Why India's policy to produce ethanol-blended petrol is short-sighted

The ambitious policy to promote ethanol-blended petrol is politically popular but will be bad for India's food and water security

India’s ambitious policy to produce ethanol-blended petrol (EBP) is a short-sighted and belated approach to bolster the country’s energy security. Plans to substitute 20 per cent of petrol in vehicles with EBP by 2025 will have an adverse impact in the long term on India’s most critical resource — water.

Ethanol as a fuel made sense in the 2000s when foreign exchange was scarce and oil was the go-to fuel. But in a world sprinting towards electric vehicles (EVs), batteries and hydrogen, ethanol, while politically popular, is less suited for India amid scarce land and water. We may end up compromising food security in the longer term.

Last June, Prime Minister Narendra Modi announced an EBP road map, advancing a 20 per cent blend target (E20) to 2025 from 2030 alongside a phased E20 rollout across the country from April 2023, starting in states with surplus ethanol production. Oil firms have earmarked selected cities in 11 states — including Uttar Pradesh, Haryana, Delhi, Goa, Karnataka, Maharashtra and Punjab — where E20 will be launched by April 2023. 

Niti Aayog’s “Roadmap for Ethanol Blending'” report was prepared primarily by bureaucrats in 75 days on the premise that “India imported 185 million tons (mt) of petroleum in 2020-21 fiscal at a cost of $55 billion, and that a successful E20 programme can save the country $4 billion/year , or, Rs30,000 crores.” Classifying ethanol as a less polluting fuel, it saw blending as a solution to the nation’s growing sugarcane and grain surpluses and termed the fuel a “national imperative and an important strategic requirement”. 

Nowhere did this exercise dwell on the damage to the water table from overproduction of sugarcane, one of the most water-intensive crops, or from that of other food grains. Nor did the report adequately address the possibility of substitutes such as an EV environment. 

Three key issues challenge India's growing commitment to ethanol. One, does India have immense agriculture resources, including land and water, such as the US or Brazil to mimic their biofuel strategies? Two, is India’s economy still in the 1991 period that saving $4 billion a year on crude imports is a national imperative? Third, are ethanol targets sustainable or viable?

“Does India have to produce so much sugarcane that it saps huge amounts of water and then convert surplus molasses into ethanol,’’ asked VB Kasi, a seasoned commodities trader who has worked in Singapore, Switzerland and the US with COFCO and Noble. It takes 2,500 litres of water to produce one kg of sugarcane.  A task force on sugarcane and the sugar industry under Ramesh Chand, member (Agriculture), Niti Aayog, estimated that sugarcane and paddy combined are using 70 per cent of the country’s irrigation water. 

In fact, a 2018 report by Niti Aayog had said, India is “suffering from the worst water crisis in its history, and millions of lives and livelihoods are under threat”. That was when E20 targets by 2030 were first announced. India ranks 13th for overall water stress and has more than three times the population of the other 17 extremely highly stressed countries combined, according to the World Resources Institute (WRI) data in 2019.  Groundwater resources are severely overdrawn in India, largely to provide water for irrigation, with some water tables declining at a rate of more than 8 cm per year over the 1990-2014 period.  

Contrast India’s rankings with the US and Brazil, the world’s biggest biofuel producers. WRI measures Brazil as a low baseline water stress nation while the US is a step lower at low-medium baseline water stress, ranking 71 and 112, respectively (the higher the ranking, lower the water stress). The US and Brazil contributed 84 per cent of global share of the total global production of fuel ethanol in 2019. Washington decided to promote biofuels over two decades ago, when fossil fuels were critical and the US depended on West Asia for crude. The US was the world’s biggest producer of corn and Brazil of sugarcane, and it made sense for both nations to divert a portion of the output to ethanol.  The ecosystem suited traders, farmers and the politicians. Ethanol also helped stabilise corn prices.

 India is 20 years late to the ethanol party, when petrol is losing ground to EVs. The central government saw ethanol as a solution for a price support system and income generation for sugarcane farmers. Distillers sell ethanol to state-oil companies, ensuring prompt payments.  

The move to ethanol only makes sense politically. Otherwise, why would a $2.7 trillion economy — soon to be $5 trillion — bother saving $4 billion a year, especially with $650 billion in foreign exchange reserves? The government earned Rs8 trillion in taxes on petrol and diesel alone in the last three fiscals. Given such impressive revenues and bulging forex reserves, savings on crude imports from ethanol substitution is insignificant. Moreover, the government is promising thousands of crores in incentives for new distilleries and an administered price mechanism for the produce.  Pricing guarantees may lead to excess sugarcane cultivation in the coming decade, sending underground water tables lower. 

India is set to become the third-largest market globally for ethanol demand by 2026, the Paris-based International Energy Agency  said. The government is projecting ethanol supply to reach 10.16 billion litres for E20 in the December 2025-November 2026 supply year. New Delhi's existing low interest loan scheme is expected to lead to a 78 per cent rise in molasses-based and 187 per cent hike in grain-based distillery capacity by 2025. 

But capacity addition forecasts may be ambitious because despite government loans, most projects find it tough to secure loans due to poor financials. Less than half of the 606 molasses-based and 418 grain-based distilleries approved in-principle since 2018 may materialise, industry sources said. The government has announced higher incentives for ethanol extracted from waste and non-food crops but industry officials said gathering, transporting and processing make this production route expensive.

It is also unclear where the excess ethanol will go if EVs gain traction, or how viable will ethanol be if crude, currently over $75 a barrel mainly on account of Covid-19, falls to $50, forcing New Delhi to subsidise oil companies to lift ethanol. Recent protests against farm laws and minimum support price show how difficult it is for any government to extricate itself from a promise to support higher crop production.