India to allow ethanol-only vehicles; response to be muted

By Mayank Bhardwaj

NEW DELHI (Reuters) - India will soon allow automakers to manufacture vehicles that can run entirely on ethanol, but adoption is likely to be slow as the country has not been able to source the sugarcane by-product even for its current low gasoline-blending targets.

Transport minister Nitin Gadkari's announcement to push the cleaner-burning fuel came on the day the Supreme Court of India slapped a temporary ban on the sale of big diesel cars in the world's most polluted city, New Delhi.

"Ethanol is the next big thing and Brazil has already shown the way in terms of running vehicles on the biofuel," Gadkari told a conference of sugar mills.

"The step will not only reduce our dependence on crude oil imports but also help reduce pollution."

The ethanol vehicles will have the flexibility to switch to other fuels, the minister said, adding that more details would be available by Jan. 26.

Shares of Indian ethanol maker Praj Industries jumped more than 13 percent to their highest in about two months in a flat Mumbai market on the news.

Car makers, however, believe the country does not have the infrastructure to launch ethanol-only vehicles. India does not allow imports of ethanol and sugar companies prefer to sell the biofuel to better-paying liquor companies.

"It is very far-fetched ... you can't expect global carmakers to start working on that just for you," said Deepesh Rathore, director at consultancy Emerging Market Automotive Advisors. "Blend is fine, because there are other countries which are running on that. Up to a 20 percent blend is a practical solution."

India, the world's third largest oil consumer, currently wants every litre of gasoline sold to be mixed with 5 percent of ethanol and hopes to eventually raise this level to 10 percent. But actual blending has not climbed above 3 percent.

A local tender issued by refiners Bharat Petroleum Corp, Indian Oil Corp and Hindustan Petroleum Corp in August seeking 2.7 billion litres of ethanol managed to secure only 1.03 billion litres, sources said.

While the Indian Sugar Mills Association has said it is ready to double ethanol supply to 1.25-1.30 billion litres in 2015/16, this would still be far below the current blending requirements even if none of it was sold to liquor makers.

Another reason oil companies find it hard to source ethanol cheaply is the high state duty it attracts because of its use in the heavily taxed liquor industry.

(Additional reporting by Sankalp Phartiyal and Aditi Shah; Writing by Nidhi Verma; Editing by Himani Sarkar)