Will India rethink emission caps to save small cars?

The potential plan may allow small cars a regulatory relaxation in the initial years from the next-generation Corporate Average Fuel Efficiency (CAFE) standards, which are aimed at making vehicles more fuel-efficient, the people said on the condition of anonymity. This will be followed by a gradual tightening in the subsequent years, they said.

The Bureau of Energy Efficiency (BEE), which is tasked with finalising CAFE III and IV norms, is studying the viability of easing these emission norms for small cars, the second person quoted above said.

“There should be something done to make small cars affordable for the common man,” said a top Indian government functionary.

Sales of small cars have tumbled 71% in five years through March 2025, with automakers attributing it to the high cost of entry-level vehicles. Market leader Maruti Suzuki India Ltd has sought relaxation from stricter CAFE norms—to be rolled out next year—for small cars weighing less than 1,000 kg. But this has split the industry with makers of electric vehicles opposing the demand.

Small cars are relatively fuel-efficient and widely used and discussions around CAFE norms for this segment are increasingly growing relevant, said Saket Mehra, partner and automotive industry leader, Grant Thornton Bharat. “Any potential adjustments to the norms must carefully weigh the benefits of affordability and accessibility against the need to maintain momentum in reducing vehicular emissions.”

Stringent emission caps

CAFE norms, applicable for vehicles weighing under 3,500 kg, create a ceiling for the average carbon dioxide emissions in a manufacturer’s fleet. Currently, under the second iteration of these standards, each company is allowed up to 113 grams of CO2 emissions per km on average, calculated by measuring the tailpipe emissions of an individual vehicle.

According to a publicly available copy of the BEE memorandum inviting comments from stakeholders, CO2 emissions ceiling will be lowered to 91.7 grams per km in CAFE III and to 70 grams per km in CAFE IV norms. The new norms will come into effect from April 2027 for five years.

Stringent CAFE norms will force automakers to manufacture cleaner vehicles with hybrid, electric, hydrogen, or flex fuel powertrains. Violations will result in a penalty of at least ₹10 lakh for every vehicle found emitting excessive carbon dioxide, under the Energy Conservation Act. Automakers will have to pay extra penalties for the amount of CO2 emitted beyond the CAFE ceiling, and breaching it by a higher margin will attract heftier penalties.

Easier rules will allow companies like Maruti Suzuki to add more small cars to their portfolio since stringent emission caps limit the number of cars the company can manufacture.

“BEE is in the process of conducting an analysis, a study, on the next iteration of CAFE norms. There have been stakeholder consultations between the industry and the government. MHI and MoRTH will send inputs for the study,” said the first of the two people mentioned above, requesting anonymity.

BEE, which reports to the Union power ministry, will take inputs from the ministries of heavy industries, and road transport and highways (MoRTH). Queries emailed to the spokespersons of BEE, MHI, and MoRTH on 8 July remained unanswered.

Small car demand craters

“The main goal of these norms is to make cars more fuel-efficient, which means they use less petrol or diesel to travel the same distance,” said Mehra of Grant Thornton Bharat. “This helps reduce the amount of fuel we consume as a country and lowers the cost of running vehicles for consumers.”

Mehra said CAFE norms encourage automakers to innovate and produce vehicles that consume less fuel and emit fewer pollutants, aligning with the country’s climate goals and public health priorities.

Queries emailed on Wednesday to the spokespersons of Maruti Suzuki, Tata Motors Ltd,Hyundai Motors India Ltd, Kia India Pvt Ltd, Toyota Kirloskar Motor Ltd, and Mahindra & Mahindra Ltd remained unanswered.

CAFE has become another point of contention between Maruti Suzuki, which makes small cars and hybrid cars, and other automakers which have electric cars in their portfolio. Electric vehicles emit no carbon dioxide, while hybrids emit lesser CO2 than petrol or diesel vehicles.

Data from industry lobby Society of Indian Automobile Manufacturers (Siam) showed that sales of small cars–under 3.6 metres in length–fell from 460,772 units in FY19 to 152,262 in FY24 and 133,397 in FY25, a 71% drop in six years, Mint reported on 5 June.

However, India’s EV market has been gaining momentum, with sales rising about 17% in FY25, according to the Vahan portal. Over 1.9 million EVs were sold in India in FY25, compared with about 1.6 million in FY24. In the same period, sales of petrol and diesel vehicles rose 4% to 21.8 million from 20.9 million in the previous fiscal.