Making the Transition to CEV-V Emission Norms: ICRA

A sizeable volume of key equipment in India which continue to be powered by <37kW diesel engines, will be making a leap from Stage III to V emission norms from January 2025. This adoption of CEV-V emission norms will bring India at par with leading global markets.
Ritu Goswami, AVP & Sector Head, Corporate Ratings, ICRA

The Indian construction equipment vehicle (CEV) industry has grown at a robust pace over the last decade, with volumes touching 1.36 lakh units in FY2024, registering a compound annual growth rate of ~12% between FY2015 to FY2024. Along with this growth, which was accelerated by rapid infrastructure development in the country, the industry has been undergoing rapid transformation in terms of equipment quality, with increased focus by the Government of India on implementing stricter emission norms and safety standards.

History of emission norm transition for CEV’s in India

Globally, diesel engines are widely used in large equipment applications typical of construction, agriculture or industrial applications. The rapid growth in their volumes in India has contributed to the rise in discharge of pollutants and while emission standards have been regularly adopted by the domestic CEV industry, the pace has lagged developed markets like the US and the EU.

The Ministry of Road Transport and Highways (MoRTH) and the Central Pollution Control Board (CPCB) enforce emission standards in India. Such standards for CEVs were first adopted in India in 2007 (viz. 1990’s in the US and the EU). With CEV stage V transition, which became effective from January 1, 2025, the industry is witnessing its fourth transition within the last two decades. With CEV-V implementation, the persisting gap with global standards will finally be bridged for wheeled CEVs in India, which constitute 65-70% of the overall industry volumes.

Non-wheeled equipment, mainly deployed in off-road / off-highway applications like mining and irrigation, continue to be outside the purview of these emission norms for now, in contrast with developed markets (like the EU), where such equipment is treated at par with the on-road CEVs and is regulated together under common norms.

Exhibit 1: Timeline of CEV emission norms adoption in India (Source: ICRA Research; ^ Deferred by 6 months - from Oct 1, 2020 * Deferred by 9-months - from April 1, 2024)

Applicability and changes under CEV stage V emission-norms and safety standards under AIS-160

The CEV-V standards will cover a wider range of engines, including those smaller than 37 kW and those larger than 560 kW, tighten particulate matter (PM) emission limits for ≥19 kW engines, and introduce Particle Number (PN) limits for engines with rated power between 19 kW and 560 kW.

In addition to the emission limits, required durability periods, deterioration factors, and test cycles, consistent with those in the European Stage IV and V standards, will be introduced. The stringent PM and PN limits are set at a level, which will ensure diesel particulate filter (DPF) - the key technology needed to effectively control such matter - is adopted. Transition from BS III to CEV-V for <37 kW-powered engines will entail major technology upgrade vis-à-vis CEV-IV to V switchover. The CEV OEMs will need to navigate the challenges of – packaging and integration of new features in existing designs, in-service monitoring and compliance demonstration, technology adoption for diverse equipment with varying complexity, and training and upskilling of end-users in field for service and troubleshooting – all the while managing the incremental cost of equipment.

Apart from changes necessitated by change in emission norms, multiple safety requirements, as contained in Automotive Industry Standard (AIS)-160 and more stringent noise levels (for operators and pass-by as per Central Motor Vehicle (CMV) rules), also became effective on the CEVs manufactured in India w.e.f. January 1, 2025. Implementation of the same will entail – both major and minor – structural changes in equipment design to accommodate safety features like – Rollover Protection Structure (ROPS), Tip-Over Protective Structure (TOPS) and Falling Object Protective Structure (FOPS), among several others.

Exhibit 2: ICRA estimated cost increase across key CEV equipment (Source: ICRA Research )

12-15% cost escalations likely on account of regulatory changes

The top five equipment - i.e. backhoe loaders (BHL), excavators, pick and carry (P&C) cranes, self-loading concrete mixers (SLCM) and soil compactors - have consistently made up over 80% of the volumes sold and have driven the development of the construction equipment market in India for the past decade. BHL occupy the dominant share – at nearly 40%; mobile (P&C) cranes, SLCM and compactors are other dominant equipment types, forming ~20% of other wheeled equipment.

A sizeable volume of key equipment in India continues to be powered by a <37kW diesel engine and will be making a leap from Stage III to V emission norms w.e.f. January 1, 2025, contributing to the significant increase in prices. Also, for some engine rating categories, the incremental cost is likely to be insignificant, like for equipment with engines rated below 19 kW.

Cumulatively, ICRA estimates that ongoing regulatory changes (both emission and safety aspects) can result in an increase of 12-15% in CEV cost (average across equipment types), which will likely be passed on to the customer over the next 12-18 months.

Volatile CEV demand expectation in near-term, albeit strong medium-term outlook

As per the GoI guidelines, while production must be stopped before the transition date to new (CEV) norms, registration of CEVs (old norm compliant) is allowed for 6 months after the respective implementation date. Hence, sales of CEV-IV compliant equipment (pre-buying activity) could take place between January to June 2025. Given the slow pick-up in project award activity in YTD FY2025 and the tight financing scenario (in terms of increased loan application scrutiny for first time buyers/users, lower loan-to-value (LTV) etc.), ICRA expects pre-buying to be mostly back-ended i.e., in Q1 FY2026.

ICRA has, however, revised its volume growth estimates for FY2025 to 0-2% growth, as against earlier expectations of 5-7% YoY decline, owing to better-than-expected volume offtake seen in 8m FY2025 (i.e., 3% YoY growth), aided by healthy mining activity. The FY2026 volume growth estimates - at 4 to 7% - have an upside potential, with pivot on sustained GoI’s capex outlay on key infrastructure development schemes and timely pick-up in awarding and execution activity.

Notwithstanding the usual cyclicality seen in the CEV industry, it is expected to sustain a healthy growth momentum over the medium to long term, driven by a strong pipeline of infrastructure projects, both currently under way and targeted to commence in the coming years, increasing project size (e.g., mega projects coming up - high-speed rail, dedicated freight corridors, river linking projects, among others) and adoption of more mechanised techniques and technologically-advanced equipment by construction companies to improve efficiency, reduce labour cost and ensure timely project implementation.

Source: ICEMA data, ICRA Research

Long-term benefits of regulatory changes to outweigh near-term cost pains

ICRA expects that the pass-through of the increase in cost by the OEMs to customers due to regulatory changes, by way of periodic price hikes, will be staggered over 12-18 months. However, coupled with a subdued credit growth outlook for banks and NBFCs, affordability and sales volumes could be adversely impacted in the near term (largely in FY2026). Also, import dependency for some components (like DPF) can increase till local vendor ecosystem ramps up.

However, over the medium to long term, the transition could help boost Indian exports to Europe and North America (as it would harmonise the production for domestic and export markets) and also to other markets, where emission standards lag behind international best practices or where no standards are in place, given the increasing focus on sustainability. Additionally, mandatory safety features will help improve operator safety and reduce the occurrence as well as impact of accidents at project sites. Lastly, reduced price differential between wheeled and non-wheeled equipment could support increasing usage of more specialised machines (e.g., excavators in favour of BHL), which have the potential to positively impact productivity.