Why is sugar industry worried about govt's 2025-26 ethanol supply policy?

Early this week, the office bearers of Indian Sugar & Bio-Energy Manufacturers Association (ISMA) – the apex body of sugar and bio-energy producers – openly expressed their concerns over the Central government’s decision to cut the share of ethanol derived from sugar-based feedstock in the annual ethanol production projections made for 2025-26.

Their complaint was that if the government prioritises ethanol produced from grain-based feedstock over sugar-based ones for its ethanol blended petrol (EBP) programme, the capacity built by the sugar industry over the years to produce ethanol will be underutilised. The cascading effect of this will be a loss of revenue, reduced diversion of sugar, surplus sugar stocks, and weakening sugar prices, all of which will in turn affect the profitability of sugar and ethanol manufacturers and their ability to pay sugarcane prices to farmers on time. How serious is ISMA’s concern? Isn’t ethanol production only an additional revenue source for sugar mills after all?

Let’s examine:

What is the Ethanol Blended Petrol (EBP) Programme?

Under the EBP programme, Public Sector Oil Marketing Companies (OMCs) sell ethanol blended with petrol.

In order to ensure that OMCs get a sufficient supply of ethanol to achieve the intended blending target, the government announces the production targets and the price of ethanol from different feedstocks from time to time. While OMCs were able to achieve the 20% ethanol blending target (for 2025-26) well in advance, the sugar-based ethanol manufacturers have been seeing their share of ethanol in the overall ethanol supplies coming down year after year.

How serious is the issue?

Well, of the 173 crore litres of ethanol supplies in 2019-20, over 90% or 157 crore litres came from sugar-based feedstock. The percentage share of ethanol made out of sugar-based feedstock started declining from the very next year onwards and was 86% in 2020-21, 83% in 2021-22, 73% in 2022-23 and 40% in 2023-24. The quota for the last Ethanol Supply Year (ESY), ie; from November 2024 to October 2025, was 315 crore litres of ethanol, which accounted for 33% of the overall ethanol production of 950 crore litres estimated for ESY 2024-25.

The basis of the sugar industry’s complaint is that the government has now decided to cut the share of sugar-based feedstock-derived ethanol in the overall estimated production of 1050 crore litre of ethanol during the Ethanol Supply Year (ESY) 2025-26 to just 28% or 289 crore litres. The sugar industry, on the other hand, has invested over Rs 40,000 crore in recent years to create 900 crore litre ethanol production capacity.

Why did the capacity expansion happen?

Government think-tank Niti Aayog had in its 2021 Biofuel Roadmap of 2020-25 projected that the sugar sector will contribute about 55% of the total ethanol requirement for achieving 20% blending by 2025-26.

Is that the only worry?

No. The ethanol procurement prices from sugarcane juice and B-heavy molasses have remained the same for some time, while the fair and remunerative price (FRP) of sugarcane, which the industry needs to pay the farmers, has increased from Rs 305 per quintal to Rs 355 per quintal since 2022-23. This has eroded the profitability of ethanol produced from sugarcane-based feed stocks.

Can sugar prices compensate for this?

The minimum selling price (MSP) of sugar has also remained unchanged at Rs 31 per kilogram since February 2019, while the increase in FRP during this period was 29%. The surplus sugar production against domestic consumption of 385 lakh MT and reduced diversion into ethanol may create a glut, leading to further depressed sugar prices.

How can policy decisions help?

The industry says that a rebalance of ethanol allocation by ensuring at least 50% of the share for sugar-based feed stocks can be the first measure. Upward revision of ethanol procurement prices, enhancement of ethanol blending beyond 20% and introduction of E100 fuel (100% ethanol) supported by the rollout of flex-fuel vehicles are also seen as ways to support the sector. Increase in sugar MSP and an appropriate sugar export policy well in advance to manage surplus stocks and plan raw sugar production are other demands from the industry

How practical are these suggestions?

Well, the government is yet to decide whether it wants to increase ethanol blending beyond 20%. The petroleum minister is on record saying that, at least for now, there are no plans to increase the share of ethanol in blended petrol beyond the current level. The other suggestion of increasing the share of sugar cane-based ethanol also has its own complications, as the capacity of grain-based ethanol production units has also gone up significantly in recent years. In fact, underutilisation of capacity is a complaint the government is hearing from both sides. It’s an act of balancing that is happening today. While the government is silent on an increase in sugar MSP or ethanol procurement price, it is talking about the possibility of exporting ethanol as a means to manage excess production.