Sanjeev Nayyar: Pay your farmers, not OPEC

For a country that imports over 70 per cent of its annual crude oil needs and remitted about Rs 1,17,000 crore* in 2004-05, the use of ethanol blend has not got the importance that it deserves. The government plans to make 5 per cent blend mandatory for all states by the next sugar season, that is, 2006-07. Further blending at 10 per cent is to be achieved across the country in the next two years. Grand plans!

Five per cent ethanol blending was made effective from January 2003 in nine states and four Union territories. Against plan, petrol ethanol blend is being supplied in the four states of UP, Punjab, Karnataka and Tamil Nadu (nine districts). In Maharashtra, Goa, Gujarat, Andhra Pradesh and Uttaranchal, oil marketing companies (OMCs) are in the process of finalising tenders for purchase of ethanol. No progress has been made in Haryana and the four Union territories.

OMCs could blame sugar companies for non-availability of ethanol. Conversely, sugar companies could attribute it to the 21 per cent drop in sugarcane production between 2001-02 and 2004-05 or blame OMCs for not lifting stocks/delayed payment, (According to Jyoti Parikh, Business Standard, February 27 2006, OMCs have not lifted 475 million litres of ethanol).

Who is responsible for this delay, where does the buck stop, what is the way forward? But first, why is use of Ethanol so important for India?

Oil prices have doubled between 2003-04 and 2005-06. Crude rates per barrel (Indian basket) leapfrogged from $27.97 (2003-04) to $55.35 (2005-06, up to December 15)*. Had OMCs been allowed to pass on the entire price, the increase impact on inflation might have been significant.

Consumption of petrol is increasing while domestic production of crude is constant, at around 33 million tonnes for the past four-five years.

Doping ethanol with petrol reduces air pollution.

Ethanol is an effective tool to reduce ground-level ozone pollution.

The biggest advantage is for the macro economy. At 10 per cent levels:

India would need at least 1,200 million litres of ethanol. Purchases of sugarcane, the primary feedstock for ethanol production would be about Rs 12,600 crore at current prices.

Sugar industry would spend approximately Rs 1,100 crore to build new ethanol capacity.

Reduce cost of petrol by about Rs 1 per litre.

Globally, how are countries using ethanol? In Brazil, 100 per cent ethanol (made from sugarcane) is used in approximately 40 per cent of the cars. The remaining vehicles use blends of 24 per cent ethanol with 76 per cent gasoline. Brazil consumes nearly 4 billion gallons of ethanol annually. There is a reduction of excise for ethanol-powered vehicles.

The US produced 3.4 billion gallons of ethanol (made from corn) in 2004. A Renewable Fuels Standard provides for a market of 8 billion gallons by 2012, and would have significant impact on the American economy. Between 2005 and 2012, the purchase of corn alone would be $43 billion and create 234,840 new jobs in all sectors of the economy by 2012.

In Thailand, ethanol-blended gasoline is cheaper by 0.5 to 0.7 baht a litre as compared to 95 Octane that is commonly used. A tax rebate is given to automotive and oil companies to promote use of ethanol. Royal Dutch Shell has a joint venture with Canada's Iogen to produce cellulosic ethanol. It is made from waste products such as straw, corn stalks and agricultural debris.

What policy changes could stimulate use of ethanol?

Sale of molasses and ethanol should be freely allowed across states but only when used in the transport sector. Since ethanol is mixed with petrol at OMC depots, free movement would create an all India market for ethanol.

There should be no excise duty on ethanol. At 10 per cent blending levels, the approximate revenue loss is Rs 375 crore. Customs and excise duty revenues from the petroleum sector for 2004-05 were Rs 56,395 crore*. The loss is not only insignificant but it is more than offset by windfall gains from customs duty on crude. Since duty on crude (5 per cent) is ad valorem, revenues increase for every increase in crude price or depreciation of the rupee.

There should be no central sales tax/VAT on sale of ethanol. At 10 per cent blending levels the approximate revenue loss should not exceed Rs 75 crore. In 2004-05, state government revenues from sales tax on the oil sector were Rs 38,3951 crore*. Loss to revenue is insignificant. It is better to waive off taxes selectively than give subsidies or have state governments provide guarantees for bank loans to sugar co-operatives.

The price of ethanol should be linked to the price of crude. For instance, if price of crude is below $50, the price of ethanol is Rs 18.5 a litre, if crude costs between $51 and $60, the price of ethanol is Rs 19.25 a litre and so on.

OMCs must be assured of regular supplies by sugar companies. They should also make regular payments to sugar companies.

A futures market should be developed for ethanol like it exists for oil.

Use of ethanol should get woven into the price structure for petrol so that it makes business sense to use ethanol.

Ethanol does not loose its properties with time. OMCs should evaluate the feasibility of creating ethanol reserves just like the US has created strategic oil reserves.

Central and state governments must take steps to ensure that sugarcane production is consistently increased.

Lastly, the government must lay down roles of individual stakeholders. Just as the Fiscal Responsibility and Budget Management Act (FRBM) lays down fiscal deficit targets, the proposed Oil Conservation and Management Act (OCMA) should lay down fuel conservation targets. Implementation of the act would be the responsibility of the ministers of petroleum and agriculture. Since ethanol is mainly produced by molasses-based distilleries situated in UP, Maharashtra, Andhra Pradesh, Tamil Nadu, Gujarat and Karnataka, their views should be ascertained. The intent is to break silos and synchronise efforts.

OMCs/sugar companies should agree on three-year or annual targets for use of alternate fuels that would become part of the act. Annual targets would, in turn, be split into quarterwise targets.

India's ballooning oil imports and burgeoning current account deficit make it imperative to closely monitor use of alternate fuels. Every six months, the two ministries should jointly give Parliament a statement of alternate fuel usage and simultaneously publish it in English and local language papers across every state capital. The intent is to make the process transparent and apply subtle pressure on the stakeholders to meet targets.

"Use ethanol "" pay your farmer instead of oil-producing countries" should be the buzzword for 2006.

(The author is CEO, Surya Consulting. Email: suryacon@vsnl.com)

*Rangarajan Committee Report, February 2006