India could choose a middle path for auto companies under CAFE III: What it means for small and big players

India is likely to balance the interests of its far-flung auto industry through the latest Corporate Average Fuel Efficiency (CAFE) III norms.According to multiple officials with knowledge of the move, stricter fuel efficiency targets are expected for major automakers, while some leniency is now expected towards smaller ones. But a general safety net may disappear if the exception (extra compensation) for small cars is stopped.

The Center is also likely to limit relaxation for adoption of newer technologies, forcing automakers to actually improve fuel efficiency.

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

This slope determines how much extra carbon dioxide (CO2) a manufacturer is allowed per kilogram of vehicle weight. A steeper slope (such as the 0.002 in the September 2025 draft) allows heavier vehicles to have significantly higher emissions targets, making it easier for large cars to meet them.

Decreasing the slope (to the suggested 0.00153) makes the target line flatter. This makes regulations stricter for heavier vehicles, because they have less CO2 space for their mass.

The concept is sent to PMO

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

Industry watches say that by lowering the slope value, regulators are ensuring that as vehicles become heavier (due to safety equipment and batteries), emissions standards remain strict 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 to the September draft and will be forwarded to the Prime Minister’s Office (PMO). “In general, they have eliminated the category-specific exemptions for small cars and flattened the slope, as in some countries, to give small cars some relief,” said an auto industry representative, adding that the final CAFE III standards would have been announced by the end of February, “but now it may take longer.”

The removal of the small car exception is expected to increase the price of entry-level gasoline cars. Industry watchers say automakers will be forced to add more expensive fuel-saving technologies to meet the new standards or face fines.