The proposed Corporate Average Fuel Efficiency (CAFE-3) norms could raise the cost of entry-level cars by up to 17%, significantly higher than the Bureau of Energy Efficiency’s (BEE) official projections, while still falling short of meeting compliance targets, industry sources said.
Under the draft framework, the BEE has estimated that automakers opting for technology-based compliance measures—such as start-stop systems, tyre pressure monitoring systems (TPMS), regenerative braking, improved transmissions and LED lighting—would incur an additional cost of about ₹15,000 per vehicle. For flex-fuel and related pathways, the BEE estimates costs at around ₹40,000.
However, industry insiders argue that these estimates understate the real impact. According to them, technology upgrades could push vehicle prices up by roughly ₹25,000, or about 7%, once taxes like GST and other associated costs are factored in. If automakers adopt flex-fuel or carbon-neutral fuel options, the increase could rise to nearly ₹65,000 per vehicle—around 17% for entry-level cars.
Affordability Gap
Data from the BEE shows that even after incurring these additional costs, an entry-level car weighing around 740 kg would emit about 83.43 g CO₂/km—despite availing technology derogation benefits—still falling short of the FY32 compliance target of 62.04 g CO₂/km by 21.39 g CO₂/km.
Even under the flex-fuel (FFV) pathway, which offers deeper emission cuts, a gap of about 7.49 g CO₂/km would persist. This indicates that, despite higher spending on compliance measures, automakers may still fall short of the targets and be exposed to penalties.
Regulatory Paradox
Industry players say this significantly raises the compliance burden, as manufacturers may end up paying both higher technology costs and regulatory penalties.
The higher estimates stem from additional expenses that go beyond component costs. These include engineering modifications, supplier upgrades, testing, and validation processes, factors that industry players say are not fully accounted for in the BEE’s calculations.
“The cost of accessing technology derogation is not insignificant. It involves tangible investments, and these costs ultimately get passed on to the customer,” a senior industry executive said.
The potential price rise is particularly concerning for the small car segment, which is highly price-sensitive and serves as the entry point for first-time buyers. Analysts warn that such increases—combined with the risk of penalties—could result in OEMs ditching small cars in favour of SUVs, a trend already visible in the domestic market.
The impact on larger vehicles is expected to be less pronounced, as their higher base prices dilute the relative effect of cost increases, and most SUVs already come equipped with many of these technological upgrades.
The small car segment has seen a steep decline of about 62% between FY19 and FY25, reflecting rising costs, tighter regulations, and a broader premiumisation trend among buyers.
Industry insiders also point out that the proposed costs could offset earlier policy benefits. One executive noted that the additional burden from compliance could effectively negate the advantages provided through GST reductions for small cars.
“The cost of these technologies could be nearly double the tax benefits given to small cars in GST cuts, eroding their affordability advantage and further accelerating the segment’s decline. Even after incurring these costs, they would still fall significantly short of meeting compliance targets” the executive said.
Experts caution that sustained price pressure on entry-level cars could have wider implications for the auto industry. A shrinking small car segment may reduce accessibility for first-time buyers and slow overall market growth, even as premium segments continue to expand.
