India’s draft CAFE-III fuel efficiency rules could make a body-on-frame SUV like the Mahindra Bolero costlier to build after April 2027, while giving small cars like the Maruti WagonR an easier pass, and the industry is openly fighting over where that line gets drawn.
The Ministry of Power released the draft third phase of India’s Corporate Average Fuel Efficiency (CAFE) rules on July 16, 2026, through the Bureau of Energy Efficiency (BEE). CAFE rules do not cap what any single car emits. They cap the sales-weighted average CO2 output of everything a manufacturer sells in a year, so a small-car-heavy lineup and an SUV-heavy one face different fights. Comments closed August 6, 2026, and the norms are still not finalised. Here is what is on the table, and why Maruti and Tata do not agree.
What the Draft Actually Targets
CAFE-III replaces CAFE-II, which expires March 31, 2027, and runs five years after that. Compliance is checked in two blocks, an initial three-year block and a final two-year block, so one bad year does not trigger an instant penalty.
| Period | Fleet-average target | Equivalent fuel use |
| FY 2027-28 (block starts) | 94.76 g CO2/km | 3.996 litres/100km |
| FY 2031-32 (block ends) | 78.90 g CO2/km | 3.327 litres/100km |
That is roughly a 17% cut in average fleet emissions over five years, applied to every passenger vehicle a manufacturer sells here, built locally or imported. Overshoot the target and a manufacturer is not fined outright. It can buy compliance credits, priced at ₹2,500 per gram of CO2/km in year one, rising ₹500 a year to roughly ₹4,500 by 2031-32, or trade credits with a rival that came in under target. Only with no credits bought or traded do Energy Conservation Act penalties apply. Makers selling under 1,000 units a year are exempt.
Why a Small Car Gets an Easier Ride Than an SUV
CAFE targets follow a weight-based curve: heavier vehicles are allowed higher absolute emissions than lighter ones, because a 1.7-tonne SUV cannot match a 900kg hatchback’s fuel economy. The fight is over how generous that curve is to the lightest cars. Tata Motors and Mahindra & Mahindra pushed to strip out an early draft’s extra 3g CO2/km relief for vehicles under a weight threshold, arguing it would functionally only help Maruti Suzuki, which controls roughly 95% of India’s small-car segment. Maruti and Toyota Kirloskar Motor wanted that relief kept. The government has since dropped the standalone small-car bonus and folded its benefit into a flatter version of the main curve, though the exact shape was still open for comment as of August 6.
A body-on-frame SUV or pickup, the Bolero, the Scorpio, the Thar, sits at the heavy end of the same curve, and whatever slope the government finally picks decides how much low-cost tech, or how much price increase, those models need to stay compliant. Flatten the curve to help small cars and the heavy end effectively pays for it.
How EVs, Hybrids and Ethanol Cars Earn Credit
The draft also tightens how much a manufacturer can lean on electrified or flex-fuel models to hit its target.
| Vehicle type | Counts as, for compliance | Change from earlier draft |
| Battery EV / range-extended EV | 3 vehicles | Unchanged |
| Strong hybrid (non-plug-in) | 1.6 vehicles | Down from 2.0 |
| Flex-fuel vehicle | 1.1 vehicles | Down from 1.5 |
Sell one electric car and it counts as three low-emission cars in your fleet average, unchanged and still the single biggest lever in the framework. Strong hybrids and flex-fuel vehicles still help, just less than the first CAFE-III draft proposed, a real tightening for manufacturers like Toyota and Maruti who have leaned on strong-hybrid tech rather than full EVs. For the first time, the draft also treats ethanol as partly carbon-neutral: at current blending levels, a manufacturer gets an 8% cut applied to a petrol car’s declared tailpipe CO2 before its compliance number is calculated, tied to India’s E20 blending programme. CNG and other biofuels get a similar cut, scaled to actual blending.
None of this changes what a buyer pays in a showroom tomorrow. It changes what a manufacturer is forced to build and price competitively over the next five years, and that is exactly why Tata, Mahindra, Hyundai and Kia are still arguing with Maruti and Toyota over a curve most car buyers will never read.
What This Means If You Are Buying in 2027
Shopping for a small or mid-size car, expect little visible change. Fleets that already skew light and hybrid, Maruti’s and Toyota’s, have the most headroom and least reason to pass on cost. Shopping for a heavy SUV, pickup, or big diesel, expect manufacturers to lean harder on hybrid variants, trim weight, or quietly retire a model’s least efficient trim rather than pay the compliance bill on it. None of this is confirmed pricing. No manufacturer has published what CAFE-III adds to any specific model, and nobody honestly can yet, since the final curve is not locked. Treat any number claiming to be CAFE-III’s cost per car, this site’s included, as a guess until BEE notifies the final rule.
Compare a car from each end of this fight, a Maruti WagonR against a Mahindra Bolero on the Compare tool, and the argument gets a lot more concrete: one is the model type the small-car concession was fought over, the other pays for whatever concession wins.
When do the CAFE-III norms take effect in India?
The draft proposes April 1, 2027, through March 31, 2032, replacing CAFE-II. Comments closed August 6, 2026, and no final notification has been issued, so the date could still shift, though officials have indicated little appetite for delaying it further.
Will CAFE-III make car prices go up in India?
Possibly, but selectively. Small, light, hybrid-friendly models from Maruti and Toyota face the least compliance pressure. Heavier SUVs and pickups without a strong hybrid or EV lineup to offset them carry the most risk of price increases or dropped trims.
Do electric vehicles get special treatment under CAFE-III?
Yes. Every battery EV or range-extended EV counts as three vehicles toward a manufacturer’s compliance average, unchanged from earlier drafts, the strongest incentive in the framework, stronger than what strong hybrids or flex-fuel vehicles get, both reduced in this draft.
