10% ethanol blending can save $1.7 bn in forex for India: McKinsey

India could save $1.7 billion of foreign exchange annually by 10 per cent mandatory ethanol blending with petrol, global consultancy firm McKinsey said on Tuesday, while advocating promotion of the sugarcane by-product to boost revenues of the cash-starved sugar mills.

Releasing a report on the Rs 80,000-crore Indian sugar industry, McKinsey said the sector is facing "worst-crisis in 30 years" and suggested various short- and long-term measures to bail out millers such as boosting exports and raising production of cane by-products including ethanol.

The consultant also said sugar mills currently owe about Rs 65,000 crore to banks and farmers: cane arrears to farmers are about Rs 14,500 crore, at present. The consultancy firm suggested various measures to absorb the over five million tonnes of excess sugar in the country.

It said the first approach could be that sugar mills export around 10 per cent of their annual production over a period of two years and the loss they suffer is compensated by an increase in cess on sugar sold domestically during periods of low sugar prices. The other approach could be the government could buy sugar from millers and export it and use the cash earned to pay back the farmers.

On the long-term, officials said distillation capacity for producing could be raised by 2.0-2.5 times of the current, building a cane price stabilisation fund and exploring ways to stabilise the fair and remunerative price (FRP) to give right price signals to farmers.

"To balance supply-demand situation, 4-6 million tonnes of surplus sugar need to be pulled out from the system through exports or some other measures," said Avinash Goyal, partner, Mckinsey and Company in India.

"Options could include considering removal of some restrictions on by-product, increasing ethanol blending norms and setting up distilleries and co-generation units," the report said. With excess supply of sugarcane production, McKinsey said sugar prices have come down, which has led to Indian millers operating at uneconomical Ebitda (earning before interest, tax, depreciation and amortisation) margins for the last three-five years.

"Many sugar mills are distressed with low profitability and return on equity and have defaulted on loans with significant arrears on payment to farmers," said McKinsey.

The consultant said a revitalised sugar industry in India could have the potential to contribute significantly to the economy.

Listing out the benefits of the sugar sector, McKinsey said it would provide job security and a stable income to more than 40 million people engaged in the industry, including 30 million farmer households. It has the potential to enhance food and energy security, as co-generation could have the potential to produce around 30 billion units of power annually.

The sector is facing a huge liquidity crunch, as the output has exceeded the domestic demand for the last five years. The trend is expected to continue in the next sugar marketing year (October-September). The sugar production of India is estimated at a record 28.3 mt in 2014-15 marketing year (October-September) as against the demand of 25 million tonnes. The closing stock of sugar is estimated at about 10 million tonnes.