Government goes aggressive

Few governments in the last 40 years have been so aggressive about changing the essential structure of Indian sugar sector as the Modi government. It made a tough call to structurally shift the total sugar narrative from a demand/supply game to a structural game. Towards this end, the government is moving towards the 10% ethanol blending target by 2022 and has advanced the 20% target by 7 years from 2030 to 2023. This will make sugar mills less vulnerable to the vagaries of demand, supply and prices. 

Larger macro narrative too

For the government, ethanol blending is not just about sugar but about national oil dependence too. Currently, India is relying on imports to meet nearly 85% of its daily crude oil needs. That is not just a trade deficit enhancer but also a potent security threat. The blending of petrol with 20% ethanol by 2023 will mean huge reduction in the demand for imported crude. This is expected to cut the oil dependence to around 70%. That is a macro advantage that cannot really be valued in monetary terms. Hence, it is more appealing to the government. 

India ethanol opportunity

If you just look at the statistics, there is a huge dichotomy. For example, India produces 17% of global sugar output but just about 2% of global ethanol output. That opens a huge opportunity for ethanol blending in India. Secondly, there is the issue of sugar being a very politically sensitive subject. However, the global macros are favorable at this juncture. Brazil has suffered a huge cut in sugar production and the global sugar pool is likely to remain grossly under-supplied. That will keep sugar prices at a buoyant level. With huge surplus sugar stocks, India may not have much of a concern on the sugar policy front. 

Getting capacity on board

If India needs to blend 20% ethanol by 2023, there is need for massive ethanol capacity to come up in 2 years. India has a current ethanol capacity of 4.25 billion liters per day (LPD). To reach the 20% blending target by 2023, this capacity has to go up to 10.50 billion LPD by 2023. That is a tall ask and is making sugar experts skeptical about the aggressive ethanol blending targets. Secondly, the government needs to ensure that it does not skew the duty structure of ethanol to the extent that it becomes just marginally attractive play in economic terms. But, the timing is right and despite the challenges, a boost to ethanol blending at $70/bbl crude is well-timed. It is now about execution.