Who Sanctioned India’s Ethanol Policy Mess, Why Are Taxpayers Backing a ₹4,687-Crore Subsidy Bill, and Who Is Accountable?
When Tarun Kapoor, Advisor to the Prime Minister, said that ethanol production in India had gone “beyond our imagination” and was now more than what the country had planned for and more than what was required for blending, he unintentionally summed up one of the most astonishing policy failures of recent years.
This was not an opposition allegation. It was not an industry lobby complaining about government policy. It was not a social-media interpretation of complicated data. A senior official advising the Prime Minister was effectively acknowledging that India had created an ethanol-production ecosystem larger than the principal market for which that ecosystem had been built.
The story itself is quite simple. The government wanted India to blend 20 per cent ethanol into petrol. To make that possible, it encouraged farmers to grow and sell ethanol feedstocks, encouraged sugar mills and distilleries to expand production, widened the range of agricultural products that could be converted into ethanol, subsidised borrowing for new capacity and created a large assured buyer through the oil marketing companies.
Farmers responded. Sugar mills responded. Distilleries responded. Banks responded. Investors responded.
The government got exactly what it asked for.
The problem is that production capacity appears to have expanded much faster than the demand created by E20. India is now sitting with an ethanol economy capable of supplying far more than oil companies require for the blending programme, and the same government that encouraged this expansion is now looking for new ways to consume the excess.
That raises a question which should be echoing through Parliament: if the government knew approximately how much ethanol E20 would require, who authorised and subsidised capacity far beyond that requirement, and who is accountable for the public money committed to creating it?
The Farmer Incentive Worked Almost Too Well
There is no mystery about why agricultural India embraced ethanol. The government showed farmers and the agricultural processing industry an additional source of income, and they understandably seized it.
For sugarcane farmers, ethanol changed the economics of the crop. Cane was no longer dependent only on the sugar market. Mills could divert sugarcane juice, syrup and molasses towards ethanol production, creating another revenue stream and improving their ability to pay farmers. Government figures say the ethanol programme has generated more than ₹1.60 lakh crore in additional earnings for farmers since 2014-15.
Then the opportunity expanded beyond sugarcane.
Maize became increasingly important to the ethanol economy. Rice and other permitted grains entered the supply chain. Grain distilleries expanded. New plants were established. Existing sugar mills invested in ethanol capacity. Banks financed projects because the government had created something businesses love: a predictable policy, administered procurement and an apparently guaranteed market.
An entire ecosystem emerged around ethanol.
None of this was accidental. Government policy was specifically designed to make ethanol attractive enough for farmers, mills, distillers and lenders to invest heavily. Interest-subvention schemes reduced financing costs. Oil marketing companies bought ethanol under government-directed blending targets. Feedstock rules were liberalised. Production capacity was encouraged to grow rapidly.
The farmers cannot be blamed for taking the opportunity. Nor can businesses be blamed for building plants when government policy was telling them that India wanted more ethanol.
The responsibility rests with the people who designed the system.
Government was supposed to ensure that supply expansion remained connected to realistic long-term demand. Instead, it appears to have built the accelerator first and started looking for the brake only after the market became saturated.
Government Knew the Demand, So How Did Supply Run So Far Ahead?
The most damaging part of this story is that India’s ethanol requirement was not unknowable.
The government’s own planning exercise had estimated that approximately 1,016 crore litres of ethanol would be required for E20 petrol blending, with additional industrial and other uses taking total ethanol demand higher. Government subsequently worked with a capacity requirement of around 1,700 crore litres, assuming plants would not operate at full utilisation.
Yet installed ethanol capacity eventually approached 2,000 crore litres.
The real scale of the mismatch becomes clearer when we look at what happened in the market. For the 2025-26 ethanol supply year, oil marketing companies sought roughly 1,050 crore litres. Eligible producers reportedly offered around 1,759 crore litres.
That is an excess offer of approximately 709 crore litres.
In simple English, producers were ready to supply roughly two-thirds more ethanol than the principal government-created market wanted to buy.
This did not happen because India suddenly stopped using petrol. It happened because government policy kept stimulating production even as the E20 market approached saturation.
And this was not a lightly regulated free market where officials could claim that private companies simply overinvested on their own judgement.
The ethanol economy has administered prices. It has government procurement. It has government-approved feedstocks. It has blending targets. It has taxpayer-supported interest subsidies. It has policy-driven offtake by state-controlled oil companies.
Government fingerprints are everywhere.
So where was the supply discipline?
Who was monitoring sanctioned capacity against projected consumption? Who decided that additional projects should continue receiving policy support? At what stage did officials realise that production capability was running significantly ahead of E20 demand? Why was the next major ethanol market not created before so much capacity was encouraged?
These are not technical questions for some future committee. They are basic questions of governance.
Taxpayers Helped Build a Capacity Government Is Now Struggling to Use
The financial side makes the failure more serious.
The Centre earmarked approximately ₹4,687 crore for interest-subvention schemes designed to encourage ethanol-capacity expansion. By January 2025, more than ₹1,270 crore had already been utilised through NABARD.
Meanwhile, tens of thousands of crores in bank financing flowed into ethanol projects.
The sequence is extraordinary.
Government wanted more ethanol, so it financially encouraged companies to build distilleries. It expanded eligible feedstocks. It provided an assured procurement ecosystem. It encouraged banks to lend. It celebrated rising capacity as evidence of the success of the blending programme.
Then India reached E20.
Now production capability exceeds what E20 can absorb, and officials are discussing flex-fuel vehicles, industrial applications, cooking fuel, isobutanol, diesel substitutes and other possible markets.
In other words, government first stimulated the supply and is now trying to invent additional demand.
That is policy-making backwards.
A sensible industrial policy identifies the likely market, estimates sustainable demand, creates the required infrastructure and then encourages production capacity broadly in line with that demand.
India’s ethanol policy increasingly looks like the reverse. Production capacity was aggressively encouraged first. The country reached the blending target. Only after supply threatened to outrun the market did policymakers begin asking what else could be done with all the ethanol.
The taxpayer therefore has every right to ask why public money was used to encourage capacity without an adequate long-term absorption plan.
Tarun Kapoor’s own words make that question unavoidable. If production has genuinely gone beyond what government imagined and beyond what it needs for blending, then somebody misjudged the scale of the programme.
“Beyond our imagination” cannot be the end of the explanation when thousands of crores of public support and tens of thousands of crores of investment were involved.
Where Is the Opposition?
Perhaps the most remarkable part of the entire episode is how little sustained political scrutiny it has attracted.
India’s opposition parties spend enormous energy pursuing daily political controversies, statements, personalities and social-media battles. Yet here is a policy involving farmers, energy security, taxpayer subsidies, bank financing, industrial investment and potentially large amounts of underutilised capacity, and there has been no sustained national demand to identify who got the planning wrong.
Kapoor’s statement should have triggered immediate questions in Parliament.
How much ethanol-production capacity is currently underutilised?
How much taxpayer-funded interest subsidy has already been paid?
How many supported projects are still under construction?
Why is additional capacity still being encouraged when existing production capability exceeds blending requirements?
Which ministry was responsible for matching ethanol supply with long-term demand?
What forecasts were used when new capacity was approved?
Were officials warned that the industry was expanding too quickly?
Who signed off on continuing financial support?
And most importantly, who takes responsibility?
Instead, much of India’s ethanol debate has remained trapped in arguments about mileage, vehicle compatibility, food versus fuel and public anger over E20 petrol.
Those questions have their place. But they are smaller than the institutional failure now staring everyone in the face.
A government has effectively admitted that production has exceeded what it imagined and what it currently requires. Yet the people responsible for designing, financing and regulating that expansion appear to face no meaningful political scrutiny.
The opposition should be demanding documents, ministerial explanations, parliamentary committee hearings and, if serious negligence is established, resignations.
Instead, the government appears free to move from one policy announcement to another, searching for new uses for ethanol without first answering how the excess capacity arose.
“Beyond Our Imagination” Is Not Accountability
India’s ethanol programme succeeded in creating an industry.
It created additional agricultural income. It strengthened the relationship between farming and energy policy. It brought sugar mills, grain processors, distilleries, banks and oil companies into a massive new economic ecosystem.
But creating production is not the same thing as planning an economy.
A competent government must know approximately how large the market is before it spends public money encouraging businesses to supply it.
If policymakers knew roughly how much ethanol E20 required, encouraged nearly 2,000 crore litres of annual production capacity, subsidised that expansion with taxpayer money and then discovered that blending demand could not absorb what the industry could supply, that is not merely an unfortunate market adjustment.
It is a policy failure.
And policy failures involving public money require accountability.
Tarun Kapoor says ethanol production went “beyond our imagination”.
Parliament should now ask the obvious question.
Whose imagination designed this policy, who sanctioned the expansion, how much has it cost taxpayers, and why is nobody being held accountable?
