29

Aug

India’s Ethanol Policy: Solving One Problem by Creating Several Others

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Prof Shivaji Sarkar

New Delhi | Saturday | August 29, 2026
India’s ethanol policy has become a classic case of solving one problem by creating several others. A programme designed to reduce oil imports has expanded into sugar, rice, maize, water, food stocks and even livestock feed. The question is no longer simply whether ethanol can be blended with petrol, but whether the country has calculated the full economic, food and environmental costs of doing so on a national scale.
A country facing growing tensions between different generations is now beginning to confront problems that were once only dimly anticipated—from looming water scarcity to the possibility of food shortages—if corrective measures are not taken urgently.
India has largely been a sugar exporter since Independence. The sudden possibility of the country becoming a sugar importer for the first time in a decade therefore requires a deeper examination. The change is being attributed partly to the ethanol policy, which has diverted sugarcane and other feedstocks towards fuel production, while increasing dependence on imported maize and other forms of cattle feed.
The Food Ministry’s decision to impose restrictions on bulk consumers—including confectioners, soft-drink manufacturers, food-processing industries, sweetmeat sellers and other institutional buyers using more than 10 tonnes of sugar a month—comes just before the Dussehra-Diwali festive season. Such buyers have been asked to limit their inventories to 15 days.
Prices of various sugar-based manufactured products are consequently likely to rise. The average retail price of sugar was Rs 52.30 a kg on August 18, 13 per cent higher than a year earlier, according to the Consumer Affairs Department. In July, retail prices had risen by 9 per cent. There is speculation that sugar prices could rise further.
Food vs Fuel
Diverting sugarcane from sugar production to ethanol creates a direct “food versus fuel” conflict. Using arable land and scarce water resources for energy production can tighten domestic sugar supplies, push up food prices and create difficult policy choices between energy security and food affordability.
Policymakers are therefore increasingly looking at shifting the blending burden towards alternative or non-food feedstocks, such as maize, damaged food grains and other agricultural residues, in an effort to reduce the dependence of transport-fuel targets on human food chains.
A possible 20 per cent decline in opening sugar stocks has been projected. The government says it plans to meet the shortfall by importing 10 lakh tonnes of sugar as a precautionary measure. Average annual sugar demand is estimated at around 280 lakh tonnes, compared with 290 lakh tonnes in the February estimate. The October 2025 assessment had put demand at 296 lakh tonnes, reportedly the lowest level since 2019-20.
About 31 lakh tonnes of sugar and molasses are diverted towards ethanol production. India’s total annual ethanol production capacity is approximately 1,822 crore litres, supported by nearly 499 distilleries. Maharashtra leads with a capacity of 396 crore litres, followed by Uttar Pradesh with 331 crore litres and Karnataka with 270 crore litres.
Sugar, molasses and grain feedstocks—mainly maize and surplus FCI rice—together account for about three-fourths of ethanol production. FCI rice alone accounts for 24.64 per cent.
More alarming is the nearly five-fold increase in national distillery capacity since 2014, driven largely by investments in bio-refineries.
There have also been reports of “damaged” food grains being diverted from FCI warehouses to distilleries. The Food Corporation of India supplied 6.35 million tonnes of rice to ethanol distilleries between June 2025 and June 2026, valued at Rs 14,596.78 crore. The grain was sold at rates between Rs 2,250 and Rs 2,320 per quintal—roughly 40 per cent below the average acquisition cost. Reports that some of this rice was subsequently returned to the FCI raise serious questions about possible losses to the exchequer.
Conflict Jacks Up Prices
Directing sugarcane juice or heavy molasses towards ethanol distilleries reduces the quantity of cane available for sugar production. In a year of tight supply, reduced sugar availability can push up domestic prices, increasing the burden on household consumers as well as food-processing industries.
There is also a clear policy contradiction. India is now considering restricting the diversion of sugarcane towards ethanol precisely because sugar has become scarce and expensive.
The government therefore needs to review the 20 per cent ethanol-blending target and assess whether its economic, food and environmental costs justify its continuation.
Vapour vs Engine
Ethanol raises another important question: while it burns as a fuel, it contains substantially less energy per litre than petrol. Ethanol has roughly 34 per cent less energy per litre than gasoline. Therefore, when 10 per cent ethanol is blended with petrol (E10), the energy content per litre falls by roughly 3–4 per cent. With E20, the reduction is generally estimated at around 6–7 per cent.
In other words, ethanol burns, but it does not deliver the same energy as petrol. If this reduction in energy content is taken into account, the benefits of blending for consumers become less clear, even though ethanol producers may gain substantially from the policy.
The issue therefore deserves a careful assessment of who actually benefits from ethanol blending and who ultimately bears its costs.
Review the Policy
The policy also has an international trade dimension. The US has been pushing to expand exports of subsidised maize and animal-feed products to India, partly to reduce its domestic agricultural surpluses. India has resisted such imports because of its restrictions on genetically modified (GM) crops, concerns over animal-derived feed in dairy farming and the need to protect millions of small and marginal farmers.
India has nevertheless approved a quota to import 0.5 million metric tonnes (5 lakh tonnes) of Dried Distillers’ Grains with Solubles (DDGS), a maize-based by-product used as cattle and livestock feed, from the US under a bilateral trade arrangement.
Washington has been using tariffs and trade negotiations to seek greater market access for its agricultural sector. India must therefore carefully protect its economic interests and ensure that imports do not undermine domestic farmers, increase food prices or cause an unnecessary outflow of foreign exchange.
The larger question is whether the country should continue pursuing ethanol blending at the present scale. A complete halt to ethanol blending may be too sweeping a response without a comprehensive assessment. But the 20 per cent target certainly requires an independent and thorough review of its impact on food security, water resources, vehicle performance, consumer prices, farmers and the public exchequer.
The damage, if any, must be assessed against the actual savings from importing less petrol. The NITI Aayog should undertake a comprehensive cost-benefit study before the policy is taken any further. The government must ensure that an energy policy intended to save foreign exchange does not end up creating greater economic, environmental and food-security problems at home.

(Senior journalist and media activist , Shivaji Sarkar specialises in writing on finance and economy)

 

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