Ethanol-blended fuel should not be forced on consumers irrationally

The Indian government’s policy to continue producing E20 petrol at a cost higher than that of pure petrol when oil prices dip under $70 a barrel to “compensate farmers adequately” is a deceptively well-formulated proposition. Most feedstock for the fuel-blending programme is from sugarcane, one of India’s most water- and fertilizer-intensive crops, mainly grown in water-stressed Maharashtra and Karnataka. Whether the policy’s net economic benefit remains positive will depend on the gains from lower crude imports, environmental improvements, and higher rural incomes outweighing these additional costs. Efficiency also remains a concern. Consumers — including people who are poorer than sugarcane farmers — pay more at the pump, oil marketing companies procure ethanol at the administered price, distilleries buy feedstock, and only then do farmers receive higher prices. Higher feedstock prices also do not address most reasons farmers have lower incomes, such as post-harvest losses and limited market access. Crucially, if the government rewards every unit of ethanol irrespective of feedstock, the policy will favour whichever feedstock has the largest installed base: sugarcane. Instead, the objectives should include resource efficiency and food security. The state could invest in irrigation and logistics and institute revenue-sharing arrangements with ethanol producers and cooperatives.

India has encouraged maize and grain-based distillation capacity has expanded rapidly, periodically allowed ethanol to be produced from the Food Corporation’s surplus or damaged rice holdings, and has supported commercial plants using agricultural residues such as rice straw under Ministry of Petroleum and Natural Gas schemes. Maize and millets are less thirsty but maize still demands significant fertilizer inputs while millets produce less fermentable starch per hectare. Sweet sorghum is less water-intensive and has a shorter growing season than sugarcane. Lignocellulosic biomass such as rice and wheat straw, maize stover and groundnut shells can also support second-generation (2G) ethanol. 2G ethanol from agricultural residues can avoid using cropland for fuel, reducing competition with food crops and addressing stubble burning. It is more expensive and technologically demanding but that is a better problem to solve, with proactive policymaking. The government could pay a premium for ethanol produced from residues, subsidise equipment and infrastructure to collect and store crop residue, facilitate contracts between aggregators and distilleries, and provide viability-gap funding and offtake agreements. Ultimately, ethanol policy should not be independent of agricultural policy. And import substitution is no excuse for consumers being forced to pay more for lower-mileage fuel than pure petrol.