The True Economics of Ethanol: How Many Times Is India Subsidising E20?

India’s ethanol programme has been sold to the public through an exceptionally attractive proposition. Blend domestically produced ethanol into petrol, reduce dependence on imported crude oil, save foreign exchange, create an additional market for Indian agriculture and put more money into the rural economy. At a time when geopolitical conflicts can send crude prices soaring overnight, replacing part of every litre of petrol with fuel produced within India appears to make strategic sense.

That broad case for ethanol is not difficult to understand. India imports most of the crude oil it consumes. Every litre displaced by a domestically produced alternative reduces some exposure to global oil markets. Ethanol production can also create demand for sugarcane, maize and surplus grain. The government therefore accelerated the Ethanol Blended Petrol programme, reached E20 blending far ahead of the original timeline and helped build enormous new distillation capacity across the country.

But reaching a blending target is not the same thing as proving its economics.

Once we begin following the money rather than merely following the blending percentage, a more complicated picture emerges. The government acquires rice through the public procurement system, makes eligible FCI rice available to ethanol producers at an administered price substantially below FCI’s average acquisition cost, supports the construction and expansion of ethanol plants through interest subvention, and ensures demand through a mandatory blending programme under which oil marketing companies purchase ethanol at remunerative, feedstock-specific prices.

The Petroleum Ministry itself has now acknowledged that when crude oil trades around $70 per barrel, producing E20 can cost as much as or more than producing pure petrol.

That raises a question far more important than whether E20 is ideologically good or bad.

What is the true economics of ethanol, and how many times is India effectively supporting the same litre before it reaches the petrol pump?

The ₹3,889 Rice Being Sold at ₹2,320

Start with the most uncomfortable number.

FCI’s average acquisition cost of rice for 2025-26 has been reported at roughly ₹3,889 per quintal. Yet rice made available to ethanol distilleries during the relevant period was priced at around ₹2,320 per quintal.

That is a difference of approximately ₹1,569 per quintal, or more than 40% of the acquisition cost.

The government disputes describing this difference as a subsidy. Its position is that food-security requirements are protected first and only surplus stocks are made available for ethanol. It also points out that old stocks, broken rice and other lower-value grain can form part of the ethanol feedstock pool.

That defence answers one question: why can the grain be released?

It does not fully answer another: why should it be released below what the public procurement system paid to acquire it?

Surplus does not make acquisition cost disappear.

Nor does declaring a stock surplus erase the cost of carrying it through procurement, storage, handling, financing and transportation.

If FCI has already spent public money acquiring grain at one price and subsequently recovers considerably less by supplying it into an industrial fuel programme, that difference deserves to be counted somewhere in the economic balance sheet.

Calling it an administered disposal price rather than a subsidy may change the accounting terminology. It does not eliminate the underlying economic question.

Not All FCI Rice Is the Same — And That Matters

There is an important qualification.

It would be misleading to claim that ethanol companies uniquely receive ordinary commercial-quality FCI rice at ₹2,320 while every other buyer must pay ₹3,889.

FCI’s own Open Market Sale Scheme distinguishes between categories and grades. During 2025-26, custom-milled rice containing 10% broken rice was offered to private parties at ₹3,000 per quintal, later rising to ₹3,090. Broken rice, however, was offered at ₹2,250 and later ₹2,320 — broadly the same administered price available to ethanol distilleries.

In the previous year too, private buyers of ordinary rice faced a ₹2,800 reserve price while ethanol distilleries were allocated rice at a fixed ₹2,250 per quintal.

This is why the government must publish the grade-wise composition of the millions of tonnes supplied to ethanol factories.

How much was old rice?

How much was broken rice?

How much was ordinary custom-milled rice?

Without that breakup, neither supporters nor critics can precisely calculate the opportunity cost.

But the broader fact remains unchanged: ethanol plants receive FCI grain through a government-created allocation mechanism at an administered price, and that price can stand substantially below FCI’s average acquisition cost.

What Happens When Cheap FCI Rice Disappears?

The best test of whether cheap feedstock matters is not theoretical. It is what happened when it was unavailable.

Credit-rating assessments of grain-based ethanol producers have previously noted pressure on profitability when FCI rice supplies were withdrawn and manufacturers had to depend more heavily on costlier alternative feedstocks such as maize and broken rice.

When access to government-priced FCI grain improved, so did the economics.

That is important because it tells us that the FCI feedstock mechanism is not merely an accounting curiosity sitting somewhere in a government warehouse.

It can materially affect distillery margins.

If an industry’s profitability changes substantially depending upon whether a government agency supplies grain at an administered price, then that feedstock policy belongs squarely inside any calculation of the industry’s true economics.

The Hidden Difference Per Litre

Government planning documents have historically used an approximate conversion ratio of around 450 litres of ethanol from one tonne of FCI rice.

Using that benchmark allows us to see how large the acquisition-cost difference becomes when expressed per litre.

At ₹2,320 per quintal, one tonne of rice costs the distillery around ₹23,200.

At an FCI acquisition cost of approximately ₹38,895 per tonne, the difference is about ₹15,695.

Spread across approximately 450 litres of ethanol, that works out to roughly:

₹34.9 per litre.

That number requires careful interpretation.

It is not an officially recognised ₹34.9-per-litre ethanol subsidy. It is the implied difference between FCI’s average rice acquisition cost and the administered feedstock price, divided by the approximate ethanol yield.

But that distinction should not make the number disappear from the debate.

If we want to know what ethanol really costs India, somebody must explain where that ₹34.9-per-litre acquisition-cost difference ultimately sits in the public accounts.

DDGS Matters — But It Does Not End the Question

A fair calculation must also acknowledge that ethanol production does not turn an entire tonne of grain into nothing but fuel.

Grain distilleries produce commercially valuable by-products, most notably distillers dried grains with solubles, or DDGS, which is sold largely as animal feed.

Revenue from DDGS reduces the effective feedstock cost attributable to ethanol.

That means it would be incorrect simply to add the entire FCI acquisition-cost difference to the OMC ethanol price and announce that this represents the “real cost” of a litre.

But even after accounting for by-product value, one conclusion remains difficult to avoid: the economics of FCI-rice ethanol are extremely sensitive to the price at which the government releases the grain.

That is precisely why the administered feedstock price deserves scrutiny rather than being treated as an irrelevant internal FCI transaction.

Then Comes the Second Layer: Remunerative Ethanol Procurement

After the grain enters the distillery through one government policy, the resulting ethanol enters another.

For ethanol supply year 2025-26, provisional feedstock-specific procurement prices include approximately:

FCI-rice ethanol at ₹60.32 per litre.

Sugarcane juice/syrup ethanol at ₹65.61 per litre.

Damaged-foodgrain ethanol at ₹64 per litre.

Maize ethanol at ₹71.86 per litre.

The government itself describes these as remunerative prices intended to ensure sufficient supply and support agricultural producers.

That is an industrial-policy choice. Governments are entitled to make such choices.

But it means ethanol is not operating as an ordinary commodity whose price is determined exclusively by an unrestricted market.

The raw material can be made available through government policy. The finished product is purchased through another policy framework. Demand exists because blending itself is mandated.

So when advocates quote the OMC ethanol purchase price as though it represents the complete economic cost of ethanol, something important is being omitted.

Government Admits E20 Can Currently Cost More Than Petrol

This is perhaps the most significant admission in the entire debate.

The Petroleum Ministry has explicitly stated that when international crude trades around $70 per barrel, producing E20 can cost as much as, or more than, pure petrol. The government argues that ethanol becomes economically more attractive when crude rises sharply — particularly into the $120-$130 range — and that domestic ethanol also protects India against international price volatility.

Those are legitimate strategic arguments.

But they change the debate fundamentally.

If E20 were simply cheaper than petrol, the economic case would be straightforward.

If E20 is currently more expensive but provides insurance against future crude shocks, then ethanol should be treated as an energy-security premium.

And if India is deliberately paying such a premium, the government should quantify it.

How much more are OMCs spending?

How much foreign exchange is genuinely being saved?

How much petroleum is actually displaced?

How much public support is entering through the feedstock side?

Only after answering all four can we determine whether the insurance premium is worthwhile.

Then Comes a Third Layer: Subsidised Finance

The story does not end with feedstock and procurement prices.

Since 2018, the Centre has operated ethanol interest-subvention schemes to encourage the construction and expansion of distilleries. Grain-based ethanol capacity was subsequently brought into these schemes.

Under the programme, the government bears interest equivalent to 6% per annum or 50% of the interest charged by banks and financial institutions, whichever is lower, for five years including a one-year moratorium.

Parliament was told that ₹1,685 crore had been released to NABARD for interest subvention to eligible sugar mills and distilleries from FY2019-20 through FY2025-26.

Unlike the argument over FCI rice, there is little ambiguity here.

This is explicit government financial support designed to build ethanol-production capacity.

Which leads naturally to another question.

If taxpayers helped finance the plants, government policy helped provide feedstock, and mandated blending helped guarantee the market, how much of the industry’s apparent commercial success can really be separated from state support?

The Government Has Created an Entire Ethanol Ecosystem

Interest subvention is only one instrument.

Government policy has also included reduced GST on ethanol supplied for blending, long-term OMC offtake arrangements, feedstock-specific procurement prices and measures intended to improve the availability of maize and other raw materials.

None of these policies individually proves that ethanol is economically unsound.

But collectively they establish something beyond dispute:

India’s ethanol industry is a deliberately constructed policy ecosystem, not a laissez-faire fuel market.

That is not necessarily a criticism.

Strategic industries often receive government support. Renewable energy, semiconductors, defence manufacturing and electric mobility all involve state intervention of some form.

The difference is that strategic intervention should be measured against strategic returns.

If public money is being committed, the public deserves the complete balance sheet.

Has India Already Built Too Much Capacity?

The next problem is what happens after successful industrial policy creates more production capacity than the present mandate can absorb.

India’s ethanol-production capacity has expanded dramatically, approaching roughly 2,000 crore litres annually.

Yet E20 does not require all of that capacity.

That creates a structural risk.

Factories have been built.

Loans have been sanctioned.

Government support has been provided.

Investors expect utilisation.

Banks expect repayment.

The temptation then becomes obvious: instead of allowing capacity utilisation to fall, find new mandated demand.

That could mean higher blending percentages, flex fuels, exports, sustainable aviation applications or other ethanol-based products.

Some of those uses may make excellent economic sense.

But future policy should be decided because those applications are independently worthwhile — not because previous incentives have created an industry that now needs another mandate to consume what it can produce.

Otherwise industrial policy turns into policy lock-in.

And Where Exactly Is the Farmer in This Chain?

The farmer-benefit argument also deserves more precise accounting.

For FCI rice, the farmer sells paddy into the procurement system and receives the applicable procurement payment.

The farmer is then largely out of that particular transaction.

FCI holds the grain.

FCI subsequently supplies rice to the distillery.

The distillery converts it to ethanol.

The OMC purchases the ethanol.

Therefore, when government statements combine large payments to “farmers and distillers”, those numbers should be broken apart.

How much reached farmers directly?

How much went to sugar mills?

How much went to grain distilleries?

How much constituted procurement payments that would have happened under MSP operations anyway?

If the purpose of a subsidy is farmer welfare, the cleanest policy is often to show exactly how much subsidy reached the farmer.

Bundling farmers and industrial processors into one headline number makes that harder to determine.

Why Not Let Ethanol Plants Buy Their Own Rice?

This leads to perhaps the simplest reform question of all.

If India has more rice than it requires for the PDS, welfare schemes and strategic buffers, why must FCI continue acting as the intermediary between farmers and ethanol manufacturers?

Why not determine the grain actually required for food security and buffer purposes and allow ethanol manufacturers to contract directly with farmers, cooperatives and agricultural markets for additional requirements?

That would reveal the true commercial value of their feedstock immediately.

The farmer could still receive price support where necessary.

But the subsidy, if government wished to provide one, would become transparent and farmer-facing instead of becoming embedded inside the difference between FCI procurement and disposal economics.

The ethanol industry would buy its own raw material.

Its true production economics would become visible.

And taxpayers would know exactly which part of the chain they were supporting.

The Government Should Publish an Ethanol Balance Sheet

India does not need another ideological argument about ethanol.

It needs an audited economic balance sheet.

For every ethanol supply year, the government should publish in one place:

the quantity of ethanol purchased;

the feedstock used to produce it;

the quantity and grade of FCI rice supplied;

FCI’s acquisition and full economic cost for that grain;

revenue recovered from ethanol distilleries;

interest-subvention expenditure;

average OMC ethanol procurement cost;

the incremental cost or saving relative to the petroleum displaced;

foreign exchange saved;

crude imports avoided;

payments made directly to farmers;

payments made to distillers and mills;

and ethanol capacity utilisation.

Then calculate the programme under several counterfactuals.

What would FCI-rice ethanol cost if plants bought rice directly from the market?

What would it cost without interest subvention?

What would E20 cost at $50, $70, $100 and $130 crude?

How much economic value does India receive for every rupee of public support?

Those are not anti-ethanol questions.

They are the questions that should have been central to ethanol policy from the beginning.

The True Economics of Ethanol Must Include Every Rupee

India may ultimately conclude that ethanol remains worth every rupee spent supporting it.

Energy independence carries value.

Insurance against global crude shocks carries value.

Stable agricultural demand carries value.

Domestic manufacturing and rural employment carry value.

But those benefits do not justify pretending that the costs on the other side of the ledger do not exist.

A programme cannot be evaluated merely by counting the dollars of crude imports it avoided while ignoring the rupees spent making that avoidance possible.

If the government acquires grain at one price and releases it into the ethanol ecosystem at another; subsidises the financing of ethanol capacity; establishes remunerative procurement prices; mandates demand through E20; and simultaneously acknowledges that E20 can currently cost more than petrol under certain crude-price conditions, then the burden should be on policymakers to present the complete economic calculation.

The fundamental question is no longer simply whether India should blend ethanol.

It is far more specific:

How many times is the Indian economy paying to finance, feed, purchase and mandate the same litre of ethanol — and what return are taxpayers and consumers receiving for the complete cost?

Until that balance sheet is published, claims about the success of E20 will remain incomplete.

The blending percentage may have reached 20%.

The economic accounting has not.