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By: Saket Mehra, Kulbhushan Kumar
15 Sep 2026 4 min read
India’s proposed Corporate Average Fuel Economy Phase III norms represent the next significant step in improving passenger-vehicle fuel efficiency. Unlike Bharat Stage norms, which regulate pollutants from individual vehicles, CAFE evaluates the sales-weighted average fuel consumption and carbon dioxide emissions of a manufacturer’s entire passenger-vehicle fleet. This gives manufacturers flexibility to manage compliance through their product mix, powertrain choices and efficiency technologies.
The framework applies to M1-category passenger vehicles manufactured or imported for sale in India. The Ministry of Power draft CAFE 2027 notification proposes implementation from 1 April 2027, covering FY2027-28 to FY2031-32. Importantly, CAFE III does not prescribe a common target for all OEMs. Each manufacturer follows the methodology to derive a fleet-specific target linked to the sales-weighted average unladen mass of the vehicles it sells.
For a representative fleet at the specified reference weight (1229 kg), the proposed fuel consumption benchmark tightens from 3.9960 litres per 100 kilometres in FY2027-28 to 3.3273 litres per 100 kilometres in FY2031-32, equivalent to approximately 94.76 gCO₂/km and 78.90 gCO₂/km, respectively. The standards become progressively more stringent each year, giving manufacturers a defined but demanding transition pathway. Technology incentives provide multiple routes to compliance.
The draft assigns a 3.0 super-credit factor to battery-electric and range-extended electric vehicles, 2.5 to plug-in hybrids and flex-fuel strong hybrids, and 1.6 to strong hybrids. Manufacturers may also claim benefits for approved efficiency technologies, subject to an overall cap equivalent to 9 gCO₂/km. These include start-stop systems, regenerative braking, tyre-pressure monitoring, efficient alternators, advanced glazing and high-efficiency air-conditioning. Importantly, CAFE III reinforces that compliance outcomes are driven by portfolio strategy as much as by vehicle technology. Historically, diesel vehicles often enjoyed a dual advantage of higher weight-based targets and lower fuel consumption, resulting in favourable CAFE performance.
The proposed Carbon Neutrality Factor framework introduces a new variable into this equation, potentially reshaping the relative compliance benefits of petrol, diesel, ethanol-blended and alternative-fuel vehicles. Consequently, product planning decisions that were previously driven primarily by market demand may increasingly need to be evaluated through a CAFE compliance lens. CAFE III also introduces greater flexibility into the compliance architecture.
Credits and debits would be recorded annually in manufacturer-level passbooks and carried forward within two compliance blocks: a three-year block beginning FY2027-28, followed by a two-year block beginning FY2030-31. Manufacturers could exchange credits bilaterally or purchase credits from the Bureau of Energy Efficiency.
The proposed BEE buyout price rises from INR 2,500 per gCO₂/km in FY2027-28 to INR 4,500 in FY2031-32. The central policy question is therefore not whether efficiency standards should tighten, but how ambition, affordability and implementation certainty should be balanced. The weight-based target curve affects manufacturers differently depending on fleet composition. Technology incentives can accelerate electrification, hybridisation and alternative fuels, but their calibration will influence the route for investments.
The transition from MIDC (Modified Indian Driving Cycle) towards WLTP (Worldwide Harmonised Light Vehicles Test Procedure) is another important development: manufacturers must report data under both cycles, while the conversion methodology for CAFE targets is still to be notified separately. For the industry, CAFE III is consequently much more than an engineering requirement. Product-launch timing, sales mix, certified emissions, credit prices and technology investments will collectively determine the compliance position.
Credits and debits will also create financial, accounting, tax, settlement and governance considerations. The immediate priority for manufacturers is to quantify model-level exposure, test alternative portfolio scenarios and establish reliable data, controls and passbook processes.
An integrated approach combining regulatory interpretation, fleet modelling, credit strategy, tax and accounting assessment, and audit-ready reporting can help organisations move from reactive compliance to informed capital and product planning. That is where multidisciplinary advisory support can add value, while preserving technology neutrality and management choice.
This article first appeared in The Economic Times on 15 September 2026.
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