Image Source: Getty
Background
In June 2021, the biofuels roadmap brought out by NITI Aayog and the Ministry of Petroleum & Natural Gas (MoPNG) shocked many experts because it (i) advanced the target for increasing ethanol blending in petrol to 20 percent (E20) by 5 years to 2025, and (ii) reversed the earlier policy of using second-generation biofuels that do not use food crops as feedstock, to using food crops such as maize (corn), sugarcane and rice as a biofuel feedstock. The report argued that blending locally produced ethanol will strengthen India’s energy security, enable local entrepreneurs and farmers to participate in the energy economy, and reduce tailpipe emissions of vehicles. One of the key motivations behind the revised goal for ethanol blending was above-average monsoon rains and the surplus production of sugarcane and other foodgrain in the previous years. Generous support for ethanol distilleries increased ethanol production from 380 million litres in 2013-14 to over 3.32 billion litres (BL) in 2020-21. However, sugarcane and rice surpluses dwindled, and the government increased the procurement price of corn-based ethanol in January 2024 to drive a shift away from sugarcane-based ethanol. The result is an increase in corn imports with India becoming a net importer of corn in 2024. This has not only increased the import of corn and ethanol, by definition an energy security threat as is the import of petroleum, but also increased international corn prices, and increased feed costs for poultry farmers. In the broader context, increase in corn prices, driven by Indian imports, has also meant higher prices for corn producers across the world at a time when oversupply was driving down prices. Food crop-based ethanol blending in petrol to increase energy security has turned out to be a self-goal.
Generous support for ethanol distilleries increased ethanol production from 380 million litres in 2013-14 to over 3.32 billion litres (BL) in 2020-21.
Policy push
According to the promotional material for the ethanol blending programme published by the MOPNG, the first phase of the programme launched in the early 2000s did not succeed. Under the programme, oil marketing companies were directed to sell 5 percent ethanol-blended petrol in select states, but the results did not meet expectations. Among the reasons listed are the non-inclusion of grain-based ethanol in the blending programme, restriction of grain-based distilleries to participating in the blending programme, high taxation of ethanol at 18 percent, dissatisfactory ‘take home’ price and irregular pricing for ethanol suppliers, limited availability of feedstock (raw material) and state level issues.
Among the long list of government interventions that facilitated ethanol blending since 2014 are: re-introduction of the administered price mechanism for ethanol, the opening of alternative route for ethanol production (2nd generation including petrochemicals), directing state oil companies to set up bio-refineries, easing the tendering process, amendment of industries development and regulation act (IDR act) to clarify the roles of the centre and state for continuous supply of ethanol, regular interaction with states and all other stake holders, notification of updated national policy on biofuels in 2018, interest subvention scheme to increase ethanol production capacity, lowering GST (goods and services tax) on ethanol from 18 percent to 5 percent, allowing conversion of various grades of sugar based feedstock including damaged food grains to ethanol, differentiated ethanol pricing based on raw material utilised for ethanol, extension of blending programme to the entire country and publishing ethanol procurement policy on a long-term basis.
Supply and demand
According to figures quoted by the government, there was a surplus of 6 MT of sugar, 30.9 MT of surplus rice with the Food Corporation of India (FCI), and 10.3 MT of surplus corn in the country in 2019-20. This gave rise to optimism over meeting demand for ethanol in 2025. Ethanol blending increased from 1.53 percent to 8.5 percent in 2019-21. To achieve a blending of 20 percent by 2025, the government estimated that 7.6 BL of sugar-based ethanol and 7.4 BL of ethanol would be required. 6 million tonnes (MT) of sugar production and 16.5 MT of grain production by 2025 was expected to support an increase in ethanol production.
Only 6.35 BL of ethanol production is expected in 2024 (calendar year), a 2 percent reduction from 2023 due to a fall in sugarcane production and a depleting rice grain supply from FCI.
In 2024 (calendar year), sugar production is estimated to decrease by 8 percent due to late rainfall and pest infestations in major sugarcane-producing regions. Similarly, rice production is also expected to be 2 percent lower than the previous year due to water stress. The availability of these two major feedstocks is expected to decrease by approximately 20 percent in 2023 compared to 2022. Only 6.35 BL of ethanol production is expected in 2024 (calendar year), a 2 percent reduction from 2023 due to a fall in sugarcane production and a depleting rice grain supply from FCI. This estimate by the US Department of Agriculture (USDA) takes into account restrictions on sugar feedstocks and broken rice for ethanol production to avoid inflationary food prices, in a low sugar production year. The ethanol blending rate for 2024 is expected to drop to 11.5 percent. The target set by the government was 15 percent by 2023-24.
Issues
India’s ethanol blending policy and its unintended consequences illustrate the complex trade-off between food and fuel security. India, traditionally a major exporter of corn to South and Southeast Asia, is expected to export 84 percent less corn this year and for the first time in two decades, become a net importer of corn. India usually exports 2 MT to 4 MT of corn, but in 2024, exports are expected to drop to 450,000 tonnes, and India is set to import a record 1 MT of corn, mainly from Myanmar and Ukraine, which grow non-GM (genetically modified) corn. India’s pursuit of ethanol blending has diminished India’s role as a key supplier to the global grains market. Between 2020 and 2024, India’s corn exports are estimated to decline by 86 percent. India is also a net importer of ethanol. In 2024, India imported 600 million litres of ethanol, almost 50 percent more than imports in 2023, to meet India’s medical, industrial, and beverage demand. The increase in imports of feedstock and fuel contradicts the goal of improving energy self-reliance by reducing imports.
India, traditionally a major exporter of corn to South and Southeast Asia, is expected to export 84 percent less corn this year and for the first time in two decades, become a net importer of corn.
The price of ethanol in India is higher than in countries like the USA (corn-based) and Brazil (sugarcane-based), which are much larger producers of ethanol. This is because India’s regulated price of feedstock (sugarcane, corn etc) is maintained at a higher level to support farmers. The minimum support price (MSP) for corn has increased from INR13,650/tonne (t) to INR19,620/t in 2022-23, a 43 percent increase. In the same period, the cost of production of corn increased by about 25 percent. In January 2024, the government raised the procurement price of corn-based ethanol by 29 percent, bringing it to INR71.86 (about US$0.86)/litre. The price of corn-based ethanol in the USA in 2024 was approximately US$0.74/litre. Generous MSP facilitate an increase in corn production and higher income for domestic corn farmers. Import of fuel crops such as corn is likely to continue, as the availability of land for corn cultivation is limited. This will support farmers from other countries. Effectively, taxpayers in India will be providing income support for farmers outside India. India’s presence as a large importer of grain in commodity markets will increase globally traded corn prices, to the benefit of corn farmers around the world.
In the nascent stages of the solar industry, subsidies in Germany, Italy, and Spain for solar installations supported the manufacture of solar panels in China. Later, a mature and competitive solar manufacturing industry in China produced affordable solar panels, that facilitated an increase in solar installations in India. Chinese solar panels dominated solar installations in India, which received a wide range of financial subsidies. This meant that Indian taxpayers effectively supported the creation of thousands of solar manufacturing jobs in China. India is now subsidising manufacturers of solar panels within India. As in the case of the solar sector, India may turn to domestic producers of corn to reduce imports and increase “energy security”. But, resource constraints - particularly land and water constraints - for domestic production of fuel crops may prove insurmountable in the long run. In the competition for resources between food and fuel, food is likely to win.
Source: Roadmap for Ethanol Blending, Government of India
Lydia Powell is a Distinguished Fellow at the Observer Research Foundation.
Akhilesh Sati is a Program Manager at the Observer Research Foundation.
Vinod Kumar Tomar is a Assistant Manager at the Observer Research Foundation.
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