Mohammad Saad, researcher at the Institute for Competitiveness, has contributed to the article
India is preparing to roll out stricter fuel economy standards under the Corporate Average Fuel Economy (CAFE) 3 and 4 to curb vehicular emissions and combat rising pollution. The move marks a critical step toward safeguarding public health and the environment. According to the Intergovernmental Panel on Climate Change, the transport sector contributed 23% of global energy-related carbon dioxide (CO₂)emissions in 2019 — 70% of which came from road vehicles, thereby making these regulations essential in tackling a major source of pollution. Although the auto industry is concerned with cost increases and demand, cleaner air and sustainable mobility are crucial for long-term well-being. Assessing the effects of these regulations on emissions and consumer trends is key to balance growth with environmental needs.
CAFE norms are regulatory measures designed to reduce fuel consumption and carbon emissions by setting minimum efficiency standards for automakers. India’s fuel efficiency regulations date back to the late 1990s and were introduced in response to worsening air quality and growing energy security concerns. Judicial intervention led to stricter emission controls, resulting in India’s first emission norms in 1991-92, introduction of Bharat Stage (BS) norms in 2000, and the establishment of the Auto Fuel Policy committee in 2001. The regulations progressively tightened emission limits, culminating in the transition from BS-IV to BS-VI in 2020. These advancements paved the way for the introduction of CAFE norms in 2015, further addressing fuel consumption and CO₂ emissions. CAFE Stage I (2017-18) established weight-based efficiency limits, followed by the more stringent Stage II standards in 2022-23.
A closer look at global trends reveals both the advantages and drawbacks of fuel economy standards. Supporters argue that fuel efficiency regulations lower consumer costs, enhance energy security, and drive innovation. Studies show that improved fuel economy leads to significant savings for households, strengthens economic stability by reducing oil imports, and fosters job creation in research anddevelopment (R&D) and manufacturing. Additionally, since CO₂ emissions cannot be mitigated by conventional pollution controls, fuel economy standards play a crucial role in reducing them. However, critics contend that such regulations disrupt vehicle pricing and design, forcing manufacturers to prioritise efficiency over power and safety while increasing production costs.
Given these dynamics, it is essential to assess how stricter fuel economy standards are reshaping India’s automotive market. One of the most immediate effects of such regulations is higher vehicle prices, as improving fuel efficiency requires advanced technologies and increased R&D investment. Critics argue that in a price-sensitive market like India, this could dampen demand for fuel-efficient vehicles. However, supporters of CAFE argue that these policies can ultimately increase sales because consumers consider not only the initial purchase price but also the total cost of ownership. Since lower fuel expenses make vehicle ownership more affordable over time, they can potentially drive higher demand. While fuel efficiency remains a key factor for Indian buyers, affordability often takes precedence. A more effective way to gauge the impact of CAFE standards on vehicle demand would be to distinguish between buyers prioritising cost and those seeking superior fuel economy.
From a purely supply-side perspective, examining trends in average fuel economy across various vehicle segments is crucial for assessing the potential impact of the regulations. Consider, for instance, that compact hatchbacks saw an improvement from 18.62 km/litre in 2000 to 22.74 km/l in 2023. Similarly, midsize sedans recorded an increase from 13.62 km/l to 19.27 km/l, compact sports utility vehicles (SUVs) saw a slide from 19.36 km/l in 2013 to 18.88 km/l in 2023, and midsize SUVs improved from 14.4 km/l in 2000 to 17.46 km/l in 2023. These modest gains suggest that fuel efficiency may not be the primary deciding factor for buyers in these segments, assuming manufacturers are aligning their offerings with consumer preferences. However, it is important to recognise that fuel economy is just one of many considerations — buyers also prioritise driving experience, comfort, safety, design, and interior features when making purchasing decisions.
In contrast, premium hatchbacks (12.03 km/l in 2000 to 20.66 km/l in 2023), compact sedans (10.75 km/l in 2008 to 21.28 km/l in 2023), full-size SUVs (7.58 km/l in 2000 to 15.06 km/l in 2023), and multi-utility vehicles (10.74 km/l in 2000 to 17.20 km/l in 2023) have shown significant improvements in fuel efficiency. This suggests that, alongside other features, buyers in these segments likely place greater importance on fuel economy, prompting automakers to enhance efficiency. Given these trends, manufacturers should prioritise fuel economy improvements in segments where consumers value them the most. In other segments, an excessive focus on efficiency could drive up costs and dampen demand. This variation in consumer preferences also reinforces the case for electric vehicle (EV) production, as CAFE credits provided by the Indian government can help offset fuel economy shortfalls in conventional vehicles.
As far as environmental impact is concerned, fuel economy standards help reduce fuel use and emissions, but their impact will be gradual since they apply only to new vehicles. Older, less efficient models will remain on the roads for years, delaying full environmental benefits.
It is clear why environmental advocates and automakers remain divided on CAFE regulations. While these policies offer clear environmental benefits, automakers face economic challenges if efficiency improvements target segments where consumers do not prioritise fuel economy. However, given India’s pressing environmental concerns, such regulations are essential. In a price-sensitive market, manufacturers must focus fuel efficiency improvements on segments where buyers value them the most to avoid declining sales. A potential solution to the compliance problem lies in EV credits, which provide a viable mechanism for regulatory compliance. These credits allow automakers to offset fuel economy shortfalls in conventional vehicles by producing more EVs. By accumulating credits from EV sales, manufacturers can balance out lower fuel efficiency in other segments without facing penalties. However, their effectiveness depends on simultaneous advancements in EV infrastructure.
Without such improvements, consumer adoption of EVs may remain limited, making it difficult for automakers to meet the new standards.
The article was published with Financial Express on March 15, 2025.
