Is India Biting Off More Ethanol Than It Can Spew?

There’s one key risk in what appears to be a win-win arrangement & roadmap on ethanol blending for auto fuels, writes Niraj Shah.

<div class="paragraphs"><p>Workers load a bundle of sugarcane onto a truck  in the Jalana district of Maharashtra, India, on March 23, 2021. (Photographer: Dhiraj Singh/Bloomberg)</p></div>
Workers load a bundle of sugarcane onto a truck in the Jalana district of Maharashtra, India, on March 23, 2021. (Photographer: Dhiraj Singh/Bloomberg)

Landmark policy shifts in India happen both because sometimes certain courses of action are obvious, and others where the circumstances present the only way out as fait accompli. The success of that policy move rests on an execution plan that offers stakeholders a stable long-term enabling framework.

For decades, India has faced a mounting oil import bill and also had a bunch of agri-industries like sugar that would frequently find themselves in financial stress due to volatile prices. A solution had been in sight, on paper, for quite a while, as experts pointed to the bio-energy policy of Brazil, and how India was missing a trick.

The idea of blending ethanol with petrol had been around, but the offtake was dismal as a policy push was amiss. That seems to have changed in the last few quarters, with the current government intent on changing the bio-energy landscape.

The Policy Intent

The ethanol blending programme effectively tackles the sugar industry woes as well as the legacy government support for the same. The current policy approach seems to be that instead of exporting sugar, for which the government has to provide an export subsidy as well, India simply converts what would have been excess sugar into ethanol by way of direct manufacture from sugarcane juice. The distillery capacity is increasing at a rate of roughly 1 million tonnes of sugar into ethanol, over the last couple of years. With a 20% blending target by 2025, the demand for ethanol will rise to be able to absorb additional sugarcane juice worth around 5-6 million tonnes of sugar. This solves the oversupply situation, the government avoids the subsidy payout, and it helps reduce cane arrear as the prices for ethanol are remunerative, the offtake is guaranteed and the working capital cycle far shorter.

The latest report by the Expert Committee On Roadmap for Ethanol Blending in India estimates that 10%-ethanol-blended-petrol, also known as E10, will be available pan India from April 2022 pan India. We are currently at 7.5% blend. A 20% blend or E20 will be introduced through a phase-wise launch from April 2023, and expected to be available nationwide by 2025.

The total alcohol demand estimated is 13.5 billion litres by 2025-26 (including around 10 billion litres for E20), of which 50% will come from the sugar industry and the rest from grain and other sources.
Is India Biting Off More Ethanol Than It Can Spew?

The report pointed to sugarcane and paddy's use of 70% of the country’s irrigated water called for the move to environmentally sustainable crops. The government intends to encourage the use of crops that consume less water, like maize and second-generation feedstock for ethanol production. The current capacity of ethanol needs to be augmented and the committee has recommended that central and state governments speed up clearances. It is for this reason that Uttar Pradesh, the top sugar manufacturing state, is working on a plan for a single-window clearance system for the setting up of ethanol plants.

The Money Math

This transformation will not happen without substantial investment, but it won't stall for want of government spending. There is no direct meaningful budgetary burden on the government for cranking up the blending. The investments are to be made by sugar companies and other ethanol manufacturers, the offtake is done by oil marketing companies which would still be able to draw a higher value from the blended fuel. You will also have an economic multiplier effect with more plants being set up, with capital goods deployed, and jobs created.

Governments need to accommodate one indirect ‘cost’ from this shift, which is potential revenue loss due to the gradient in the tax levied on ethanol and petrol. The GST on ethanol works out to between Rs 2.28– 3.13/litre, while the central excise duty on petrol is approximately Rs 33/litre.

When 332 crore litres of ethanol are blended to substitute petrol, the central government may incur a revenue loss of around Rs 10,000 crore per annum.

That's the one hiccup in a policy direction that looks durable, even with a change of state and central governments. Having seen 3-4 years of this policy working well, why would any government want to change it?

The Concern: Supply

So what could trip up this win-win arrangement? With the pace at which the government is talking of implementing the plan, for 20% ethanol blending to be used across the country, India needs an additional capacity of 750-1,000 crore litres. Here's the math.

The total demand for alcohol is estimated to be 1,350 crore litres in 2025-26 (assuming E20) and total production capacity needed at 1,500 crore litres.

The broad estimates are of 750 crore litre-capacity based on molasses/sugarcane (currently at 420 crore litres, thus an increase of 330 litres) and balance the 750 crore litres to be based on grains (currently at 260 crore litres and thus addition of 490 crore litres).

Is India Biting Off More Ethanol Than It Can Spew?

This ramp-up is not an easy task, even if we consider that some of these capacities will happen via brownfield expansion and some via grain-based distilleries, especially considering the weak balance sheets of a large number of cooperative sugar mills. While there are companies that have added small capacities in grain-based distilleries, we don't have very large capacity-creating companies, simply because the players in this space aren't some of the biggest corporates in the country.

What The Companies Are Saying

Companies are optimistic, as they would be.

Praj Industries Ltd. told BloombergQuint that the company is working on technology to blend up to 5% ethanol in diesel, the consumption of which would rival the consumption at 20% blending in petrol. So demand is not a dampener but supply could well be. Mind you, electric vehicle penetration can potentially have a 9-29% impact on ethanol demand in 2025-26 as per JM Financial's estimates.

In its third-quarter conference call, Globus Spirits Ltd. said, “this continued thrust will benefit by drying up surplus capacities of alcohol and giving us greater control on margins in all states. It also enables opportunities to expand our capacities in areas that continue to remain deficit in ENA for beverage and ethanol for petrol blending.”

In its Q4FY21 earnings interaction, Balrampur Chini Mills Ltd. told BloombergQuint that the company might announce additional brownfield expansion to take advantage of the advanced blending of E20 to 2023, as it believes that the opportunity can be lucrative.

Net Net

While the optimism may be warranted, especially after union transport minister Nitin Gadkari's comments that a flex-fuel policy announcement will be made in a few days, one needs to keep in mind that for the ethanol policy to succeed, the grain-based distilleries need to mushroom. If an inordinately large amount of sugarcane is diverted to ethanol, it hampers the supply of sugar and sends prices higher, something that any government would frown at. The policy moves thus far are positive on many fronts – reduced oil imports, giving a cyclical industry like sugar a long-term structural base, broadening the opportunities for farmers relying on that sector, prompting capex, and also reducing pollution. However, the targets are stiff, and one must not lose sight of the fact that while the intent is toward early adoption, things may not play out as per the timelines laid out in the script.

Niraj Shah is Markets Editor at BloombergQuint.