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India’s sustained economic growth will not happen without 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 fourth 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 percent of the total, but production is at 25 percent. 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 dollars or more for importing coal.
At 20 percent 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
For transportation the import dependence is higher. Nearly 90 percent of the crude oil consumed is imported, clocking 242 million tonnes last year. Depending on international prices, say in a range of 65 to 85 dollars, it drains 125 to 150 billion dollars 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 percent 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.
The world is also trying to move away from fossil fuels
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 actually reduce the total outgo of foreign exchange. Keep in mind that the world is also trying to move away from fossil fuels.
In order to reduce pressure on foreign exchange, and to reduce the carbon footprint, India embarked on an ambitious program to blend ethanol with petrol and diesel. Ethanol was to be made from sugarcane i.e. molasses, or from grains such as maize and rice, or from dual feed. The progress since 2013 on ethanol blending is very impressive. It started with just 1.5 percent blending back in 2013.
The ethanol blending program (EBP) is benefited by special subsidies provided for the purchase of feedstock by ethanol producers, and the lower rate of GST paid by them
By this year the target of 20 percent has already been achieved. In terms of the growing volume it is a spectacular growth of nearly 30 percent 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 program (EBP) is benefited by 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.
One side effect of diverting grain like rice and maize to EBP is that it deprives the poultry feed sector which is suffering from scarcity and input cost escalation
EBP targets also mean that oil marketing companies have to compulsorily purchase ethanol upto a certain target. Presently of 1,810 crore litres of installed capacity, 816 crore litres is 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 outgo of foreign exchange, to reduce carbon emissions and finally to provide a boost to agricultural output. At 20 percent blending already achieved, how successful has the EBP been in meeting these objectives. Firstly, as per a report from PIB, over past ten years till 2024, the total saving in crude oil import was about 18 million tonnes, which is just 0.8 percent of the total oil imported during that period.
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
In terms of foreign exchange savings, it was about 1.06 trillion rupees, or roughly 10 billion dollars (using average exchange rate). But that is less than 0.5 percent of outgo saved over ten years. In terms of carbon dioxide emissions, in ten years the EBP has saved 54 million tonnes, which is also less than 1 percent. As far as agriculture is concerned, farmers earned nearly 1 trillion rupees extra during these ten years and distilleries too earned another 1 trillion rupees. The percent increase in farm income for those sugarcane or maize farmers, is probably modest. 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 percent of world exports, to ethanol production. It represents only 4 percent of India’s production, and 10 percent of stocks sitting in government godowns.
Thanks to the high assured price for ethanol, distilleries often make more money converting rice to ethanol, rather than selling it as grain
One side effect of diverting grain like rice and maize to EBP is that it deprives the poultry feed sector which is suffering from scarcity and input cost escalation. India turned from net exporter to net importer of maize, thanks to EBP. It can also lead to food inflation, leading to instant and arbitrary bans on 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 kilos 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 is more than 50 percent 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 percent 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.