India may take middle path for car companies under CAFE III: What it means for small and large players

India is likely to balance interests across its widely divided automobile industry through the latest Corporate Average Fuel Efficiency (CAFE) III standards.

According to multiple officials aware of the move, stricter fuel efficiency goals for large carmakers while some leniency to smaller ones is now expected. But a blanket safety net may go away with derogation (extra allowance) for small cars being discontinued.

The Centre is also likely to cap the relaxation for adopting newer technologies, forcing carmakers to genuinely improve fuel efficiency.


“Slope value for CAFE III is likely to reduce from 0.002 in the existing draft to 0.00153 in the final version,” a senior official told ET, adding the derogation benefit will no longer be there.

This slope defines how much additional carbon dioxide (CO2) a manufacturer is allowed for every kilogram of vehicle weight. A steeper slope (like the 0.002 in the September 2025 draft) allows heavier vehicles to have significantly higher emission targets, making it easier for large cars to comply.

Reducing the slope (to the proposed 0.00153) flattens the target line. This makes the regulations more stringent for heavier vehicles, as they are granted less CO2 headroom for their mass.

Draft will be Sent to PMO

It also forces manufacturers of larger vehicles to invest more heavily in electrification or hybridisation.

Sector watches say by lowering the slope value, the regulators ensure that as vehicles get heavier (due to safety equipment and batteries), the emissions standards remain rigorous enough to meet climate targets.

There have been two official drafts of CAFE III, the first in 2024, followed by another in September 2025. The latest changes have been made in the September draft and will be forwarded to the Prime Minister’s Office (PMO). “Broadly they have removed category specific exemption for small cars and flattened the slope, like in some countries, to give small cars some relief,” an automobile industry representative said, adding the CAFE III final norms were supposed to be notified by February-end, “but now it may take longer”.

The removal of derogation for small cars is expected to raise the price of entry-level petrol cars. Sector watchers say car makers will be forced to add more expensive fuel-saving technologies to meet the new standards or face penalties.