IndiasSugarIndustry:

AnalysingDomesticDemand
andRecentTrends

TableofContents
1.Certificate.
2.ExecutiveSummary
3.Introduction
4.Objectives
5.ProposedMethodology
6.Analysis
6.1.ProductioninIndia
6.2.Consumption
6.3.Prices
6.4.Tradepolicy
6.5.SugarProductionandMarketingPolicy
6.6.Molassesbasedethanolindustry
6.7.EthanolProgram
6.8.Augmentingethanolsupply
6.9.Biodieselpolicy
6.10.BioethanolandBiodiesel
6.11.SnapshotofIndiasnationalpolicyonbiofuels
7.MainFindings
8.Recommendations
9.Bibliography
10.Datasources

2.ExecutiveSummary

Indiandomesticsugarmarketisoneofthelargestmarketsintheworld;involumeterms.Itremains
a key growth driver for world sugar, growing above the Asian and world consumption growth
average. Sugar is one of the most important cash crops in the world and hence there is always a
wrestletocontrolitsimports/export.

ThesugareconomyinIndia,likemanyothercountries,ishighlyregulated,startingfromsugarcane
totheendproductsugar.Eventhebyproductsaresubjecttogovernmentcontrol.Theprojectaims
todelveintotheissuesfacedbytheindustryanditstradeprospects.Theprojectwouldalsoexplore
the impact on sugar volumes and prices because of its use as alternative fuel. Supply side and
demand side impact would be analyzed for complementary (sugarfree) and supplementary
products.

Thepaperalsohighlightsconvincingevidencethatoilpricesmaytrendhigheroverthenexttwo
decadesandthiswouldhaveasubstantialnegativemacroeconomicimpactforIndia.A50%increase
inoilpricesbetween20102030wouldsignificantlyreduceeconomicgrowth,realconsumptionand
household income. Expansion of biodiesel is one policy response India can use to counteract the
economic impacts of oil price hikes. Biodiesel intervention can significantly counteract these
negative impacts whereas ethanol intervention has a minimum offsetting impact. Combining
supplyside energy solutions, like biodiesel development, together with modest energy efficiency
improvementsandproductivityimprovementsinagriculturewillprovideimpressiveresults.

3.Introduction

Sugarcaneisgenerallyregardedasoneofthemostsignificantandefficientsourcesofbiomassfor
biofuel (ethanol) production. Sugarcane offers production alternatives to food, such as feed, fibre
and energy, particularly cogeneration of electricity and ethanol. Strong linkages between world
sugarandoilpriceshaveemergedinrecentyears,driveninpartbytherelationshipsbetweensugar
astheprimaryethanolfeedstockinBrazil,thedominantproducerandexporterofbothsugarand
ethanolintheworld.Givenexpectationsofrisingoilprices,thesignificantpotentialforexpansionof
globalsugarcaneproductionasethanolfeedstockhasresultedinaheightenedglobalfocusonsugar
andethanolasinternationallytradedcommodities.
Global demand for fuel ethanol has increased significantly over the past few years, driven by
concernsoverenergysecurity,environmentalsustainabilityandtheneedtomitigateclimatechange
throughthereductionofgreenhousegasemissions.AccordingtoarecentFOLichtsurvey,61%of
worldethanolproductionwasproducedfromsugarcrops(sugarbeet,sugarcaneordesugarization
ofcaneandbeetmolasses).

The linkages between sugar, oil and ethanol prices are clear and very important considerations in
future as the ethanol market continues to develop. Sharp increases in oil prices may tend to exert
upward pressure on ethanol prices during harvest, and growing tendency to fix physical ethanol
priceswiththeNewYorkcontractmayemergeattimesofvolatileoilprices.Theestablishmentofan
international ethanol futures exchange was attempted during the oil crises of 1973 and 1979,
however,failedduetolackofliquidity.Thereareconsiderationsintheglobalmarketnowthatwere
less present three decades ago, such as concerns to abate greenhouse gas emissions for climate
changemitigationandenvironmentalsustainability.Thecomovementbetweensugarandcrudeoil
prices has developed mostly because of the strong link between ethanol and sugar production in
Brazil, the worlds largest sugar producer and exporter accounting for about 38 percent of world
exports and 19.5 percent of production. The growing number of Brazilian flexfuel vehicles which
canrunonanycombinationofgasolineandethanoldirectlyinfluencesthedemandforethanol.As
consumersreacttotherelativepricedifferentialbetweenethanolandgasoline,anyincreaseinthe
price of gasoline stimulates demand for ethanol, reduces sugar exports and raises world sugar
prices.Attheworldlevelcurrently,itisestimatedthatabout15percentofsugarcropsareconverted
intoethanolratherthansugar.

Recent developments in the global ethanol market suggest the emergence of ethanol as an
internationally traded commodity. Demand growth is robust, and for the first time, strongly
supported not only by higher oil prices and greater need for energy security, but perhaps more
importantly, by global environmental and sustainability concerns. Biofuels, such as ethanol, are
centraltoworldwideeffortstoabategreenhousegasesandmitigateclimatechange.Reportsindicate
thatbioenergycouldsupplyamaximumofslightlymorethanthirtypercentoftotalglobalenergy
demand. Some developing countries, particularly Brazil, India, Thailand, Malaysia, Indonesia and
potentially a number of African countries, such as Tanzania or Mozambique, have underutilised
landandnaturalresourcesthatcouldbeusedtosignificantlyexpandliquidbiofuelsproductionif
oilpricesstayhighorincreasefurther.InIndia,ethanolmadeitsforayintothetransportsectorasa
fueladditivein2001.ThegovernmentlaunchedthreeEBPpilotprojects,thefirstinUttarPradesh,
followed by two others in Maharashtra. In order to enhance the countrys energy security, the

GovernmentofIndiamandatedblendingof5percentethanolwithpetrolin9Statesand4Union
Territoriesintheyear2003andsubsequentlymandated5percentblendingofethanolwithpetrolin
20 States and 8 Union Territories in November 2006 on an allIndia basis except a few North East
statesandJammu&Kashmir.

4.Objectives

TheobjectiveofthispaperistostudythetrendsofsugarmarketinIndiaderivingapattern.

Useofsugarbasedfuel(ethanol)andanalyzingitsimpactonprices

Useofcomplementaryproductsandtheimpactonsugarprices.

Analysisoftrends

5.ProposedMethodology

India has become a significant consumer of energy resources. Its oil consumption has risen to 3.3
million barrels per day in 2009, from 643,000 barrels of oil per day in 1980, making it the worlds
fourthbiggestconsumerofoil.Indiaisalsothefourthlargestproducerofethanolintheworld.By
blendingpetrolwith10percentbiofuel,80millionlitresofpetrolcouldbesavedannuallyinIndia,
saysareportbytheInstituteofDefenceStudiesandAnalyses.Thepaperseeksto:
1.StudythevariouspolicyaspectswhichgoverntheSugarTradeandmoreimportantlytherecent
developmentinethanolandbiodieselproduction.
2. Analyse the changing global prices of Raw Sugar and the Refined Sugar and its impact on
domesticprices.

6.Analysis

In India, sugar is an essential item of mass consumption and the cheapest source of energy,
supplyingaround10percentofthedailycalorieintake.Indiaisthesecondlargestproducerofsugar
(16.3milliontonproductionin200809).It,however,ranks15thinexportrankings(.23millionton
exports in 200809) as India is the largest consumer of sugar in the world. Raw as well as refined
sugar prices plunged this year on expectation that output in Brazil and India, the secondbiggest
producer,willincrease.Rawsugarpricesdeclinedby45percentsincethestartoftheyear2010amid
hopesthatglobaloutputwillrebound.
FourfactorsdeterminesugarproductioninIndia:
Areaundersugarcaneproduction(Max.acreageof4.43millionhectare)
Sugarcaneyieldperhectare(Max.yieldof71.3tonnesperhectare)
The productionof sugarcane that is crushed by sugar factories in relation to the total sugarcane
produced(Maxdrawlpercentage=69%)
Recoveryofsugar(Maxrecovery=10.48%)

Ethanol is being promoted as an alternative to oil. It is commercially viable, cleaner fuel but its
efficiencyisquestionable.EthanolpromotionisprimarilydrivenbyBrazilwhichhappenstobethe
largestconsumerofethanol.Incidentally,Brazilproducesethanoldirectlyfromthesugarcaneunlike
manyothercountrieswhichproduceethanolfrommolasses(abyproductafterextractionofsugar
fromsugarcane).Almost60%ofBraziliancanecropisdivertedtoproductionofethanol.
Changes to emission norms under Kyoto protocol, increased fiscal incentives from several
governments, US bill mandating ethanol use in gasoline, high oil prices are several other factors
influencing ethanol production and diverting cane from sugar to ethanol production. In October
2007, Government of India (GOI) has mandated 5% ethanol blending. India requires an estimated
550 million litres of ethanol. GOI has also permitted companies to produce ethanol directly from
sugarcanejuice.Thiswillprovidecompaniesflexibilitytoaltertheproductmixbetweensugarand
ethanoldependingontherelativedemandandrealisation.

The Government of India (GOI) approved the National Policy on Biofuels on December 24, 2009.
Thebiofuelpolicyencouragesuseofrenewableenergyresourcesasalternatefuelstosupplement
transport fuels (gasoline and diesel for vehicles) and proposes a target of 20 percent biofuel
blending(biodieselandbioethanol)by2017.

Presently, the government is unable to implement compulsory blending of 5 percent ethanol in

petrol(gasoline)duetotheshortsupplyofsugarmolassesin2009/10and2008/09becauseofoverall
low sugarcane crop production in India. Consequently, India imported about 280 million litres of
ethanolinCY2009tomeetthedemandforindustrialandpotableliquorproduction.Withabumper
sugarcaneandsugarproductionoutlookfor2010/11,thegovernmentislikelytorenewitsfocusand
implement the mandatory 5 percent ethanol blending in petrol. Industry sources report that the
government is likely to take a decision on the purchase price of ethanol for the Ethanol Blending
Program(EBP).

Commercialproduction of biodiesel in India is very small and its utilization is mostly confined to
the unorganized sector. The governments ambitious plan of producing sufficient biodiesel by
2011/12 to meet its mandate of 20 percent diesel blending is unrealized due to a lack of sufficient
jatrophaseedstoproducebiodiesel.AdvancedbiofuelsinIndiaarestillattheresearchstageandit
willtaketimebeforecommercialproductionbecomeseconomicallyviable.

6.1.ProductioninIndia

SugarcaneandsugarproductioninIndiatypicallyfollowa6to8yearcycle,wherein3to4yearsof
higherproductionarefollowedby2to3yearsoflowerproduction.Aftertwoconsecutiveyearsof
decliningsugarproduction(MY2007/08and2008/09),productionresurgedinMY2009/10,andisset
togainstronglyintheupcomingMY2010/11.

2009/10 centrifugal sugar production estimate is revised higher to 19.5 million tons due to lower
diversion of cane for production of alternative sweeteners (khandsari and gur) and better than
anticipatedcaneproduction.AfterdroughtlikeconditionsinJunethroughmidAugust,mostofthe
cane growing areas received adequate and well scattered rains from midAugust through October
during the crop growth stage. Low winter temperature and scattered rains in DecemberJanuary
further contained expected crop damage due to early dry conditions. High sugar prices and
speculationonlowercanecropresultedinsugarmillsofferingsubstantialincreaseincaneprices
tofarmerscomparedtolastyear.Thehighercanepricesbythesugarmillscoupledwithrelatively
weakgurpricesvisavissugarlimitedthediversionofsugarcaneforproductionofgurduringthe
peakcrushingseason.

The mill sugar production for MY 2009/10 up to March 15, 2010 is estimated at 15.3 million tons
(crystalweightbasis)comparedto13.3milliontonsforthecorrespondingperiodofMY2008/09.The
recentweakeningofgurpriceshasloweredtheprospectsforlateseasondiversionofcaneforgur
production.CrushingisgoingoninthemajorproducingstatesofMaharashtraandU.P.,andmay
continuethroughApril/earlyMay,nearly4weekslongerthanlastyear.Industrysourcesreportthe
averagecrushingdurationduringtheMY2009/10at150days(vs.120dayslastyear)andaverage
sugar recovery higher at 10.3 percent (vs. 10.0 percent last year). Consequently, MY 2009/10

centrifugalsugarproductionhasbeenraisedto19.5milliontonsagainsttheearlierestimateof17.3
milliontons.

Posts estimates for MY 2008/09 sugarcane production have been revised higher and sugar
productionrevisedmarginallylowerbasedonfinalestimatesfromtheMinistryofAgricultureand
theIndianSugarMillsAssociation,respectively.
Khandsarisugar:alowrecoverycentrifugalsugarpreparedbyopenpanevaporationmethod.

Gur:acrudenoncentrifugalsugarinlumpformproducedbyopenpanevaporationmethod.

GOIsinitiallyestimatedMY2009/10sugarcanecropat249milliontonsinDecember,2009.

6.2.Consumption

SugarconsumptioninMY2010/11isforecasttoincreaseto24.5milliontonsonforecastimproved
domesticsuppliesandstrongdemandfueledbyagrowingpopulationandcontinuedgrowthin
economy. Bulk consumers such as bakeries, makers of candy and local sweets, and softdrink
manufacturers account for about 60 percent of mill sugar demand. Most of the khandsari sugar is
consumed by local sweets manufacturers. Gur is mostly consumed in rural areas for household
consumptionandfeeduse.

6.3.Prices

Despite various measures taken by the Government of India (GOI) to control sugar prices, sugar
prices escalated during calendar year 2009 on fears of short domestic supplies and strong
international sugar prices. Sugar prices have eased significantly from February 2010 on improved
expectationsofdomesticproductioninMY2009/10andforecasthigherproductioninMY2010/11.

Marchendsugarpricesinmajordomesticwholesalemarketsrangedfrom$685to745perton,about
17 percent lower than peak prices in January, 2010. However, sugar prices are still more than 50
percenthigherthanpricesinMarch2009.Pricesareexpectedtocontinuetoweakenfurtherinthe
comingmonthsonimproveddomesticsupplies,althoughinternationalpricemovementscanimpact
domesticprices.GurpriceshadbeenunderpressurefromthebeginningoftheMY2009/10dueto
recordopeningstocks

6.4.Tradepolicy

Indias imports are forecast lower at 1.2 million tons due to forecast improved domestic supplies.
Industrysourcesexpectimportsmostlyduringtheearlypartoftheseason.TheGOImaywithdraw
the relaxed import policy on improving domestic supplies and lowering of sugar prices to more
comfortable levels as the domestic crushing season progresses. Despite forecast higher sugar
production,relativelytightdomesticsuppliesprecludeanysignificantcommercialexportsofsugar
inMY2010/11;exportswillbelargelylimitedtoquotacountries.

Importestimateisrevisedlowerto4.5milliontonsbasedonthecurrentpaceofimportsreportedby
industrysources.TradesourcesestimateIndiassugarimportsduringtheOctober2009toFebruary

2010 at 2.9 million tons; of which about 2.3 million tons is raw sugar mostly from Brazil, and rest
whitesugarfromThailand,Brazil,U.A.E.Anadditional500,000tons,mostlywhitesugar,havebeen
contractedfordeliverythroughJune/July,2010.Despiteweakeningdomesticsugarprices,industry
sources expect additional imports of raw sugar in August/September before the beginning of the
nextcrushingseason.Consequently,MY2009/10importsareforecasttoreacharecordlevelof4.5
milliontons.

Forcedbytheseveredomesticshortagesandabnormallyhighsugarpricessincebeginningof2009,
theGOItookseveralmeasurestorelaximportrestrictionstoaugmentdomesticsupplies.

OnFebruary17,2009,thegovernmentrelaxedthenormsfordutyfreeimportsofrawsugarunder
the advance licensing scheme (ALS) exempting future export commitments from actual user
conditionsforrawsugarimportsduringFebruary17,2009toSeptember30,2009.OnApril17,2009,
thegovernmentallowedmillstoimportrawsugaratzerodutyundertheopengenerallicense(no
futureexportcommitments).Thegovernmentalsoallowedselectstatetradingenterprises(STEs)to
importwhitesugaratzeroduty.Subsequently,onJuly31.2009,thegovernmentalloweddutyfree
importsofwhitesugarbytradersandprocessorsuntilNovember31,2009.

ThroughaseriesofnotificationstheGOIhasextendedthedutyfreeimportsofrawsugarandwhite
sugar up to December 31, 2010. The GOI has also exempted imported sugar, both raw sugar and
white sugar, from the levy sugar obligation and the market quota release system, applicable to
domesticsugar.Withthesugarpriceseasing,thereisanincreasingpressurefromthelocalindustry
toreimposetheimportdutiesonwhiteandrawsugar,andrevertingbacktotheoldimportpolicy
regime. Currently, the GOI does not allow exports of sugar and nor provide any export incentive
(transportsubsidy)forsugar.

TheGovernmentofIndia(GOI)supportsresearch,development,trainingoffarmersandtransferof
new varieties and improved production technologies (seed, implements, pest management) to
growers in its endeavor to raise cane yields and sugar recovery rates. The Indian Council of
Agricultural Research (ICAR) conducts sugarcane research and development at the national level.
State agricultural universities, regional research institutions, and state agricultural extension
agenciessupporttheseeffortsattheregionalandstatelevels.Thecentralandstategovernmentsalso
supportsugarcanegrowersbyensuringfinancesandinputsuppliesataffordableprices.

TheGOIestablishesaminimumsupportprice(MSP)forsugarcaneonthebasisofrecommendations
by the Commission for Agricultural Costs and Prices (CACP) and after consulting State
Governments and associations of the sugar industry and cane growers. Last year the GOI
announcedanewsystemoffairandremunerativePrice(FRP)thatwouldlinksthecanepriceswith
sugarpricerealizationbythesugarmills.SeveralstategovernmentsfurtheraugmenttheMSP/FRP,
typicallyby2025percent,duetopoliticalcompulsionsratherthanmarketpricing.

Sugarmillsarerequiredtopaythestateadvisedprice(SAP)tosugarcanefarmersirrespectiveof
the market price of sugar. However, high sugar prices coupled with fears of lower cane crop
encouragedthesugarmillstopaymuchhigherpricesthantheFRPorSAPinmostofthegrowing
states. Although the local industry has been advocating rationalization of cane pricing policy by

linkingitwithdomestic/worldsugarprices,industrysourcesdonotexpectanydownwardrevision
ofFRPinthecomingyearsifthesugarpricesdeclinegiventhepoliticalcloutofthefarmerslobby.

6.5.SugarProductionandMarketingPolicy

The GOI levies a fee of Rs. 240 ($5.33) per ton of sugar produced by mills to raise a Sugarcane
Development Fund (SDF), which is used to support research, extension, and technological
improvement in the sugar sector. The SDF is also often used to support sugar bufferstocks
operations,provideatransportsubsidyforsugarexports,andprovideaninterestsubsidyonloans
for the installation of power generation and ethanol production plants. In March 2008, the GOI
enacted the Sugar Development Fund (Amendment) Bill, 2008 that enables the government to
includetheuseofthefundsfordebtrestructuringandsoftloanstothesugarmills.

TheGOIfollowapolicyofpartialmarketcontrolanddualpricingforsugar.Thelocalsugarmills
arerequiredtosupply20percentoftheirproductiontothegovernmentaslevysugaratbelow
marketprices,whichthegovernmentdistributesthroughthePublicDistributionSystem(PDS)toits
belowpoverty line population at subsidized rates. Mills are allowed to sell the balance of their
productionasfreesugaratmarketprices.However,thesaleoffreesalesugarandlevysugaris
administered by the government through periodic quotas , designed to maintain price stability in
themarket.

On March 12, 2009, the central government advised the state governments to impose stock and
turnover limits on traders to prevent hoarding of sugar. Khandsari sugar has also been brought
under the ambit of stockholding and turnover limit from July 17, 2009. Most state governments
imposed stock and turnover control orders in their respective states. On August 22, 2009, the
governmentimposedstockholdinglimitsonlargeconsumers(foodandbeveragecompanies)who
consume more than 1.0 ton of sugar per month. Initially these consumers were asked to maintain
stocknecessarytomeetnotmorethan20daysrequirement;whichwasfurtherloweredto10days
requirementsinFebruary2010.TheselimitsareeffectiveuptoSept30,2010.Withtheimprovement
indomesticsugarsupplies,thereisgrowingpressurefromthedomesticsugarmillsandtradersto
removethesestocklimits.

6.6.Molassesbasedethanolindustry

Molasses is a byproduct of sugar industry. The production of sugarcane is related to sugar

productionwhichinturnisrelatedtotheproductionofmolasses.Theproductionofmolassesinthe
last decade is as follows. From the above table it can be seen that the molasses production has
fluctuatedsignificantlyinthelastonedecade.Thisisprimarilyduetothecyclicnatureofthesugar
industry which follows of a three to five year cycle. This consists of higher production leading to
glutofsugarandmolassesfollowedbyashortageandthenbyanotherincreaseinproduction.

However,thesugar/molassesproductionhassignificantlyincreasedonalongtermbasis.InIndia
themolassesproducedisheavyfromwhichasmuchsugaraspossiblehasbeenextracted.However,
heavymolassescanalsobeproducedwhichcanproducemuchlargerquantityofalcoholpertonne
ofmolasses.

AlcoholProduction

Alcohol can be commercially produced from sugar and starch based feedstocks. While grain and
tuber based alcohol is primarily used for producing potable alcohol because of its high cost of
production,molassesisthedominantfeedstockandisusedforpotable,industrialandforblending
purposes. It has been estimated that about 95% of the molasses produced in India is used for the
productionofAlcohol.Sincethealcoholproductionisrelatedtomolassesproduction,thereforeits
productionalsobecomescyclic.TheproductionofKhandsarialsoleadstoproductionofmolasses.
Thissourceandgrainbasedalcoholalsocontributestoproductionofalcoholbutisoftennottaken
intoaccountwhileestimatingthetotalproductionofalcohol.Whilethereisageneralagreementon
estimated production of alcohol based on molasses, estimates of alcohol based on grain as well
khandsari molasses is not reflected in estimates by three prime Associations representing various
sectors of Industry, which recently made presentation to the committee examining the price of
Ethanol for Government of India. However, there is no consensus on the utilization of alcohol for
varioussectors.

Source:IndianChemicalCouncil

FromtheabovetableitcanbeseenthattheestimatesofAlcoholproductionfor2010and2011are
muchlowerthanestimatesoftheIndustryAssociations.Itappearsthattheproductionstatisticsof
the industry associations are more accurate because the 2010 estimates have been jacked up
considerablybasedonrealtimedataandsignificantlyhighermolassesprojectionshavebeenmade
bytheISMAfor2011becauseexcellentmonsoonandfeedbackfromtheindustry.

6.7.EthanolProgram
Indias ethanol program is based on producing ethanol from sugar molasses, a byproduct of the
sugarindustryandnotdirectlyfromsugarcaneorcornasinmostcountries.
TheGOIraisedthelevysugarratiofrom10percentto20percentfromOctober2009.

Normally, the central government announces a three month quota allocation for free sale and
levysugarwithspecificallocationtoeachsugarmill.However,theGOIshiftedtoannouncing
monthlyquotafromFebruary2009.

India is the fifth largest primary energy consumer and fourth largest petroleum consumer in the
world. Growing population and rapid socioeconomic development has spurred an increase in
energyconsumptionacrossallmajorsectorsoftheIndianeconomy.Givenlimiteddomesticenergy
resources, most energy requirements are met through imports. Provisional estimates indicate that
Indiameetsmorethan76percentofitspetroleumdemandthroughimports.Importexpenditureson
petroleum products in fiscal 2009/10 is currently estimated at over $83 billion, up four times the
value in fiscal 2003/04. Consequently, Indian petroleum consumption has also gone up from 84
milliontonsinIndianFiscalYear(IFY)1997/98to134milliontonsinIFY2008/09andisexpectedto
growover136milliontonsinIFY2009/10.

Source:PetroleumPlanningandAnalysisCell,GovernmentofIndia(GOI)

Fromtheabovegraphweseetheburgeoningdemandforcrudeoil.WithIndiagrowingatafast
pace,thedemandforoilissettorise.IndiaandChinawillaccountfor45percentoftheincreasein
globalprimaryenergydemandby2030.
India has become a significant consumer of energy resources. Its oil consumption has risen to 3.3
million barrels per day in 2009, from 643,000 barrels of oil per day in 1980, making it the worlds
fourthbiggestconsumerofoil

Source:PetroleumPlanningandAnalysisCell,GovernmentofIndia(GOI)

EthanolisproducedinIndiafromsugarmolassesforblendingwithpetrol.BeginningJanuary,2003,
the GOI mandated the use of 5 percent ethanol blend in petrol through its ambitious Ethanol
BlendingProgram(EBP).

SinceIndiansugarcaneproductioniscyclical,ethanolandalcoholproductioninIndiadependson
the availability of sugar molasses (a byproduct of domestic sugar production). Lower sugar
molasses availability and consequent higher molasses prices have impacted ethanols cost of
production, thereby causing a disruption in the supply of ethanol at prenegotiated fixed ethanol
prices.Presently,thegovernmentisunabletoimplementcompulsoryblendingof5percentethanol
in petrol (gasoline) due to the short supply of sugar molasses in 2009/10 and 2008/09 on low
sugarcanecropproduction.Withabumpersugarcaneandsugarproductionoutlookfor2010/11,the
governmentislikelytorenewitsfocusandimplementthemandatory5percentethanolblendingin
petrol. Industry sources report that the GOI is likely to take a decision on providing a hike in
purchasepriceofethanolfortheEthanolBlendingProgram(EBP)forupcoming2010/11season.

6.8.Augmentingethanolsupply

Currently,thegovernmentdoesnotallowuseofimportedethanolfortheEBPprogram,asthefocus
isondevelopingdomesticproductioncapacities.Toaugmentsupply,theGOIhaspermittedethanol
production directly from sugarcane juice while ensuring that the move does not constrain
productionofsugarorethanolforindustrialuse.Effortstoproduceethanolfromsweetsorghum,
sugarbeets,andsweetpotatoes,however,areattheexperimentalstage.Thegovernmentdoesnot
provideanydirectfinancialassistanceortaxincentivefortheproductionormarketingofethanolor
ethanol blended petrol. The GOI is offering subsidized loans (through sugarcane development
funds)tosugarmillsforbuildingethanolproductionunits.Theloanswouldcoveramaximumof40
percentoftheprojectcosttosugarmillsfordevelopmentofethanolproductionunit.Impediments:
HighertaxesandleviesindifferentstateshaveimpactedtheEthanolBlendingProgram.Rulesand
regulations(highexciseduty,interstatechargesetc.)applicabletothecontrolofalcoholforpotable
industry use are equally applicable for ethanol blending with petrol, thereby constraining its
availabilityandutilizationfortheEBP.

6.9.Biodieselpolicy

OnApril,2003theGOIlaunchedaNationalBiodieselMission(NBM)identifyingjatrophacurcasas
the most suitable treeborne oilseed for biodiesel production on wastelands. The Planning
Commission of India had set an ambitious target of covering 11.2 to 13.4 million hectares of land

under jatropha cultivation by end of 11th Five Year Plan (2011/12). The central government and
several state governments provide fiscal incentives for supporting planting of Jatropha and other
nonedibleoilseeds.

6.10.BioethanolandBiodiesel

Ethanol:Currently,Indiaproducesconventionalbioethanolfromsugarmolassesandproductionof
advancedbioethanolisstillintheresearchanddevelopmentphase.Indiahas330distillerieswhich
produce 4 billion litres of rectified spirit (alcohol) per year. Of the total distilleries, about 115
distillerieshavethecapacitytodistill1.8billionlitresofconventionalethanolperyearsufficientto
meetthe5percentblendingmandate.

Production: With an outlook of bumper sugarcane and sugar production in 2010/11 , the
government is likely to renew its focus and strongly implement the mandatory 5 percent ethanol
blending in petrol. This will, however, be dependant on whether or not the government takes a
decision on the purchase price of ethanol for EBP. Higher sugarcane and sugar production in
2009/10improvedethanolproductionbuttotalsupplyremainedat2008/09levelmostlyduetoshort
stockscarriedforwardfromthepreviousyear(2008/09).Shortsupplyofsugarmolassesin2008/09
severely constrained ethanol production and the consequent higher prices made it unviable to
supplyethanoltopetroleumcompaniesatthenegotiatedprices.

Consumption:Stronggrowthintheconsumptionofethanolacrossthechemicalandpotableliquor
industry is expected to raise total ethanol consumption close to 2 billion litres in 2010/11, up 140
millionlitresoverthepreviousyear.Thegrowthinconsumptionacrossthesesectorswouldseverely
constrainitssuppliesforEBP.Consequently,theavailabilityofethanolin2010/11forblendingwith
petrol is roughly estimated at 200 million litres, against the target of 800million litres set by the
Ethanol Manufacturers in India. Ethanol consumption in 2009/10 was drawn down to 50 million
litresfrom100millionlitresin2008/09,mostlyduetoashortsupplyofmolassesandhigherdemand
forethanolfromcompetingindustries.Accordingtotradesources,highermarketpricesforethanol
wereattractiveforthesupplierstodiverttheresuppliesfromEBP.

Trade:Indiadoesnotimportethanolorotherbiofuelsforfuelpurposes.Duringyearsoflowsugar
production, and consequent shortage of molasses and alcohol, India imports alcohol, mainly for
industrialandpotableliquorproduction.Indiaexportssmallquantitiesofethanolmostlyfornon
fuel use, to Sri Lanka, U.A.E and some African countries. Although there are no quantitative
restrictionsonimportsofbiofuels,highdutiesmakeimportseconomicallyunviable.TheGOIdoes
not provide any financial assistance for biofuel exports (biodiesel and ethanol). Current trade
regulations allow duty free imports of feed stocks for reexport by certified export oriented units,
butnosuchoperationsareinplace.

6.11.SnapshotofIndiasNationalPolicyonBiofuels

SettingupaNationalBiofuelCoordinationCommitteeunderthePrimeMinisterforabroader
policyperspectiveandsetupaNationalBiofuelSteeringCommittee(NBSC)toprovidepolicy
guidelines.

Strengthen Indias energy security by encouraging use of renewable energy resources to

supplementtransportfuels.A20percenttargetforblendingofbiofuelforbothbiodieseland
bioethanolby2017isproposed.
Derivebiofuelsfromnonfeedstockthatwouldberaisedondegradedlandorwastelandsthat
arenotsuitedtoagriculture,thusavoidingapossibleconflictoffuelversesfoodsecurity.

Facilitateandbringaboutoptimaldevelopmentandutilizationofindigenousbiomassfeedstock
fortheproductionofbiofuels.Thepolicyalsoenvisagesdevelopmentofnextgeneration,more
efficientbiofuelconversiontechnologiesbasedonnewfeedstocks.

MinimumSupportPrice(MSP)mechanismtoensureafairpriceforbiodieseloilseedgrowers.
Theimplementationoftheproposalwouldbeconsideredcarefullyafterconsultationwithstake
holders,centralandstategovernmentsandthenbytheBiofuelSteeringCommitteeandfinally
decidedbyNationalBiofuelCoordinationCommittee.

OilMarketingCompaniesproposetopurchasebioethanolataMinimumPurchasePrice(MPP)
based on the actual cost of production and the import price of bioethanol. In the case of
biodiesel,theMPPshouldbelinkedtotheprevailingretaildieselprice.

As necessary, the GOI proposes considering a National Biofuel Fund for providing financial
incentives,includingsubsidiesandgrants,fornewandsecondgenerationfeedstocks,advanced
technologies and conversion processes, and production units based on new and second
generationfeedstocks.

Except for a concessional excise duty of 16 percent on bioethanol, no other central taxes and
dutiesareproposedforonbiodieselandbioethanol.

A thrust for innovation, (multiinstitutional, indigenous and time bound) on research and
developmentofbiofuelfeedstockproduction,includingsecondgenerationbiofuels.

Biofueltechnologiesandprojectswillbeallowed100percentforeignequitythroughautomatic
approvalroutestoattractForeignDirectInvestment(FDI),providedbiofuelisfordomesticuse
only,andnotforexport.PlantationsofnonedibleoilbearingplantswouldnotbeopenforFDI
participation.

7.MainFindings

BiofuelPolicy:Indiasbiofuelpolicyiscomprehensiveandgivesabroadoutlinetoallthemajor
areasthatneedattention.Theseguidelineshavetobetranslatedintoabiofuelprogramandaseries
of projects to reap the potential benefits. Given the vast differences in the economic performances
andcrosssectoralimplicationsofethanolandbiodiesel,thebiofuelpolicycanservebetterifthese
twosectorsaredealtwithseparately.
PotentialforProducingBiofuels:Simplenaturalresourceaccountingshowsthat20%blendingof
ethanol with petrol can be achieved by 2017, only if sugar cane juice is converted to ethanol to
supplement molasses ethanol. Sweet sorghum (SS) and tropical sugar beets (TSB) are still at the
initialstageofdevelopmentandfacemajortechnologicalandfinancialconstraints.About32million
hectares of wasteland are required for biodiesel production together with yield improvements to
meeta20%blendingtargetwithpetroleumdiesel.However,itisunlikelythatIndiacanachievethe
20%blendingtargetby2017giventhecurrentinfantstageofthebiodieselindustryinthecountry.
Food Security: At the current level of productivity, a 20% blending of sugar cane based ethanol
cannot be achieved without affecting the food sector. SS and TSB will also compete with the food
sectorforlandandwater.However,molassesbasedethanolblendingdoesnothaveanyimpacton
thefoodsector.Ifconfinedtowastelandsandusingonlylimitedirrigationduringtheestablishment
phaseofthecrops,biodieselproductionwillnothaveanyadverseimpactonthefoodsector.
Technological Constraints: The sugarcane sector is well organized and there are no major
technological or other constraints, which prevent meeting the blending targets. The SS and TSB
supplychainsareyettobefullydevelopedandtheyfaceamajorbottleneckatthejuiceextraction
segment of the supply chain making juice extracting units financially unattractive. In contrast to
sugarcane,thebiodieselsupplychainisinitsinfancyandunderstandingtheagronomyofthecrops
and development of nurseries and plantations with high yielding varieties are major constraints,
whichneedtoberemovedforthesectortotakeoff.
ImpactonWater:Sugarcaneisawaterintensivecropbutifconfinedtoexistingsugarcanelandsor
tomolassesbasedethanol,ethanolproductionwillnotaddtotheirrigationwaterdemand.Biodiesel
crops most likely will not add to the water problems if confined to limited irrigation in the early
stageofthecropestablishment.
Environmental Impacts: Both ethanol and biodiesel crops have limited negative environmental
impacts which can be easily mitigated using available technologies and regulatory measures.
Compared to ethanol, biodiesel crops have a number of positive environmental effects and their
carbonbenefitpotentialisalsolarge.Therearenoforeseeablenegativesocialimpactsofbiodiesel.

Financial Feasibility Ethanol: Ethanol production is not profitable under the administratively
determined price of Rs21.5/liter. The recent price revision may provide adequate profits to
producers.
Financial Feasibility Biodiesel: Biodiesel production is also not financially feasible under the
currentpricingmechanism.ThecurrentadministrativelydeterminedpriceofRs26.5/literneedstobe
revisedtoprovidefinancialincentivesalongthesupplychain.
EconomicFeasibilityEthanol:Molassesbasedethanoliseconomicallyfeasibleatthecurrentprice
of oil and increases of oil prices make molasses based ethanol economically more attractive. The
diversionofethanolfromcurrentusesinindustryandaspotablealcoholisnoteconomicallyviable.
Thecostofsugarcanejuicebasedethanolexceedsthesocialbenefits,hence,sugarcanejuiceethanol

is not economically justifiable. Higher oil prices do not make sugarcane juice based ethanol
economicallyattractive.Therefore,sugarcanebasedethanolwillnotbeeconomicallyviableevenin
the future. Alternative feed stocks such as TSB and SS are not economically feasible at current oil
prices. Therefore the ethanol sector should revise its national targets to an economically beneficial
targetupto5%blendingonlyusingmolassesethanol.
EconomicFeasibilityBiodiesel:Bothjatrophaandpongamiaprovideacceptableeconomicreturns
at current oil prices, and an increase in the price of diesel makes biodiesel economically more
attractive. Employment generation and CDM benefits are also significant in the case of biodiesel.
Therefore, the expansionof biodieselproduction is socially desirable and the results of this report
supportanaggressiveprogramforbiodieselinIndia.
Economy Wide Impact of Biodiesel: The Indian general equilibrium model, with only biodiesel
interventions, shows that biodiesel could provide India with an opportunity to enhance economic
growthandthewellbeingofruralpopulations.Thenationalbiofuelprogramhasthepotentialto
create a significant number of jobs with substantial real wage increases; hence, it is a potential
avenueforpovertyreductionwithinaninclusivegrowthpolicyframework.Thenegativeeffectof
theprogram,i.e.higherfiscaldeficits,seemsnottodampenthegrowtheffect.Incontrast,the20%
ethanolblendingdoesnotaddmuchvaluetotheeconomy.

8.Recommendations

Separate Policies for Ethanol and Biodiesel: Separate policies for ethanol and biodiesel would
servethetwosectorsbettergiventhedifferenceineconomicperformanceandotherissues.
Focus on Molasses based Ethanol: Ethanol production should be limited to molasses based
ethanol.
Research on Second Generation Biofuel: There is limited scope for first generation ethanol in
India.However,thereseemtobealargepotentialforsecondgenerationethanol.Therefore,research
effortsonsecondgenerationethanolshouldcontinue.
Public Sector Support for biodiesel: The main focus of public support should be on biodiesel.
Followingarethespecificareasthatrequireimmediateattention:
a) Land use mapping and land allocation study and for formulating a strategy for the necessary
legal,institutional,andotherprovisionstomakewastelandavailableforbiodieselproduction.
b) Revision of biodiesel and oil seed prices and provision of a stable policy environment for the
biodieselsectortodevelop.
c) Accelerated research program on agronomy, selection and breeding, pest and diseases control,
othermanagementpractices,andthepropagationofhighyieldingplantingmaterialsforplantation
development.
d) Incentive packages for the private sector to mobilize private investment resources for the
developmentofthebiodieselsector.
e) Further studies to examine the potential synergy between Indias rural development programs
and biodiesel sector development particularly focusing on the long gestation period of biodiesel
crops.
f)Establishmentofanationalagencywithbranchesinrelevantstatestodesignandimplementthe
above stated public support program, oversee and monitor the biodiesel industry, periodically
reviewthecostofproductionandprices,anddesignandrecommendsubsidiesandtaxesbasedon
changesinoilprices.


Bilateralandregionaltradeagreementshaveemergedasmorereliablemechanismstoremovetariffs
andnontariffbarriersthatmayaffectbiofuelstradethantheDohanegotiations.Standardizationof
trade classifications is necessary, as well as ways to certify and label biofuels and feedstock to
ensurethatsustainabilitycriteriacontributetoglobalenvironmentalgoals,particularlythoserelated
toclimatechangemitigation.Furthermore,theemergenceofcarbontradingprogrammesrelatedto
ratificationoftheKyotoProtocolmayenhancethecompetitivenessofbiofuels,particularlyethanol.
Ethanolconsumption,particularlysugarbased,resultsinreducedgreenhousegasemissions,thus,
earningcarboncreditsthatcanbesoldthroughthecarbonmarkets.JapanandtheEUhavelaunched
carbontradingprogrammes,andsimilarcarbonschemesmaycontinuetoemergeworldwide.
Subsidizedethanolproductionandsupportstodomesticindustriestendtoprovidejustificationfor
high import tariffs and the protection of infant industries, certainly the stage of emerging ethanol
industries at the current time. Fuel ethanol supplies, particularly, will continue to volatile in the
absenceofaneffectiveinternationalexchangeandtrade.Despitesomepossibleconstraints,ethanol
production, particularly fuel ethanol, is expected to continue to increase globally, with a greater
numberanddiversityglobalproducersandsuppliers.Therearesignsthatethanolisbecomingan
internationally traded commodity, with the promise of contributing to climate change mitigation,
ruraldevelopmentandenvironmentalsustainability.

9.Bibliography

SugarConsumptionandProductionDatafromhttp://www.indexmundi.com/agriculture
http://commerce.nic.in/
http://www.thebioenergysite.com/articles/369/indiabiofuelsannualreport2009
http://www.wikinvest.com/commodity/Sugar
http://business.rediff.com/slideshow/2010/jul/27/slideshow1whyindiamustpushforethanol
blendedpetrol.htm
Background paper for the Competitive Commercial Agriculture in SubSaharan Africa (CCAA)
StudySUGARBASEDETHANOLInternationalMarketProfilebyJenniferNyberg,TradeandMarkets
Division,FoodandAgricultureOrganizationoftheUnitedNations

10.Databasesused

TRAINS
Trademap.org
www.macmap.org
WITS