Once the Cabinet decision to ensure that the entire country complies with the policy of blending petrol with ethanol in a 95:5 ratio, ethanol producers mostly sugar firms may rake in around R1,500 crore more, or an additional 20%, from ethanol sales. This, analysts say, would help improve the bottom lines of sugar firms, which have piled up huge amounts of debt in the last four years as myriad state controls made their business a loss-making one.
The move would make the sugar industry more viable and would open another avenue of income for it which can be shared with the farmers, said National Federation Of Cooperative Sugar Factories MD Vinay Kumar.
The Cabinet decision on ethanol-blending of petrol comes close on the heels of a series of good news for the debt-ridden industry in recent weeks. Sugar prices have crept up by more than 15% since June after remaining subdued for around a year, and a panel headed by C Rangarajan, chairman of the Prime Minister's Economic Advisory Council has suggested deregulation of the sector. In a first, the government is constituting an inter-ministerial panel to consider implementing at least some of the suggestions of the panel where the states' role isn't required, including freedom to mills from supplying subsidised sugar for state-run welfare programmes.
Profits remained subdued in the sugar sector due to tight government controls over sales and stocks of sugar while high cane prices pushed up arrears to farmers. This enhanced the industry's reliance on returns on the sale of by-products of molasses such as ethanol.
Last year, the Saumitra Chaudhuri panel had recommended linking the ethanol price with the rate of petrol at the depot, with a discount of 20%.
When rectified spirits, produced from molasses, with 94.5% purity fetch Rs 34-36 a litre, producers were supposed to supply fuel ethanol with 99.5% purity at a provisional price of Rs 27 a litre. Moreover, producers were suffering huge losses as the volume also drops by around 5% if you process the rectified spirit further to produce fuel ethanol. But if OMCs (oil marketing companies) buy at market prices and the blending plan is implemented strictly, the sugar industry will benefit greatly, as ethanol producers would have fixed buyers each year, said a senior industry executive.
The country's ethanol production rose 8% in 2011-12 from a year earlier to 283.8 crore litres while demand stood at 279.6 crore litres, of which the requirement by OMCs accounts for nearly 30%. Although mandatory ethanol blending was introduced in 2008, only 13 states have implemented the programme and the average blending is just 2%. If the mandatory blending programme is now strictly implemented, OMCs would require around 100 crore litres a year.
OMCs say that as long as ethanol is priced lower than petrol, they don't have any problem implementing the blending programme. Indian Sugar Mills Association director general Abinash Verma said the industry has the ability to meet the entire ethanol requirement of OMCs if it gets the market price.