Food vs fuel: Time to recalibrate

Sugar prices have spiked sharply within weeks. The all-India modal retail price climbed from around Rs 45/kg on July 24 to about Rs 65/kg by August 24, an increase of nearly 44%. The government is blaming traders and millers for hoarding and is threatening them with strict action. While speculative behaviour may have amplified the spike, the deeper reality is a tightening of supplies just before the festival season.

Three pressures on the supply side seem to have caused a “perfect storm”. First, opening stocks in the current sugar year (October-September) were significantly low (5 metric tons) compared to last year (8 MT). The lower carry-over stocks reflected weak production in the previous season and left little room to absorb another supply shock.

Second, sugar production in 2025-26 fell short of expectations. The initial estimate was around 34.3 MT, but the government has now revised it to 30.6 MT, citing damage from red rot, top borer, etc. Around 27.35 MT of sugar had been produced by June, implying that another 3.25 MT would have to be produced during July-September to reach the revised estimate. Yet, production during these three months averaged only around 0.38 million metric tons over the previous six seasons. We expect a further downward revision of sugar production to 28-29 MT.

Third, the ethanol programme diverted about 2.75 MT of sugar even when supplies were tight. An important issue is that ethanol blending has progressed much faster than the supplies of its feedstocks. Ethanol blending remained largely stagnant for years, reaching only 1.53% in 2013-14, before accelerating to around 5% by 2019-20 and ultimately 20% in 2025-26. Feedstock supplies could not keep pace with the programme. No wonder, energy policy started competing with food markets.

The timing is particularly difficult. The festival season, when sugar demand typically rises, is approaching while fresh cane supplies will not arrive in significant quantities until mid-October. The market must therefore rely on existing stocks for many more weeks. Thin inventories are thus pushing sugar prices, which may go even higher if action is not taken.

In a more open economy, production shortfall would normally be corrected through price signals, triggering imports and changes in consumption. But India’s sugar sector remains heavily regulated: sugarcane pricing, sugar sales, imports, exports, and ethanol feedstock allocation, etc. are decided by the government. When the government is controlling every step of the sugar/ethanol value chain, it must also account for the resulting spike in sugar prices. It is a classic case of policy failure.

The government’s response so far has been to allow 1 MT of duty-free raw sugar imports. We feel this is too little, too late. If we have to tame inflationary expectations, our calculations suggest the government needs to import at least 3-4 MT of refined sugar and increase supplies in the open market before and during the festival season. The government’s import duty on refined sugar (100%) must be slashed to zero or just 5%.

The second response should be to temporarily alter the ethanol feedstock mix. Sugar-based ethanol should be drastically reduced, with greater use of alternative feedstocks. The FCI is overflowing with rice stocks, far in excess of buffer norms. The government can allocate more from these stocks and minimise the use of sugar for ethanol. But the FCI must charge ethanol plans at least the procurement price of rice, if not its full economic cost.

Maize is the best option as a feedstock for ethanol, as it is not a water-guzzler like rice or sugarcane/sugar. The government is already using maize as a primary feedstock for ethanol. Although maize production has been growing rapidly over the last decade or so, our productivity levels hover around 3.5 tonnes per hectare, way below in the US (11 tonnes/ha) for instance. Its further use for ethanol without commensurate increase in production will put pressure on prices of maize and in turn of poultry meat, eggs, and milk as it has been the main feed. Thus, shifting from sugar to rice or maize does not eliminate the food-fuel trade-off. The only way to generate large surpluses of maize is by raising its productivity. Would India allow genetically modified maize, which drives US yields?

The third response could be either to directly import ethanol, when domestic supplies are putting pressure on food prices, or reduce the blending from 20% to 15% or so.

The deeper lesson is that India’s ethanol programme needs a rethink and recalibration. We need to know what is the net energy balance with different feedstocks. Instead of rigidly allocating ethanol from sugar, rice, or maize, oil marketing companies could have greater flexibility to choose the most economical source, subject to safeguards for food security, farmers, and the environment. The government should focus on strategic buffers and food-security safeguards, and not manage every feedstock allocation.

The immediate response is clear: bring in enough sugar to rebuild the stock cushion, temporarily shift ethanol away from sugar, use FCI grains only when there is a genuine surplus, and retain imported ethanol as a safety valve. Maize-based ethanol would save water and be more benign to the environment, but we need to invest more to raise its productivity. India’s ethanol programme has made major strides, and going from 5% blending in 2019-20 to 20% in 2025-26 is placing a huge demand for its feedstocks. Overall, fuel self-reliance should never force a choice between food and fuel. Atmanirbharta in fuel must strengthen, not undermine, India’s food security; food must remain the higher-order priority.

We hope the Modi government will do a 360-degree evaluation of its ethanol programme, and recalibrate its policy design so that it does not push up food prices.

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.