India is targeting a 20% ethanol blend in petrol by Ethanol Supply Year (ESY) 2025, requiring an annual production of approximately 990 crore liters. To meet this ambitious goal, effective utilization of both grain and sugarcane feedstock is crucial. CRISIL Ratings projects a notable increase in grain-based ethanol production, expected to reach around 600 crore liters by the next season, up from this season’s estimate of 380 crore liters. The remaining supply will come from sugarcane, leveraging the country’s substantial processing capacity.
This strategy could also help manage the country’s sugar inventory, especially given the anticipated high carry-over stock at the end of the current season. Government restrictions on diverting sugar for ethanol production and exports have contributed to this surplus. An analysis by CRISIL Ratings of 17 integrated sugar mills, which account for about one-third of the sugar-based ethanol supply, supports this outlook.
Ethanol blending is a key component in reducing India’s dependence on crude oil imports. Since ESY 2021, the ethanol blending rate has increased by 200-300 basis points each season. However, while grain utilization for ethanol production is not regulated, the government controls the quantity of sugarcane used for this purpose, based on the projected demand-supply balance of sugar.
Last year’s erratic rainfall is expected to impact sugarcane production, leading to a limitation on ethanol production from sugarcane to the equivalent of 2.5 million tonnes of sugar diversion this season. According to Poonam Upadhyay, Director of CRISIL Ratings, ethanol blending could still reach 14% in ESY 2024 due to a significant 40% increase in grain processing capacity. This expansion could offset the reduced output from sugarcane. However, achieving the 20% blending target by ESY 2025 may require the allocation of sugarcane equivalent to 4 million tonnes of sugar for ethanol production, similar to the 2023 season.
Looking ahead, gross sugar production for the 2025 season is expected to be approximately 33.5 million tonnes, with consumption at around 29.5 million tonnes. Sugar inventories are projected to remain healthy by the end of the current season. Therefore, diverting sugarcane, equivalent to the amount required to produce 4 million tonnes of sugar, for ethanol production (~390 crore liters) could be a viable option, with the larger share of ethanol production coming from grain-based sources.
Anil More, Associate Director at CRISIL Ratings, noted that increased sugarcane usage for ethanol production could also optimize sugar inventory, which is estimated to rise to about four months’ worth of consumption (~8 million tonnes) by the end of this season. Additionally, this could improve cash flows for sugar mills, enabling timely payments to farmers.
Moving forward, policies regarding the quantum of sugarcane allowed for ethanol production in the next season, along with the availability and pricing of grain-based feedstock, will be critical factors to monitor.
