CAFE-III must make green mobility affordable: For India, the transition to greener mobility is necessary given its heavy dependence on imported crude oil and its climate commitments. The challenge is to decarbonise road transport without making personal vehicle ownership less affordable for middle-class households.
For a country where a car remains a major household purchase, rising vehicle prices, expensive financing and tighter regulatory requirements can turn ownership into a long-term financial burden. India is selling more passenger vehicles, but the average car is becoming more expensive. Higher sales therefore do not necessarily mean that buying a car has become easier for the middle class.
READ | CAFE-3 norms could drive India’s small cars off the road
The government’s new Corporate Average Fuel Economy (CAFE-III) norms, notified on September 30, sharpen this question. The rules will take effect from April 2027 and require manufacturers to improve the fuel efficiency of their passenger-vehicle fleets by about 16.7% over five years. Carmakers can meet the targets through more efficient internal-combustion engines, hybrids, alternative fuels and electric vehicles. Battery-electric and range-extended electric vehicles receive a threefold volume factor in fleet-average calculations, giving manufacturers a strong incentive to sell more of them.
The policy could therefore accelerate the search for smaller and cheaper EVs. But regulation by itself cannot make cars affordable.
A growing car market with a pricing problem
India’s passenger-vehicle market reached a record 46.43 lakh units in FY26, according to the Society of Indian Automobile Manufacturers. SIAM attributed the strong performance partly to lower financing costs, tax relief and improved purchasing power. Yet the composition of sales has changed as consumers have moved towards SUVs and higher-priced models.
JATO Dynamics data cited in January 2025 put the average retail price of mass-market cars at about ₹13 lakh, compared with ₹11.64 lakh in 2024. The figures capture the effect of premiumisation and rising vehicle costs, even as manufacturers continue to compete for volume.
The small-car segment illustrates the tension. Stricter safety and emissions requirements have raised manufacturing costs, while consumer preferences have shifted towards SUVs. Recent tax relief has helped revive demand for smaller cars, suggesting that price remains an important constraint. Entry-level sedans accounted for 7.1% of passenger-vehicle sales in January-August 2026, up from 6.2% in 2024, according to JATO Dynamics data.
This does not mean that rising average prices are evidence of rising household prosperity. A manufacturer can increase the value of its sales by selling more expensive vehicles even when a first-time buyer finds an entry-level car harder to afford.
The same problem is visible in electric vehicles. Around 65% of India’s passenger-vehicle market is below ₹12 lakh, but EV penetration in that segment remains around 1.5-2%. In FY26, vehicles priced below ₹10 lakh accounted for only 6% of electric passenger-vehicle sales, while the ₹20-30 lakh category accounted for 35.7%, according to JATO Dynamics data cited by Business Standard.
The green transition is therefore progressing faster in parts of the market where consumers can absorb a higher upfront price.
READ | EVs vs hybrids: Can the electric vehicle market survive without subsidies?
CAFE-III could change the economics of affordable EVs
CAFE-III gives manufacturers several ways to meet their fleet targets. They can improve conventional-engine efficiency, increase sales of hybrids and alternative-fuel vehicles, introduce more EVs, or use the credit mechanism provided under the rules. The threefold volume factor for battery EVs and range-extended EVs makes each such vehicle particularly valuable in fleet calculations.
That creates a commercial reason to develop EVs that can sell in large numbers. If an affordable electric model can generate substantially more compliance value than its actual sales volume, manufacturers have an incentive to use it as part of their wider product strategy.
This is where the regulation could intersect with the affordability problem. Industry executives have argued that CAFE-III strengthens the case for smaller EVs because manufacturers need high-volume vehicles that can improve their fleet averages. Around 65% of passenger-vehicle demand is below ₹12 lakh, yet the EV presence in this segment remains small.
Range-extended EVs could also have a role. They retain electric drive while using a smaller internal-combustion engine as a generator, potentially addressing concerns about long-distance travel without requiring the large battery packs used by some conventional EVs. Their treatment under CAFE-III gives manufacturers another route to reduce fleet-average fuel consumption.
But the regulatory incentive should not be mistaken for a guarantee of cheaper cars. Manufacturers still have to recover the cost of batteries, electronics, safety equipment and compliance. If those costs are passed on to buyers, a policy intended to improve efficiency could raise the price of entry-level vehicles.
READ | Hybrids vs EVs: A glimmer of green or a roadblock to electrification?
Affordability is more than the showroom price
A cheaper purchase price is only one part of affordable mobility. For an EV, battery warranty, financing costs, charging access and eventual replacement costs influence the economics of ownership. For an internal-combustion vehicle, fuel consumption, insurance, maintenance and repair costs can determine whether the vehicle remains affordable over several years.
The distinction is important because the cheapest car to buy is not necessarily the cheapest car to own.
India therefore needs a green mobility policy that allows several technologies to compete on cost and usefulness. Smaller EVs have a role, but affordable petrol, CNG and hybrid vehicles will continue to serve households for which an EV remains impractical or too expensive. Safety and emissions standards should continue to improve, while their cumulative effect on entry-level vehicle prices needs to be considered.
The larger policy objective should be to widen access to cleaner mobility rather than simply increase the number of electric vehicles sold. CAFE-III can help if manufacturers respond to its incentives by developing efficient vehicles at price points accessible to a much larger share of households. If the benefits of cleaner technology remain concentrated in ₹15-25 lakh vehicles, India will reduce the emissions intensity of a part of its car market without resolving the affordability problem.
A successful transition will require both outcomes: lower emissions and a passenger-vehicle market in which a middle-class household can still afford to buy and own a car.