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Informist, Friday, Sept. 26, 2025

 

By Anand JC and Gopika Balasubramanium

 

NEW DELHI/MUMBAI – Manufacturers of small cars are expected to get some relief from the expected easing of norms on corporate average fuel efficiency. Lower compliance costs would likely hold back carmakers from increasing the prices of small cars. This is an added boost to the recently announced cut in goods and services tax for the segment. However, demand prospects for small cars in the long run look bleak, as customer preference has shifted more to utility vehicles, analysts said.

 

Late Thursday, the Bureau of Energy Efficiency released an updated draft on norms for corporate average fuel efficiency, which will be applicable for five years starting 2027-28 (Apr-Mar). Small cars, select hybrid, and flex fuel vehicles are set to gain from the updated norms. "India needs small cars. Under the older CAFE (corporate average fuel efficiency) norm draft, small cars would've become unviable, and production of some models could've been stopped because of them," Puneet Gupta, Director at S&P Global Mobility, said.

 

The norms set carbon dioxide emission limits, measured in grams per kilometre, for the fleets of companies. The norms promote fuel efficiency and the use of cleaner technologies. While the second cycle of these fuel efficiency norms is currently in force, views have been sought for the next iteration.

 

The bureau has now classified small cars for the first time for the third cycle, which will be applicable between 2027-28 and 2031-32. It has defined small petrol cars as a motor vehicle that weighs up to 909 kilograms, has an engine with a capacity of 1,200 cubic centimetres or less, and is not longer than 4 metres. It has also been proposed to hand petrol-run small cars additional benefits in the form of higher credit, in addition to their certified fuel-saving technologies.

 

Analysts expect Maruti Suzuki India Ltd. to gain the most from the updated norms, should they go through. Maruti Suzuki, which has a strong market share in this segment, had asked for small cars to get some relief under the next two cycles of fuel efficiency norms, arguing that smaller cars emit less carbon dioxide per passenger, use fewer materials, and consume less fuel than larger cars.

 

However, other companies opposed these concessions, saying that such concessions would undermine India's global competitiveness, according to a report by Business Standard newspaper.

 

The market leader had argued that fuel efficiency norms favoured bigger cars. Stricter norms for smaller cars would've caused price increases and reduced the demand for the segment, which has seen its share eaten by larger cars in the last few years. The latest rejig in goods and services tax rate reduced the tax on small cars by 10% and removed 1-2% of compensation cess levied, which has buoyed demand for them.

 

GST BOOST NOT ENOUGH

The new GST rates came into force from Monday, and companies have been optimistic, based on the demand seen so far this week. Maruti Suzuki, India's largest passenger vehicle maker, said that customer response has been "very strong". "Bookings remain robust, with small cars leading the momentum, registering 50% growth compared to earlier levels. Beyond top 100 cities, we are seeing booking growth close to 100% for small cars," Partho Banerjee, Maruti Suzuki's senior executive officer for marketing and sales, said.

 

However, analysts have argued that this bump in demand is only a short-term phenomenon. "Small car demand hasn't really picked up; customers still prefer compact sport utility vehicles over them," an analyst tracking the automobile sector said under condition of anonymity. "If the demand for small cars were actually that good, there would be fewer discounts on them," he said.

 

Multiple automakers have announced steeper price cuts exceeding the GST rate cut benefit, seeking to benefit from the festive fervour and pent-up demand from the last few weeks. "At best, CAFE (corporate average fuel efficiency) norms will help companies' margin, prima facie," the analyst said.

 

Another analyst, who also spoke under condition of anonymity, said that the structural demand for entry-level cars hasn't picked up. "We will see small car demand go up only in the next two quarters, this is due to the GST rate cut," the analyst said. "Most of the higher demand we are seeing is from rural areas due to the festival season. Bookings haven't increased in urban areas," the analyst said.  End

 

Edited by Ashish Shirke

 

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