The rapid expansion of ethanol capacity was not accidental but actively supported through government-backed soft loans and interest subvention running into thousands of crores | Photo Credit: cueapi

The logic behind India’s ethanol push appears compelling: blending more ethanol with petrol will help cut crude oil imports, ease pressure on the current account by conserving foreign exchange, support the rupee and raise farm incomes.

At a time when India imports the bulk of its crude oil requirements and external balances remain sensitive to oil prices, the argument has found wide acceptance. But the economics increasingly suggest otherwise.

The ethanol push now appears to have more to do with absorbing excess production capacity than reducing India’s import dependence. The challenge has shifted from building supply to finding demand.

India requires 10-11 billion litres of ethanol to meet E20 blending norms. Yet production capacity had already approached 20 billion litres (https://tinyurl.com/2s3e6uza) by November 2025 and may expand by a further 15 per cent in FY 2026-27 as new distillation projects come on stream. Put differently, the current blending target absorbs barely half of installed capacity. The issue therefore is no longer about producing more ethanol; it is about finding demand for capacity already built.

The rapid expansion of ethanol capacity was not accidental but actively supported through government-backed soft loans and interest subvention running into thousands of crores. The ethanol programme may have catalysed investments exceeding ₹40,000 crore. Once investments of that scale are committed, utilisation becomes central to financial viability. Idle capacity compresses returns, raises fixed costs and increases the risk of stranded investments.

To address recurring sugar surpluses, cane-based distilleries were encouraged. As sugar availability tightened, policy support gradually shifted towards grain-based distilleries, including incentives through relatively higher prices for ethanol produced from maize. Ethanol created an additional revenue stream protected through administered pricing, unlike sugar, where prices are largely influenced by supply conditions.

In many ways, the current excess capacity reflects the cumulative effect of these policy shifts and incentives. Higher blending targets are no longer only an energy-security tool but are needed to absorb surplus capacity.

Substituting petrol with domestically produced ethanol does lower oil demand. But the import story becomes more complicated when the full production chain is considered.

Producing ethanol at scale requires larger volumes of sugarcane, maize and rice. Expanding these crops raises demand for fertilizers such as urea, DAP and potash which require imported inputs such as natural gas.

Greater policy support for ethanol feedstocks may also reshape cropping patterns, drawing acreage towards sugarcane, maize and rice and away from oilseeds or pulses — segments where India already relies heavily on imports.

In that sense, ethanol may reduce crude oil imports without proportionately reducing external dependence. The dependence simply shifts. Lower oil imports could partly be offset by higher requirements for fertilizers, natural gas and edible oil imports, while consumers also experience lower mileage because of ethanol’s lower energy density.

Environmental costs

The environmental arithmetic is equally complex. A government study estimates that producing a litre of ethanol from sugarcane requires roughly 2,860 litres of water across the production cycle. Water intensity rises further for grain-based pathways, with maize-based ethanol requiring around 4,093 litres and rice-based ethanol as much as 10,790 litres per litre of output.

India now has close to 500 ethanol distilleries (https://tinyurl.com/eps3cdz4), with grain-based capacity accounting for a growing share of incremental supply. The shift towards grain-based ethanol therefore raises the water intensity of ethanol production.

The imbalance is already visible. In Maharashtra, sugarcane occupies less than 10 per cent of cropped area but perhaps consumes over half per cent of irrigation water. Expanding ethanol-linked feedstocks in such regions risks intensifying pressure on already stressed water systems.

The environmental costs extend beyond water. Higher production requires more fertilizer, irrigation and electricity, much of it generated from coal. Emissions therefore do not disappear entirely; part of the environmental burden moves upstream.

India’s ethanol programme has undoubtedly created additional revenue streams for mills, helped manage cyclical sugar surpluses and contributed to fuel diversification. But the economics of the programme have entered a different phase.

After rapid capacity expansion and large private investments in ethanol, capacity utilisation became the economic imperative. Reducing crude imports is not necessarily the same as reducing external dependence, nor is expanding production the same as improving efficiency.

As India evaluates the next stage of ethanol policy, the focus may need to move beyond blending targets and towards a broader assessment of water use, cropping incentives, import substitution and long-term resource allocation.

The writer is a business economist and CEO, Indonomics Consulting Private Ltd

Published on June 15, 2026