Modi Government’s Big Ethanol Push: A Necessary but Risky Bet

The ethanol supply year has ended and final supply numbers are not available but the target has surely been missed.

India’s ethanol programme, for all practical purposes, is based on surplus sugarcane/sugar and rice production. The high prices and assured procurement which the government offers make these crops quite attractive for farmers and they go big for them.

(Photo: Kamran Akhtar/ The Quint)

The Bharatiya Janata Party (BJP) government was rightly worried, when it assumed power in 2014, about India’s over-dependence on the import of petroleum crude. India had imported 144 million tonnes of crude oil in 2013-14 costing a humungous USD 143 billion.

Prime Minister Narendra Modi vowed in April 2015 to bring down India’s import dependence from 77 percent in 2014 to 67 percent by 2022. The mega push for ethanol by the Modi government (20 percent blend in petrol by 2025-26) was launched in this context.

The Modi government could not attain a targeted reduction in import dependency. Instead, import dependency has gone up by 10 percent to 87 percent now.

Ethanol Policy’s Big Shift Under the Modi Government

How has ethanol policy fared? What is the current state of ethanol policy and push? Can it attain the targets or are there risks which can undermine it?

India’s engagement with ethanol acquired formal policy shape in 2006 when the UPA government directed the Oil Marketing Companies (OMCs) to supply 5 percent ethanol-blended petrol as part of the newly-adopted National Policy on Biofuels (NPB-2006). The government later adopted the goal of 20 percent blending of bio-diesel in diesel and ethanol in petrol by 2017.

Nothing much, however, happened in the implementation of these directions and policies. In June 2018, when the Modi Government adopted the NPB-2018, ethanol blending in petrol was only around 2.0 percent, with next to nothing blending in diesel. Modi government adopted the same 20 percent blending target for ethanol and a lower 5 percent for biodiesel, with a revised timeline of 2030.

The big difference was in the seriousness with which the Modi Government went about implementing the policy. In September 2019, the government permitted the inclusion of new sources – sugar and sugar syrup – for producing ethanol.

In August 2020, the government began providing procurement assurance for a 5-year supply to registered ethanol suppliers. In September 2020, the OMCs began offering off-take guarantees besides investing in building storage facilities. The government also lowered the GST rate on ethanol meant for blending to 5 percent.

The government felt quite confident and showed its commitment by amending the NPB-18 in May 2022 to advance the ethanol-petrol blending target to Ethanol Supply Year (ESY) 2025-26.

The Government Altered Production Sources and Price Incentives

The government estimated that a little over 1,000 crore litres of ethanol would be required to achieve 20 percent ethanol blending by 2025-26. To make sure that such a large quantity of ethanol can be produced, the government altered the supply sources materially.

Taking advantage of India turning into a major sugar surplus producer, the government decided to allow ethanol production from sugar/sugarcane juice expecting a diversion of 5-6 MMT of sugar to yield 300-350 crore litres of ethanol. The government also decided to allow use of spare and unfit for human consumption food grains – rice and wheat – from rising food grains stocks with the Food Corporation of India (FCI).

In addition, the government decided to offer price incentives – providing not only good prices for ethanol produced but also different prices for ethanol sourced from different sources.

Ethanol prices were raised aggressively from ESY 2018-19 onwards when the ex-mill price of ethanol derived from C-heavy molasses was fixed at Rs 43.46 per litre. For the first time, a separate ex-mill price of Rs 52.43 per litre was fixed for ethanol derived from B-heavy molasses/partial sugarcane juice and Rs 59.19 per litre for 100 percent sugarcane juice.

These prices were regularly increased. For the current ESY 2022-23, the ethanol prices from C-heavy molasses, B-heavy molasses, and sugarcane juice/sugar/sugar syrup are Rs 49.41, Rs 60.73, and Rs 65.61 per litre respectively.

Ethanol Production Increased Steadily Until 2021–22

The result of all these measures and incentives was visible in the quantity of ethanol produced and supplied to the OMCs.

For the ESY 2018-19, 188.57 crore litres of ethanol were supplied to OMCs. The supply reduced slightly to 173.03 crore litres in ESY 2019-20 but increased sharply to 302.30 crore litres in ESY 2020-21.

In ESY 2021-22, the ethanol procured by OMCs increased to 433.6 crore litres. The ethanol industry responded phenomenally in building production capacity which has by now increased to approximately 1037 crore litres.

The Government Is Likely To Miss the Target This Year

The target of ethanol production for the current year – ESY2022-23 – was fixed at 542 crore litres. This has proved challenging.

Reduced production of rice and sugarcane threatened to disturb the principal source supply. The government tried to protect the ethanol industry by reducing the sugar export quota and banning the export of non-basmati rice. Despite that, FCI had to stop the supply of spare rice to ethanol producers.

The OMCs had floated tenders for about 600 crore litres of ethanol for the year. By August end, about 415 crore litres were supplied.

The ethanol supply year has ended on 31 October. The final supply numbers are not available but the target has surely been missed.

Risk Lies in Availability of Sugar and Rice

India’s ethanol programme, for all practical purposes, is based on surplus sugarcane/sugar and rice production. The high prices and assured procurement which the government offers make these crops quite attractive for farmers and they go big for them.

There are, however, natural limits to increasing sugarcane and rice production in the country. The rainfall variability is the biggest risk as both these crops consume enormous amount of water. The 2022-23 shortfall is because of enormous variation in monthly and temporal rainfall from the normal.

These variations will keep occurring every now and then.

Give Up the Hard Target; Be Opportunistic

The present ethanol promotion strategy is fundamentally risky. It is certainly not conducive to a hard target-based approach. The variability of source supply also makes investments in ethanol capacity creation non-viable.

A 20 percent ethanol in petrol amounts to only 4% of petroleum products as the share of petrol in petroleum products is about 20 percent only. There is no progress on bio-diesel as India lacks surplus supply sources for producing bio-diesel. It does not make sense to hard-target ethanol production as well.

It will be better if the ethanol promotion strategy is built on the economics of opportunistically producing as much ethanol as available and sparable sugarcane and food grains allow.

The policy should aim at producing more ethanol in the years of excess sugarcane and rice production and less or even no production in lean/bad years.

(The author is former Economic Affairs Secretary and Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)