Ethanol Economics Explained — Why does Made in India E20 fuel cost you more?

The Ministry of Petroleum and Natural Gas has addressed the one question ethanol blending has never satisfactorily answered – why hasn’t the fuel become any cheaper?

Its reply, in effect, was that consumers should treat E20 as a tool for price stability and energy security rather than for lower fuel prices. Government also, for the first time, conceded that E20 delivers 3 to 5% lower mileage than conventional petrol, even as it defended the programme.

This follows the July 4 press conference at which automakers rejected claims of engine damage, and repeated defences from Union Petroleum Minister Hardeep Singh Puri. Reports now suggest E25 will be rolled out in phases, precisely to avoid another compatibility backlash.

Yet the complaints from two-wheeler owners about lower mileage and the sense of paying the same for less have not gone away. The most pertinent question being asked is – what does E20 actually cost, both to produce and to the person at the petrol pump?

KBS Sidhu, IAS (Retd.), former Special Chief Secretary of Punjab told Financial Express Digital that he believes the consumer price of E20 rests on incomplete accounting, and a real national benefit is being used to justify a bill the motorists should not be paying in full.

1. Ethanol is the more expensive input

The expectation that “domestic, renewable” fuel is cheaper is not corroborated with the procurement numbers.

“On a pure procurement basis, the administered price OMCs pay for ethanol, roughly Rs 65 to Rs 72 a litre depending on feedstock, is higher than the pre-tax, refinery-gate cost of petrol, which runs closer to Rs 53 a litre,” Sidhu said. “Litre for litre, before any tax is added on either side, ethanol is not the cheaper input.”

The Ministry’s own FAQs agree that E20’s economics hinge on the global crude price and at around $70 a barrel, producing E20 can cost as much as, or more than, conventional petrol. Blending turns genuinely advantageous only when crude climbs into the $120 to 130 range or higher. In other words, at today’s prices, the blended fuel is not a cost saving.

2. Consumers are also buying less energy per litre

Ethanol carries less energy than petrol. Blended at 20%, E20 delivers roughly 6–7% less energy per litre according to NITI Aayog’s 2021 report. In practice, that means lower mileage and fewer kilometres on the same litres.

Crucially, NITI Aayog anticipated exactly this and recommended a pricing correction. Its report stated: “For better acceptability of higher ethanol blends… retail price of such fuels should be lower than normal petrol to compensate for the reduction in calorific value.”

3. Rs 1.97 lakh crore is a gross figure, not a net one

The Centre’s claim of Rs 1.97 lakh crore saving, alongside some 316 lakh metric tonnes of crude substituted, is not the net saving, Sindhu argues.

“The Rs 1.9 lakh crore figure is a gross substitution number, the value of crude oil not imported, not a net saving,” Sidhu said. “It does not net out what the government has actually paid to procure that ethanol domestically at administered prices, the excise and GST concessions foregone on higher blends, or the power-and-water subsidy embedded in growing the feedstock in the first place.”

A genuine savings figure, he argued, has to subtract the domestic cost of the substitute from the avoided cost of the import. Subsidised electricity and underpriced water that go into growing the feedstock never appear in the headline.

4. A macro saving used as a shield

The foreign-exchange saving is a national, balance-of-payments benefit. The pump price is a domestic matter of excise, GST and oil-marketing-company margin. The problem, Sidhu argued, is that the first is being invoked to avoid touching the second.

“If OMCs are already paying more per litre for the ethanol component than they would for petrol, the savings Minister Puri cites are macro-level import-substitution savings, not a cost reduction that has already been passed through — and therefore [do not] justify charging the consumer full price for a fuel that delivers less energy,” he said. “The two forms of saving are being conflated so that one is used to justify withholding the other.”

5. The farmer-income “trade-off”

The most common defence of E20 pricing is that any cut would hurt farmers. Sidhu rejects the framing outright.

“The price paid to distilleries for ethanol and the price charged to the motorist at the pump are two entirely different administrative levers: one is procurement, the other is retail taxation and OMC margin,” he said.

“The government can lower the retail price of E20, through the excise component or the OMC margin, without touching the procurement price paid to farmers and distilleries by a single rupee. Conflating the two allows a tax and pricing choice to be presented as a straight trade-off between cheaper fuel and poorer farmers. It is not one.”

6. Why states are not rushing to cut prices either

There is a fiscal reason the relief has not materialised at the state level. Petrol is taxed ad valorem and as a percentage of the final price.

Lower the petrol pump price, and state VAT revenue falls with it, automatically. That disincentive holds across states regardless of which party governs them and is a structural drag on any price cut.

The saving is happening but not for the consumer

Reducing dependence on imported crude is a legitimate national goal, and the programme has been rolled out effectively. The Ministry is also right that a domestically sourced fifth of every litre insulates India’s fuel supply from Brent swings, shipping disruptions and geopolitics.

The narrower charge stands, though. On a per-litre basis, E20 costs more to produce than petrol at current crude prices, and it delivers less energy once it is in the petrol tank. The forex saving that offsets this benefits the exchequer, not the consumer.

“The saving is real,” as Sidhu’s argument reduces to, “it simply is not the consumer’s saving.”

Until E20 is priced to reflect the energy it actually delivers, as NITI Aayog itself recommended five years ago, the ordinary motorist will keep paying full price for a fuel that does less, while the taxpayer and the environment quietly absorb the rest of the bill.