding the existence of India’s small car business.
What Are the CAFE Norms?
The CAFE norms, launched in 2017, control the overall carbon dioxide (CO₂) emissions permissible per kilometre for an automobile manufacturer’s entire passenger vehicle fleet that weighs less than 3,500 kg. They encompass petrol, diesel, LPG, CNG, hybrid, and electric vehicles. The aim: cut India’s transportation-associated greenhouse gas presence and be in sync with international climate objectives.
Under CAFE-II, which took effect from 2022, the carbon-dioxide emissions limit was 113 grams of CO₂ per km or 4.78 litres per 100 km. The just-announced CAFE-III regulations squeeze this limit considerably further to 91.7 grams of CO₂ per km—a 19% increase in stringency. Meeting this target will call for a major leap in electric vehicles (EVs), hybrids, and fuel-saving technologies across automobile segments.
But the weight-based formula applied to calculate emissions targets results in lighter or smaller cars being held to tighter standards than heavier ones, making new winners and losers in the auto industry.
Small Cars in a Tight Spot
The largest victim of CAFE-III may be India’s erstwhile small car market. Controlled by Maruti Suzuki, the segment has long been the preserve of price-sensitive, first-time car owners. However, changing consumer tastes, along with rising expenses and regulatory demands, have pushed the segment into a precipitous decline.
The small car segment has contracted 40%—from 2.2 million units in FY19 to 1.35 million units in FY25, according to the Society of Indian Automobile Manufacturers (SIAM). Even industry leader Maruti Suzuki, which produces favorites such as the Alto, WagonR, and Celerio, is not immune. In June 2025, small car production by Maruti fell 23%, to 125,392 units from 163,037 in June 2021, the sharpest decline in five years.
Maruti Suzuki has now made a direct appeal to the government: exempt the small car segment from CAFE-III norms. The company argues that such stringent fuel-efficiency targets disproportionately affect affordable vehicles. According to Maruti, upgrading small cars to meet these norms—through hybrid or electric technologies—will increase prices and make them unaffordable for India’s lower- and middle-income buyers, ultimately pushing them out of the new car market altogether.
The Case Against Exemptions
But Maruti’s request is facing pushback from rivals. Automakers like Mahindra & Mahindra, Tata Motors, and Hyundai have come out in firm opposition to exempting any segment, including small cars, from the new norms.
In a letter to the Heavy Industries Ministry, Mahindra contended that small cars constitute nearly 60% of India’s passenger vehicle (PV) industry, but account for 53% of sectoral carbon emissions. Excluding them from CAFE-III compliance would thus nullify the very intention of the norms—reducing overall emissions and fostering sustainability.
Tata Motors, which is a pioneer in the EV sector, has highlighted that technology has now made electrification and hybridization of even lighter vehicles viable without making them prohibitive, as long as there is adequate government and supply chain eco-system support. Hyundai felt the same way, underlining that market change needs to catch up with global environmental aspirations instead of pushing back against them.
Between Regulation and Reality
This tug-of-war between price and climate is laying bare fundamental fault lines in India’s automotive revolution. The CAFE-III norms are unquestionably vital in the war against climate change, particularly as India struggles with increasing air pollution and oil dependence. But their success will hinge on striking a balance between ambition and affordability.
Industry analysts contend that small cars will have to endure in the CAFE-III regime with policy assistance, technology subsidies, and economies of scale for hybrid and EV components. In their absence, the heightened compliance cost may compel OEMs to either withdraw from the segment or transfer the costs to buyers, shrinking the entry-segment market.
On the demand side, the imperative to purchase more expensive, cleaner cars can postpone new purchases, particularly by first-time buyers. That could slow overall auto industry growth—unless financing, charging infrastructure, and used markets come on board to facilitate the shift.
What Lies Ahead?
With less than two years until implementation, the automotive industry will be subjected to dramatic changes. Numerous manufacturers have already been overhauling their product lineup, spending on EV R&D, as well as collaborating with suppliers to localize battery and electric drivetrain technology.
The government, meanwhile, is said to be mulling phased incentives or transition assistance to assist smaller suppliers and OEMs in achieving the new CAFE-III targets without jeopardizing affordability. No word yet, however, on whether exemptions will be extended to the small car class.
Ultimately, the success of CAFE-III will depend on cooperation among policymakers, manufacturers, and consumers. As India builds towards a more sustainable transportation future, the test is ensuring that eco-consciousness doesn’t compromise inclusivity and access.
Key Takeaway: India’s car industry is being transformed by CAFE-III standards—driving fuel efficiency and emissions lower than ever before. But as small car manufacturers sound the alarm about price, the country has a make-or-break test: Can India green without losing its first-time car buyer?
