​Insular incentive: on ethanol-blended fuel and the Indian consumer

The Indian government’s policy to continue producing E20 petrol at a cost higher than that of pure petrol when oil prices dip under $70 a barrel to “compensate farmers adequately” is a deceptively well-formulated proposition. Most feedstock for the fuel-blending programme is from sugarcane, one of India’s most water- and fertilizer-intensive crops, mainly grown in water-stressed Maharashtra and Karnataka. Whether the policy’s net economic benefit remains positive will depend on the gains from lower crude imports, environmental improvements, and higher rural incomes outweighing these additional costs. Efficiency also remains a concern. Consumers — including people who are poorer than sugarcane farmers — pay more at the pump, oil marketing companies procure ethanol at the administered price, distilleries buy feedstock, and only then do farmers receive higher prices. Higher feedstock prices also do not address most reasons farmers have lower incomes, such as post-harvest losses and limited market access. Crucially, if the government rewards every unit of ethanol irrespective of feedstock, the policy will favour whichever feedstock has the largest installed base: sugarcane. Instead, the objectives should include resource efficiency and food security. The state could invest in irrigation and logistics and institute revenue-sharing arrangements with ethanol producers and cooperatives.