In today’s Finshots, we break down the CAFE framework and explain why it’s turning India’s auto industry into a bit of a tug of war.

The Story

The Indian auto industry is caught in the middle of a big fight right now, and the bone of contention is something called the CAFE framework — short for Corporate Average Fuel Efficiency.

If you’ve heard the term before, you probably know that CAFE norms are government rules designed to push carmakers to sell more fuel-efficient cars that emit less carbon dioxide (CO₂). These rules first showed up in 2017 and apply to pretty much every passenger vehicle under 3,500 kg, whether it runs on petrol, diesel, LPG, CNG, is a hybrid or even an electric vehicle.

The idea is simple. A company can sell big, heavy fuel consuming SUVs if it wants, but it has to balance them with smaller, more fuel-efficient cars so that its average across all cars sold in a year doesn’t cross the government’s set limit for CO₂ emissions. It doesn’t matter if one model emits more, it’s the fleet average that counts.

For now, carmakers are working under what’s called CAFE-II, which means their cars sold from 2022-23 must stay within fuel consumption of 4.78 litres per 100 km, or CO₂ emissions of not more than 113 grams per kilometre (g/km). If a company’s average crosses this line, it risks paying heavy fines.

This setup worked fine for a while. But now, the government wants to tighten the rules even more. It’s drafting the next phases: CAFE-III and CAFE-IV, which will run from 2027 to 2037. And each new phase comes with stricter targets. For CAFE-III, the aim is to bring average emissions down further to somewhere around 91–95 g/km.

And this is where India’s largest carmaker, Maruti Suzuki, has a problem. Maruti built its name by selling small, fuel-sipping hatchbacks (Alto, WagonR, Swift), or what millions of Indians buy as their first family car. But under the new framework, Maruti thinks it’s getting the short end of the stick.

Why’s that, you ask?

You see, CAFE norms are not just about fleet averages. They also adjust the CO₂ limit based on how heavy a company’s average car is. If you sell heavier cars, you’re allowed a slightly higher CO₂ target. The logic is simple. Bigger cars naturally burn more fuel. So the baseline figure of 91–95 g/km is just an example for a fleet with an average weight of about 1,170 kg. If your average fleet is heavier, you get some cushion. If it’s lighter, your limit drops even more.

So Maruti, with its lineup mostly made up of small, lightweight cars, has to meet an even tougher limit than companies selling more SUVs. That’s the sticking point.

To get why Maruti is upset, just look at what Nomura researchers found. They plotted a graph that shows the problem clearly. On this graph, the horizontal line shows the average weight of a company’s cars, while the vertical line shows their average CO₂ emissions. There’s a diagonal line in the middle. That’s the pass/fail line.

Then it takes two examples. Model A represents one of the high-selling SUVs. It weighs a lot and emits about 130 g/km. But because its CO₂ limit is higher thanks to its weight, it still passes the test. Then there’s Model B, a high-selling small car that emits only about 100 g/km. That’s much cleaner in absolute terms. But because it’s lighter, its limit is lower too. So it fails.

So the strange twist is that the small car, which is actually greener, gets penalised, while the heavier SUV slides through.

And that’s what has Maruti worried. Their bread and butter small cars like the Alto and WagonR already hover around 100 g/km. So, under CAFE-III, these cars would barely meet the limit or fail unless Maruti upgrades engines, adds hybrid systems or rolls out more CNG and electric variants. All of this costs money and time.

The company argues that this weight-based rule ends up rewarding makers of bigger cars and punishing companies like them that have always made small, fuel-efficient cars affordable for the middle class.

But of course, other carmakers like Tata Motors, Mahindra & Mahindra and Hyundai don’t agree with Maruti’s demand to tweak the rules for small cars. They believe that introducing exceptions would increase compliance costs for bigger vehicles and would just make things too easy for Maruti, which already dominates the small car space. They want one simple, uniform rule for everyone.

In fairness, they do have a point. Many of these companies have been pouring money into better engines, cleaner diesel and hybrids for bigger vehicles. They don’t want to see the system tilt unfairly toward small-car makers.

But Maruti’s frustration isn’t unique either. If you look at what other countries do, you see they’ve already made adjustments to make sure small cars aren’t unfairly punished. The US, for instance, uses a footprint-based model. If a car is really small, its fuel economy target doesn’t keep getting tighter and tighter. There’s a limit to how much you can squeeze out. China and South Korea use a similar system and even hand out bonus credits for selling small, efficient cars. Japan’s system bends the curve to protect small cars from impossible targets. And in Europe, they do the opposite of India. The lighter your cars, the easier your CO₂ targets, while bigger vehicles face tougher requirements.

Nomura researchers say India could borrow a page from these playbooks. Instead of a straight line that keeps tightening the screws on already efficient cars, India could use a piecewise or non-linear method. That means setting a limit below which small cars don’t face stricter targets. Or giving carmakers extra credits for selling lightweight, fuel-efficient cars.

So maybe, it’s not just about protecting Maruti, but about keeping small cars on Indian roads. 

India’s middle class still depends on affordable hatchbacks. If the cost of making them CAFE-compliant gets too high, companies may shift focus to heavier vehicles that can more easily meet the targets because of the extra weight allowance. That would be a strange outcome for a rule meant to reduce oil imports and pollution.

Maybe the answer is to phase in these tighter norms slowly, with rules that reward innovations like lightweighting, not make them harder to achieve. The goal should be to make the entire fleet cleaner, not force carmakers to ditch the very cars that help millions of Indians own their first family car.

Will India’s CAFE norms find the right balance?

We’ll have to only wait and see. Until then…

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