Unseen Price of Ethanol | Food, forex, and fiscal fallout

At 20% blending, we need to take a comprehensive look at the ethanol blending programme, which has multiple objectives, inter-linked complicated incentives, and unintended side effects on food security, food inflation, and fiscal burden

India’s sustained economic growth will not happen without a parallel and steady increase in energy usage. That will increase at roughly the same rate as GDP growth for the next two decades. We need to increase electricity for households, factories and offices, and fuel for transportation.

Three-fourths of India’s electricity is produced from coal, and the remaining is from renewable sources such as solar, wind, hydro, nuclear, and biomass. The installed capacity of renewables has reached nearly 50 per cent of the total, but production is at 25 per cent. India has the third-largest deposits of coal, but still needs to import more than one-fifth of its requirement from foreign sources. That means an outgo of $20 billion or more for importing coal.

For transportation, the import dependence is higher. Nearly 90 per cent of the crude oil consumed is imported, clocking 242 million tonnes last year. Depending on international prices, say in a range of $65-85, it drains $125-150 billion from India’s foreign exchange. At higher oil prices, the forex burden is much higher.

The good news is that the export of petrol and diesel is increasing faster than the import of crude oil. Last year, the total export was 65 million tonnes of petrol and diesel, with very good profit margins. In the next few years, India’s domestic refining capacity will go up by 20 per cent and reach above 310 million tonnes. This growth in refining capacity is faster than the domestic requirement growth, meaning more export earnings. The refining capacity expansion happens due to a combination of brownfield expansion and building new refineries. The refineries in the Western world are closing down, and thus, there is an opportunity for India. A proposed new refinery in western Maharashtra would be a big boost for production, employment, and exports. Imagine a future where one-fourth of the refining capacity of the country is used only for exports, which will reduce the total outflow of foreign exchange. Keep in mind that the world is also trying to move away from fossil fuels.

To reduce pressure on foreign exchange and the carbon footprint, India embarked on an ambitious programme to blend ethanol with petrol and diesel. Ethanol was to be made from sugarcane, i.e. molasses, or grains such as maize and rice, or dual feed. The progress since 2013 on ethanol blending is very impressive. It started with just 1.5 per cent blending back in 2013. By this year, the target of 20 per cent has already been achieved. In terms of the growing volume, it is a spectacular growth of nearly 30 per cent per year, compounded over the past 12 years. This pace is far ahead of the growth of petrol and diesel consumption in India.

The ethanol blending programme (EBP) benefits from special subsidies provided for the purchase of feedstock by ethanol producers, and the lower rate of GST paid by them. There are also interest subvention schemes, providing loans and lower interest rates to the producers. India has become a global leader in ethanol production technology. The EBP targets also mean that oil marketing companies have to compulsorily purchase ethanol up to a certain target. Currently, of the 1,810 crore litres of installed capacity, 816 crore litres are of sugarcane/molasses-based, 136 crore litres of dual feed, and 858 crore litres are grain-based, which include maize and rice.

At this stage, it is worth examining the EBP. It has four objectives, namely, to reduce import dependency on crude oil, to reduce the outflow of foreign exchange, to reduce carbon emissions, and to provide a boost to agricultural output. At 20 per cent blending already achieved, how successful has the EBP been in meeting these objectives?

As per a report from PIB, over the past 10 years till 2024, the total savings in crude oil imports were about 18 million tonnes, which is just 0.8 per cent of the total oil imported during that period. In terms of foreign exchange savings, it was about Rs 1.06 trillion, or roughly $10 billion (using the average exchange rate). But that is less than 0.5 per cent of the outgo saved over 10 years. In terms of carbon dioxide emissions, in 10 years, the EBP has saved 54 million tonnes, which is also less than 1 per cent. As far as agriculture is concerned, farmers earned nearly Rs 1 trillion extra during these 10 years, and distilleries too earned another Rs 1 trillion.

The percent increase in farm income for those sugarcane or maize farmers is probably modest. The EBP has provided an assured market for sugarcane, and hence the sugar sector, which is often plagued by excess production, thanks to the minimum support price and assured price mechanism. Recently, the government has decided to divert 5 million tonnes of rice, which is about 9 per cent of world exports, to ethanol production. It represents only 4 per cent of India’s production, and 10 per cent of stocks sitting in government godowns.

One side effect of diverting grain like rice and maize to the EBP is that it deprives the poultry feed sector, which is suffering from scarcity and input cost escalation. India turned from a net exporter to a net importer of maize, thanks to the EBP. It can also lead to food inflation, leading to instant and arbitrary bans on the export of sugar and rice. Thanks to the high assured price for ethanol, distilleries often make more money converting rice to ethanol, rather than selling it as grain. Keep in mind that India provides free five kilogrammes of wheat or rice to 810 million people. That operation too requires government procurement and distribution.

The excise and other tax burdens on oil marketing companies are more than 50 per cent for petrol and diesel, but ethanol has a negligible tax burden. Can some of this be rationalised to make the fiscal burden fairer between petrol and ethanol? The bottom line is that at 20 per cent blending, which is a great milestone, we need to take a comprehensive look at the EBP policy, which has multiple objectives, inter-linked complicated incentives, and unintended side effects, on food security, food inflation, and fiscal burden.

Ajit Ranade is an economist. (Syndicate: The Billion Press)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.