There are some policy ideas that look great on paper but throw up umpteen challenges on implementation. The notion that India can do a Brazil and transform 90 per cent of its fleet into flex-fuel vehicles seems to be one such instance. businessline reported this week that, to reduce dependence on China, the government is looking to promote flex-fuel vehicles powered by ethanol. Parleys are on as to whether these vehicles should be granted concessional GST and subsidies.

However, before India takes the leap to flex-fuel it needs to conduct an impartial assessment of the ethanol blending programme (EBP) which is supposed to power this transition. The EBP has taken wing in the last four years. But the jury is still out on whether the positive pay-offs it generates outweigh the costs it imposes on consumers, trade policy and the fisc.

EBP takes off

Successive governments had toyed with the idea of ethanol blending, but it was the NDA regime that created the right conditions for it. In 2018, a new biofuel policy allowed sugar mills to produce ethanol directly from cane juice and B-heavy molasses, a more efficient route than the conventional one. Foodgrains were cleared for use as ethanol feedstock, with the FCI (Food Corporation of India) tasked with selling surplus stocks to ethanol makers.

The Centre brokered a long-term supply agreement, under which Oil Marketing Companies (OMCs) would lift ethanol from distillers at government-decided prices. An interest subvention scheme was launched for bio-ethanol capex.

In 2021, the NITI Aayog set a 20 per cent target for ethanol blending in fuel by 2025 and drew up a detailed roadmap. To meet this target, India would need about 10.16 billion litres of ethanol for fuel blending. Accounting for other uses, the total requirement would be 13.5 billion litres, calling for installed capacity of 15 billion litres. Cane-based distillers were expected to produce 5.5 billion litres for blending, with grain-based distilleries producing 4.6 billion litres from rice, maize and damaged grains. The roadmap worked, with private distillers putting up ethanol capacities of 16.2 billion litres by September 2024.

With OMCs floating tenders every year, they have ramped up ethanol supplies for fuel blending too. This surged from 0.67 billion litres in 2016-17 (ethanol supply year November to October) to 5.45 billion litres in 2023-24. India has attained 15 per cent fuel blending in 2024, putting the 20 per cent target within reach. Over a decade, the government says, EBP has delivered ₹1.01 lakh crore in foreign exchange savings, while OMCs paid ₹1.45 lakh crore to distillers and ₹87,558 crore to farmers. However, the journey to 15 per cent blending has been far from smooth. To keep up ethanol supplies, the government has had to resort to numerous policy contortions on feedstock mix and pricing that have impacted sugar, rice and maize consumers. It has made ad-hoc changes to import and export policies that have impacted India’s position in global agri-trade. It has also incurred indirect subsidies via OMCs and FCI, with implications for the fisc.

Cane conundrum

The knottiest problem confronting EBP is ensuring diversion of food crops to ethanol without risking food security or inflation. With India not producing durable surpluses of cane, rice or maize, this has been a tall ask.

Take sugarcane. When NITI Aayog prepared its roadmap in 2021, India was sitting on a comfortable sugar surplus of 6 million tonnes, with production at 32 million tonnes and consumption at 24 million tonnes. This led it to project that cane would make up the bulk of ethanol feedstock. But as it transpired, a severe El Nino in 2023 depressed sugar output to 33 million tonnes, even as consumption rose to 27 million tonnes.

With dwindling sugar stocks leading to a price surge, the Food Ministry issued a desperate directive in December 2023 barring sugar mills from diverting their cane juice or B-Heavy molasses to ethanol. This led to a halving of cane supplies to ethanol in 2023-24, with distillers lamenting the ₹15,000 crore they had sunk into capex. These curbs were lifted recently, but with the caveat that the Food Ministry would monitor sugar prices.

In the long run, India’s sugarcane output may be adequate to divert the required 78 million tonnes, to churn out the projected 6.8 billion litres of ethanol. But diversion to ethanol will likely tighten domestic supply of sweeteners, stoking inflation in bad monsoon years.

Food or fuel?

If the tightrope walk between consumers and the EBP is tricky with sugarcane, it is positively harrowing with rice where the demand-supply balance is tighter. Assuming that rice and maize chip in equally to produce 4.6 billion litres of grain-based ethanol, five million tonnes of rice and six million tonnes of maize are required annually as feedstock.

But in August 2023, after a drop in paddy acreage, FCI found itself in a tight corner with rice stocks of 24 million tonnes that were just about enough for PMGKAY obligations. This prompted the Centre to stop FCI rice sales to distilleries and ban non-basmati exports. FCI sales were resumed in August 2024 with a 2.3 million tonne cap. But whether the rice route to ethanol will revive is moot. Against the original commitment that FCI would sell rice to distillers at ₹20/kg, they are now required to buy it from auctions at over ₹30/kg. They complain this is unviable, but FCI is unlikely to budge. With its economic cost for procuring and storing rice at ₹39 per kg, FCI cannot afford to bloat its own losses or the Centre’s food subsidy bill, by selling rice at throwaway prices.

With the rice route posing a challenge, the Centre has been nudging distillers towards maize. But this is a slippery slope. Though India’s maize acreage has expanded in recent years, the grain is consumed by multiple sectors — poultry, animal feed, starch and food processing. This year, the diversion of maize to ethanol has left the poultry/feed industry short and clamouring for duty-free imports. If 6 million tonnes of maize are diverted annually to ethanol, India may turn from a net exporter of maize to a net importer. There is also the risk of GM corn supplies entering the food chain through imports.

This tug-of-war on crop supplies for food versus fuel is unlikely to be temporary. With climate change leading to unpredictable monsoon patterns, trying to meet fixed ethanol blending targets with fluctuating food output will remain a Sisyphean task.

Pricing problems

Then there is the question of how far the Centre is willing to raise ethanol prices to coax distilleries to stay in the game. Between FY19 and FY23, it was obliged to hike ethanol procurement prices from ₹43-59 a litre to ₹49-66. It has also been fixing different prices for different feedstock though the end-product is the same. OMCs bear these procurement costs, which may trend up irrespective of crude oil prices.

In countries such as Brazil where ethanol blending has been a success, its economics is decided by market forces. Distillers pay market prices for feedstock and ethanol prices automatically adjust to changes in input costs and oil prices. Consumers switch between petrol and ethanol based on relative prices. In India though, EBP economics is distorted by subsidies. Minimum support prices for cane, rice and maize set a high floor on ethanol production costs. This pushes up ethanol pricing, but OMCs have no choice but to procure it with their costs indirectly borne by their shareholders and the fisc.

Clearly, there is a long way to go before India can leapfrog to flex-fuel vehicles. The Centre needs to undertake an impartial cost-benefit analysis of whether the EBP is delivering the goods.

Assuming that rice and maize chip in equally to produce 4.6 billion litres of grain-based ethanol, five million tonnes of rice and six million tonnes of maize are required annually as feedstock.