India has notified the third phase of its Corporate Average Fuel Economy framework, commonly known as CAFE III, introducing new fleet efficiency requirements for passenger vehicle manufacturers. The new rules will come into effect from April 1, 2027, and remain applicable until March 31, 2032.
The CAFE III framework is designed to progressively improve the fuel efficiency of passenger vehicle fleets sold in India. According to the government, the fuel consumption benchmark will become stricter during the five year period, moving from 3.996 litres per 100 kilometres in 2027 to 2028 to 3.3273 litres per 100 kilometres in 2031 to 2032. This represents an improvement of around 16.7 percent over the period.
One of the most significant features of the new regulations is the additional compliance benefit provided to electric vehicles. Battery electric vehicles and range extended electric vehicles will receive a volume derogation factor of 3.0, commonly described as a three times super credit.
In simple terms, if a manufacturer sells one eligible battery electric vehicle, that vehicle can effectively count as three vehicles when the company’s fleet average is calculated under the specified volume factor. The mechanism is intended to encourage manufacturers to increase the share of electric vehicles in their overall product portfolios.
The three times factor does not mean that an electric vehicle receives three times the subsidy or that the customer receives a direct financial benefit. Instead, it is a regulatory calculation mechanism used to determine a manufacturer’s fleet level compliance with CAFE requirements.
The new framework also provides different volume factors for other powertrain technologies. Plug in hybrid electric vehicles and strong hybrid electric vehicles running on flex fuel receive a factor of 2.5. Strong hybrid electric vehicles receive a factor of 1.6, while flex fuel vehicles receive a factor of 1.1. These factors allow manufacturers to receive varying levels of compliance recognition depending on the technology used.
Another important aspect of CAFE III is that the regulations focus on the average efficiency of a manufacturer’s overall passenger vehicle fleet. This means carmakers will need to consider the combined performance of the vehicles they sell rather than meeting the requirement through individual models alone.
The framework also takes vehicle weight into account when determining the applicable fuel consumption target. Heavier fleets are allowed a different target from lighter fleets, while the final regulations have removed a separate proposed concession for petrol cars weighing up to 909 kilograms.
The government has also introduced a mechanism that can provide manufacturers with additional recognition for approved fuel saving technologies. The final framework expands the list of recognised technologies from four to twelve. Manufacturers can receive a concession of 1 gram of carbon dioxide per kilometre for each eligible technology, subject to a maximum concession of 9 grams of carbon dioxide per kilometre.
The recognised technologies are intended to encourage manufacturers to improve efficiency through different engineering solutions. These can work alongside electrification and alternative fuel technologies, giving companies several routes to improve their fleet level CAFE performance.
Another feature of the regulations is the recognition of renewable and lower carbon fuels. The government has introduced a Carbon Neutrality Factor that can provide an additional compliance pathway for fuels such as ethanol blended petrol, biofuels and compressed biogas. This allows the CAFE framework to recognise improvements that come from cleaner fuels as well as vehicle technology.
The new regulations also include a credit mechanism for manufacturers. A company that performs better than its applicable CAFE target can generate credits, while a manufacturer that does not meet its target can accumulate a deficit. Credits can be carried forward within the applicable compliance framework and can also be traded between manufacturers under the prescribed rules.
Manufacturers with outstanding deficits will have additional compliance options. The framework provides for purchasing credits from the Bureau of Energy Efficiency, with the specified buyout price starting at Rs 2,500 per gram of carbon dioxide per kilometre in financial year 2027 to 2028. The price increases progressively and reaches Rs 4,500 per gram of carbon dioxide per kilometre in financial year 2031 to 2032.
For electric vehicles, energy consumption is measured differently from conventional petrol and diesel vehicles. EV consumption is measured in kilowatt hours per 100 kilometres and converted into a petrol equivalent figure using the prescribed conversion factor. This calculation is combined with the three times volume factor when determining the manufacturer's fleet level performance.
The introduction of CAFE III is expected to influence product planning across the Indian automobile industry. Manufacturers may need to balance sales of petrol, diesel, hybrid, flex fuel and electric vehicles in order to meet their fleet level efficiency requirements.
The regulations could also influence future vehicle development. Carmakers may have greater incentives to introduce more electric models, improve conventional engine efficiency, adopt hybrid technology and incorporate approved fuel saving technologies. The exact strategy will differ between manufacturers depending on their existing product portfolios and technology investments.
For consumers, the CAFE III framework is primarily a manufacturer level regulation rather than a direct requirement on individual vehicle owners. The three times EV factor does not mean that buyers receive three times the value of their vehicle. Instead, it gives manufacturers additional recognition in the calculation of their overall fleet performance.
The government says the new CAFE framework provides greater regulatory clarity and a stable policy environment for the automobile industry. It is intended to encourage technological innovation while supporting India's broader transition towards lower fuel consumption and cleaner mobility.
The CAFE III rules will therefore become an important part of India's automotive regulatory landscape from April 2027. With stricter fleet efficiency targets, three times recognition for battery electric and range extended electric vehicles, additional benefits for hybrid and flex fuel technologies, and credit trading mechanisms, manufacturers will have several compliance pathways available under the new framework.
