Indian Govt Wants To Fine Hyundai, Mahindra, Kia Rs. 5,972 Crore For Emission Norm Violations: Fair Or Unfair?

The Indian government wants to fine Hyundai, Mahindra and Kia Motors Rs. 5,792 crores for violating emission norms, reports IndianExpress. Honda, Renault, Nissan, Skoda and Force Motors are also said to be on the radar, with the Indian government seeking to fine them a combined 1,316.8 crore. Taken together, the Indian government plans to fine 8 of these automakers a combined Rs. 7,300 crore, or about 0.86 billion US dollars. And these fines are for not meeting CAFE norms for the financial year (FY) 2022 (April 2022 to March 2023). What’s going on? Let me explain!

Say hello, to CAFE!

CAFE – an acronym for Corporate Average Fuel Efficiency – is a norm that all automakers in India have to follow. Under this norm, automakers have to ensure that their cars sold in India, on average, should consume less than 4.78 liters per 100 kilometers, and emit less than 113 grams of carbon dioxide per 100 Kms. In mileage terms, this translates to about 20.92 Kmpl.

Since some cars will consume more than 4.78 liters of fuel per 100 kilometers and others will consume less than 4.78 liters of fuel per 100 kilometers, the term ‘Corporate Average’ in CAFE comes into play. So, instead of considering fuel consumption individually, CAFE norms consider the emissions of the entire fleet, and rightly so as car makers can have some fuel efficient cars and some not-so-fuel efficient cars.

Wait, but how does CAFE work

Let me illustrate with an example.

Let’s assume that it’s 2022, and Hyundai sells only 2 cars in India – the Grand i10 NIOS and the Creta. Another assumption: Hyundai sold 10,000 Grand i10 NIOS hatchbacks last year, and 10,000 Creta SUVs in the same year. Yet another assumption: the Grand i10 NIOS has a mileage of 25 Kmpl, and that the Creta has a mileage of 15 Kmpl.

This means the Grand i10 NIOS consumes 4 liters of petrol per 100 Kms, ducking under the CAFE norms. On the other hand, the Creta consumes 6.66 liters of petrol per 100 Kms, which is well over the 4.78 liter limit under the CAFE norms.

According to CAFE norms, the total fleet fuel consumption and emission from Hyundai for 2022 should have been 20,000 (total number of cars sold) times 4.78 (maximum allowable fuel consumption per car for 100 Kms). 20000 times 4.78 totals 95,600 liters. In reality, 10,000 Grand i10 NIOS’ times 4 (fuel efficiency) plus 10,000 Cretas times 6.66 (fuel efficiency) totals 106,600 liters of fuel consumed according to CAFE. So, the excess is about 10,000 liters of fuel, which means a violation of CAFE norms.

Naturally, the fines must kick in! But from when is the moot question. For instance, there were no fines up to November 2022 for CAFE II norm violations as it was only in December 2022 that the new penalties were notified by the Government by amending the Energy Conservation Act of 2001.

According to the latest CAFE norm violation penalties, if a vehicle exceeds the norms by under 0.2 liter per Km, the manufacturer will be fined Rs. 25,000 per vehicle sold, plus a base fine or Rs. 10 lakh. This is called Slab 1. If a vehicle exceeds the 0.2 liters per Km threshold, then the fine per vehicle will be Rs. 50,000 per vehicle sold plus the base fine of Rs. 10 lakh. This is called Slab 2.

Now, let’s revisit the imaginary Hyundai example.

Hyundai sold 20,000 vehicles, and exceeded the CAFE norms by 10,000 liters. So, the excess is 10,000 divided by 20,000, or 0.5 liters per kilometer. This is over the 0.2 liter per Km threshold. So, a higher fine of Rs. 50,000 per vehicle kicks in, apart from the base fine of Rs. 10 lakh. So, 20,000 times 50,000 rupees plus 10 lakh is what the Indian govt will fine Hyundai for exceeding the CAFE norms. This comes up to Rs. 100.1 crore. I reiterate, all figures here are imaginary, and just meant to explain how penalties for CAFE norm violations are calculated.

Automotive emissions are one of the many reasons of declining air quality (COx and NOx emissions), and global warming (CO2 emissions). Automobiles also consume fossil fuels primarily, and India imports most of its petroleum, leading to a massive fuel import bill. To curtail this and make cars cleaner, CAFE norms were put into place by the Bureau of Energy Efficiency (BEE) – a division of the Union Ministry of Power.

These norms were first introduced in FY 2017-18, and were called CAFE or CAFE I. Under CAFE I, average fleet fuel consumption limit was pegged at 5.5 liters/100 Kms, and fleet CO2 emission was pegged at 130 grams of CO2 per 100 Kms. In FY 2022-23, the government introduced more stringent CAFE (CAFE II) norms (4.78 liters per 100 Kms and 113 grams of CO2 per 100 Kms), and higher penalties for violations.

This is where things get complicated!

So, if Hyundai, Mahindra, Kia and others violated these norms, they must pay, no? Well, automakers are saying that the fines are unfair. While the government announced the more stringent CAFE II norms for FY 2022, automakers contend that the higher fines came into force only from January 2023, and not April 2022.

This has to do with the gap between announcement of CAFE II norms, and notification of higher fines. Any government order needs to be notified for it to come into affect. Mere announcement does not mean the law/order coming into effect.

It was only in December 2022 that the law (Energy Conservation Act of 2001) was amended to include the higher penalties.

In fact, as early as January 2023, there were hectic parleys between the Indian government and automakers, regarding the high penalties for CAFE II norm violations. Why, even in the middle of 2022, JATO Dynamics found that Mahindra – an automaker that mainly builds large, heavy SUVs running on diesel – was exceeding the proposed CAFE II target by about 28 % in FY22 (April 2021 to March 2022).

Even Maruti and Hyundai were found to have exceeded the proposed CAFE II target by about 10 % for FY22. However, CAFE II norms were not yet in place. Notably, all 18 automakers had met the CAFE I norms that were in place during FY 2021-22.

Circling back to the issue at hand, India’s leading car makers hit by the penalties contend that the government must not impose the hefty fines as the higher fines came into place for CAFE II violations only in December 2022. I feel it’s a fair point as the Indian government should have notified the new penalty structure concurrently with the introduction of the CAFE II norms rather than bringing in a penalty clause nearly 9 months after the new norms were in place.

Policies have to be consistent!

The Indian auto industry employs millions of people, through direct and indirect employment. Cars and motorcycles made in India are exported to countries around the world. Homegrown automakers such as Mahindra, Royal Enfield, Bajaj Auto, TVS Motors, Tata Motors – just to name a few are continuously innovating, taking Indian products to the globe.

Parts makers such as Motherson Sumi, Bharat Forge and Uno Minda – again naming just a few – are supplying Indian-made parts to automakers across the globe. Sudden policy changes and knee-jerk action by the Indian government affects crores of Indian engaged in the automotive sector, and has a disrupts livelihoods.

What’s the whole point of having CAFE norms?

CAFE norms are meant to cut down on fuel consumption and tail pipe emissions. How does this work? Hypothetically speaking, if a car consumes 1 liter of fuel, it emits say 10 grams of CO2 and other tail pipe emissions, most of which are harmful the environment. Now, if the car’s consumes only half liter of fuel thanks to a slew of measures meant to improve fuel efficiency, it will emit only say 5 grams of tail emissions or even probably a lower figure thanks to complex emission control equipment. So, CAFE norms not only lead to fuel efficient cars but also to cars that are cleaner, and better for the environment.

This leads us to the next big point: The inevitability of hybrids and electrics!

While CAFE I norms were the beginning, CAFE II norms took it a step further, to the extent that car makers are feeling the pinch. For perspective, Hyundai India’s FY23 profits stood at Rs. 4,709 crore while the proposed Rs. 2,837.8 crore fine by the Indian government is a whopping 60 % of the car maker’s profits. As for Mahindra, which made profits of about 10,000 crores in FY23, the fine is over 17 % of profits. Clearly, these numbers will be too hard to digest for any automaker.

And CAFE norms are only going to get tighter. In 2027, CAFE III norms will come into effect, seeking to reduce carbon dioxide (CO2) emissions to 91.7 grams/Km, that too under the more stringent WLTP (world harmonised light vehicles testing procedure) cycle. Five years later, in 2032, CAFE IV norms will come in, further cutting CO2 emissions to 70 grams per Km, again under the WLTP cycle, which is a lot tougher than the MIDC (Modified Indian Driving Cycle) cycle that CAFE 1 and CAFE 2 follow.

To meet these norms, along with much tighter emission norms, car makers have no option but to electrify their fleets. So, a slew of hybrids and electric cars will be the only way that car makers in India, and abroad, will be able to meet these norms, and avoid hefty fines. Yes, reduction of CO2 emissions is a global goal, and India is a signatory to the global climate action plan under the Paris Agreement.

Finally, how did the country’s largest car maker – Maruti Suzuki – meet CAFE II norms while Hyundai, Mahindra, Kia and other were caught napping? Well, this is another story, for another day. Keep an eye on this space!