India s Sugar Industry: Analysing Domestic Demand and Recent Trends

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1 India s Sugar Industry: Analysing Domestic Demand and Recent Trends

2 Table of Contents 1. Certificate. 2. Executive Summary 3. Introduction 4. Objectives 5. Proposed Methodology 6. Analysis 6.1. Production in India 6.2. Consumption 6.3. Prices 6.4. Trade policy 6.5. Sugar Production and Marketing Policy 6.6. Molasses based ethanol industry 6.7. Ethanol Program 6.8. Augmenting ethanol supply 6.9. Bio diesel policy Bioethanol and Biodiesel Snapshot of India s national policy on bio fuels 7. Main Findings 8. Recommendations 9. Bibliography 10. Data sources

3 2. Executive Summary Indian domestic sugar market is one of the largest markets in the world; in volume terms. It remains a key growth driver for world sugar, growing above the Asian and world consumption growth average. Sugar is one of the most important cash crops in the world and hence there is always a wrestle to control its imports/export. The sugar economy in India, like many other countries, is highly regulated, starting from sugarcane to the end product sugar. Even the by products are subject to government control. The project aims to delve into the issues faced by the industry and its trade prospects. The project would also explore the impact on sugar volumes and prices because of its use as alternative fuel. Supply side and demand side impact would be analyzed for complementary (sugar free) and supplementary products. The paper also highlights convincing evidence that oil prices may trend higher over the next two decades and this would have a substantial negative macroeconomic impact for India. A 50% increase in oil prices between would significantly reduce economic growth, real consumption and household income. Expansion of biodiesel is one policy response India can use to counteract the economic impacts of oil price hikes. Biodiesel intervention can significantly counteract these negative impacts whereas ethanol intervention has a minimum offsetting impact. Combining supply side energy solutions, like biodiesel development, together with modest energy efficiency improvements and productivity improvements in agriculture will provide impressive results.

4 3. Introduction Sugarcane is generally regarded as one of the most significant and efficient sources of biomass for bio fuel (ethanol) production. Sugarcane offers production alternatives to food, such as feed, fibre and energy, particularly co generation of electricity and ethanol. Strong linkages between world sugar and oil prices have emerged in recent years, driven in part by the relationships between sugar as the primary ethanol feedstock in Brazil, the dominant producer and exporter of both sugar and ethanol in the world. Given expectations of rising oil prices, the significant potential for expansion of global sugarcane production as ethanol feedstock has resulted in a heightened global focus on sugar and ethanol as internationally traded commodities. Global demand for fuel ethanol has increased significantly over the past few years, driven by concerns over energy security, environmental sustainability and the need to mitigate climate change through the reduction of greenhouse gas emissions. According to a recent FO Licht survey, 61% of world ethanol production was produced from sugar crops (sugar beet, sugarcane or desugarization of cane and beet molasses). The linkages between sugar, oil and ethanol prices are clear and very important considerations in future as the ethanol market continues to develop. Sharp increases in oil prices may tend to exert upward pressure on ethanol prices during harvest, and growing tendency to fix physical ethanol prices with the New York contract may emerge at times of volatile oil prices. The establishment of an international ethanol futures exchange was attempted during the oil crises of 1973 and 1979, however, failed due to lack of liquidity. There are considerations in the global market now that were less present three decades ago, such as concerns to abate greenhouse gas emissions for climate change mitigation and environmental sustainability. The co movement between sugar and crude oil prices has developed mostly because of the strong link between ethanol and sugar production in Brazil, the worldʹs largest sugar producer and exporter accounting for about 38 percent of world exports and 19.5 percent of production. The growing number of Brazilian flex fuel vehicles which can run on any combination of gasoline and ethanol directly influences the demand for ethanol. As consumers react to the relative price differential between ethanol and gasoline, any increase in the price of gasoline stimulates demand for ethanol, reduces sugar exports and raises world sugar prices. At the world level currently, it is estimated that about 15 percent of sugar crops are converted into ethanol rather than sugar. Recent developments in the global ethanol market suggest the emergence of ethanol as an internationally traded commodity. Demand growth is robust, and for the first time, strongly supported not only by higher oil prices and greater need for energy security, but perhaps more importantly, by global environmental and sustainability concerns. Bio fuels, such as ethanol, are central to worldwide efforts to abate greenhouse gases and mitigate climate change. Reports indicate that bio energy could supply a maximum of slightly more than thirty percent of total global energy demand. Some developing countries, particularly Brazil, India, Thailand, Malaysia, Indonesia and potentially a number of African countries, such as Tanzania or Mozambique, have underutilised land and natural resources that could be used to significantly expand liquid bio fuels production if oil prices stay high or increase further. In India, ethanol made its foray into the transport sector as a fuel additive in The government launched three EBP pilot projects, the first in Uttar Pradesh, followed by two others in Maharashtra. In order to enhance the countryʹs energy security, the

5 Government of India mandated blending of 5 per cent ethanol with petrol in 9 States and 4 Union Territories in the year 2003 and subsequently mandated 5 per cent blending of ethanol with petrol in 20 States and 8 Union Territories in November 2006 on an all India basis except a few North East states and Jammu & Kashmir. 4. Objectives The objective of this paper is to study the trends of sugar market in India deriving a pattern. Use of sugar based fuel(ethanol) and analyzing its impact on prices Use of complementary products and the impact on sugar prices. Analysis of trends

6 5. Proposed Methodology India has become a significant consumer of energy resources. Its oil consumption has risen to 3.3 million barrels per day in 2009, from 643,000 barrels of oil per day in 1980, making it the worldʹs fourth biggest consumer of oil. India is also the fourth largest producer of ethanol in the world. By blending petrol with 10 per cent bio fuel, 80 million litres of petrol could be saved annually in India, says a report by the Institute of Defence Studies and Analyses. The paper seeks to: 1. Study the various policy aspects which govern the Sugar Trade and more importantly the recent development in ethanol and bio diesel production. 2. Analyse the changing global prices of Raw Sugar and the Refined Sugar and its impact on domestic prices. 6. Analysis In India, sugar is an essential item of mass consumption and the cheapest source of energy, supplying around 10 percent of the daily calorie intake. India is the second largest producer of sugar (16.3 million ton production in ).It, however, ranks 15th in export rankings (.23 million ton exports in ) as India is the largest consumer of sugar in the world. Raw as well as refined sugar prices plunged this year on expectation that output in Brazil and India, the second biggest producer, will increase. Raw sugar prices declined by 45 percent since the start of the year 2010 amid hopes that global output will rebound. Four factors determine sugar production in India: Area under sugarcane production (Max. acreage of 4.43 million hectare) Sugarcane yield per hectare (Max. yield of 71.3 tonnes per hectare) The production of sugarcane that is crushed by sugar factories in relation to the total sugarcane produced (Max drawl percentage = 69%) Recovery of sugar (Max recovery = 10.48%) Ethanol is being promoted as an alternative to oil. It is commercially viable, cleaner fuel but its efficiency is questionable. Ethanol promotion is primarily driven by Brazil which happens to be the largest consumer of ethanol. Incidentally, Brazil produces ethanol directly from the sugarcane unlike many other countries which produce ethanol from molasses (a by product after extraction of sugar from sugarcane). Almost 60% of Brazilian cane crop is diverted to production of ethanol. Changes to emission norms under Kyoto protocol, increased fiscal incentives from several governments, US bill mandating ethanol use in gasoline, high oil prices are several other factors influencing ethanol production and diverting cane from sugar to ethanol production. In October 2007, Government of India (GOI) has mandated 5% ethanol blending. India requires an estimated 550 million litres of ethanol. GOI has also permitted companies to produce ethanol directly from sugarcane juice. This will provide companies flexibility to alter the product mix between sugar and ethanol depending on the relative demand and realisation.

7 The Government of India (GOI) approved the National Policy on Bio fuels on December 24, The bio fuel policy encourages use of renewable energy resources as alternate fuels to supplement transport fuels (gasoline and diesel for vehicles) and proposes a target of 20 percent bio fuel blending (bio diesel and bio ethanol) by Presently, the government is unable to implement compulsory blending of 5 percent ethanol in petrol (gasoline) due to the short supply of sugar molasses in 2009/10 and 2008/09 because of overall low sugarcane crop production in India. Consequently, India imported about 280 million litres of ethanol in CY 2009 to meet the demand for industrial and potable liquor production. With a bumper sugarcane and sugar production outlook for 2010/11, the government is likely to renew its focus and implement the mandatory 5 percent ethanol blending in petrol. Industry sources report that the government is likely to take a decision on the purchase price of ethanol for the Ethanol Blending Program (EBP). Commercial production of biodiesel in India is very small and its utilization is mostly confined to the unorganized sector. The government s ambitious plan of producing sufficient bio diesel by 2011/12 to meet its mandate of 20 percent diesel blending is unrealized due to a lack of sufficient jatropha seeds to produce bio diesel. Advanced bio fuels in India are still at the research stage and it will take time before commercial production becomes economically viable Production in India Sugarcane and sugar production in India typically follow a 6 to 8 year cycle, wherein 3 to 4 years of higher production are followed by 2 to 3 years of lower production. After two consecutive years of declining sugar production (MY 2007/08 and 2008/09), production resurged in MY 2009/10, and is set to gain strongly in the upcoming MY 2010/ /10 centrifugal sugar production estimate is revised higher to 19.5 million tons due to lower diversion of cane for production of alternative sweeteners (khandsari and gur) and better than anticipated cane production. After drought like conditions in June through mid August, most of the cane growing areas received adequate and well scattered rains from mid August through October during the crop growth stage. Low winter temperature and scattered rains in December January further contained expected crop damage due to early dry conditions. High sugar prices and speculationʹ on lower cane crop resulted in sugar mills offering substantial increase in cane prices to farmers compared to last year. The higher cane prices by the sugar mills coupled with relatively weak gur prices vis a vis sugar limited the diversion of sugarcane for production of gur during the peak crushing season. The mill sugar production for MY 2009/10 up to March 15, 2010 is estimated at 15.3 million tons (crystal weight basis) compared to 13.3 million tons for the corresponding period of MY 2008/09. The recent weakening of gur prices has lowered the prospects for late season diversion of cane for gur production. Crushing is going on in the major producing states of Maharashtra and U.P., and may continue through April/early May, nearly 4 weeks longer than last year. Industry sources report the average crushing duration during the MY 2009/10 at 150 days (vs. 120 days last year) and average sugar recovery higher at 10.3 percent (vs percent last year). Consequently, MY 2009/10

8 centrifugal sugar production has been raised to 19.5 million tons against the earlier estimate of 17.3 million tons. Post s estimates for MY 2008/09 sugarcane production have been revised higher and sugar production revised marginally lower based on final estimates from the Ministry of Agriculture and the Indian Sugar Mills Association, respectively. Khandsari sugar: a low recovery centrifugal sugar prepared by open pan evaporation method. Gur: a crude non centrifugal sugar in lump form produced by open pan evaporation method. GOI s initially estimated MY 2009/10 sugarcane crop at 249 million tons in December, Consumption Sugar consumption in MY 2010/11 is forecast to increase to 24.5 million tons on forecast improved domestic supplies and strong demand fueled by a growing population and continued growth in economy. Bulk consumers such as bakeries, makers of candy and local sweets, and soft drink manufacturers account for about 60 percent of mill sugar demand. Most of the khandsari sugar is consumed by local sweets manufacturers. Gur is mostly consumed in rural areas for household consumption and feed use Prices Despite various measures taken by the Government of India (GOI) to control sugar prices, sugar prices escalated during calendar year 2009 on fears of short domestic supplies and strong international sugar prices. Sugar prices have eased significantly from February 2010 on improved expectations of domestic production in MY 2009/10 and forecast higher production in MY 2010/11. March end sugar prices in major domestic wholesale markets ranged from $685 to 745 per ton, about 17 percent lower than peak prices in January, However, sugar prices are still more than 50 percent higher than prices in March Prices are expected to continue to weaken further in the coming months on improved domestic supplies, although international price movements can impact domestic prices. Gur prices had been under pressure from the beginning of the MY 2009/10 due to record opening stocks 6.4. Trade policy India s imports are forecast lower at 1.2 million tons due to forecast improved domestic supplies. Industry sources expect imports mostly during the early part of the season. The GOI may withdraw the relaxed import policy on improving domestic supplies and lowering of sugar prices to more comfortable levels as the domestic crushing season progresses. Despite forecast higher sugar production, relatively tight domestic supplies preclude any significant commercial exports of sugar in MY 2010/11; exports will be largely limited to quota countries. Import estimate is revised lower to 4.5 million tons based on the current pace of imports reported by industry sources. Trade sources estimate India s sugar imports during the October 2009 to February

9 2010 at 2.9 million tons; of which about 2.3 million tons is raw sugar mostly from Brazil, and rest white sugar from Thailand, Brazil, U.A.E. An additional 500,000 tons, mostly white sugar, have been contracted for delivery through June/July, Despite weakening domestic sugar prices, industry sources expect additional imports of raw sugar in August/September before the beginning of the next crushing season. Consequently, MY 2009/10 imports are forecast to reach a record level of 4.5 million tons. Forced by the severe domestic shortages and abnormally high sugar prices since beginning of 2009, the GOI took several measures to relax import restrictions to augment domestic supplies. On February 17, 2009, the government relaxed the norms for duty free imports of raw sugar under the advance licensing scheme (ALS) exempting future export commitments from actual user conditions for raw sugar imports during February 17, 2009 to September 30, On April 17, 2009, the government allowed mills to import raw sugar at zero duty under the open general license (no future export commitments). The government also allowed select state trading enterprises (STEs) to import white sugar at zero duty. Subsequently, on July , the government allowed duty free imports of white sugar by traders and processors until November 31, Through a series of notifications the GOI has extended the duty free imports of raw sugar and white sugar up to December 31, The GOI has also exempted imported sugar, both raw sugar and white sugar, from the levy sugar obligation and the market quota release system, applicable to domestic sugar. With the sugar prices easing, there is an increasing pressure from the local industry to re impose the import duties on white and raw sugar, and reverting back to the old import policy regime. Currently, the GOI does not allow exports of sugar and nor provide any export incentive (transport subsidy) for sugar. The Government of India (GOI) supports research, development, training of farmers and transfer of new varieties and improved production technologies (seed, implements, pest management) to growers in its endeavor to raise cane yields and sugar recovery rates. The Indian Council of Agricultural Research (ICAR) conducts sugarcane research and development at the national level. State agricultural universities, regional research institutions, and state agricultural extension agencies support these efforts at the regional and state levels. The central and state governments also support sugarcane growers by ensuring finances and input supplies at affordable prices. The GOI establishes a minimum support price (MSP) for sugarcane on the basis of recommendations by the Commission for Agricultural Costs and Prices (CACP) and after consulting State Governments and associations of the sugar industry and cane growers. Last year the GOI announced a new system of fair and remunerative Price (FRP) that would links the cane prices with sugar price realization by the sugar mills. Several state governments further augment the MSP/FRP, typically by percent, due to political compulsions rather than market pricing. Sugar mills are required to pay the state advised price (SAP) to sugarcane farmers irrespective of the market price of sugar. However, high sugar prices coupled with fears of lower cane crop encouraged the sugar mills to pay much higher prices than the FRP or SAP in most of the growing states. Although the local industry has been advocating rationalization of cane pricing policy by

10 linking it with domestic/world sugar prices, industry sources do not expect any downward revision of FRP in the coming years if the sugar prices decline given the political clout of the farmers lobby Sugar Production and Marketing Policy The GOI levies a fee of Rs. 240 ($5.33) per ton of sugar produced by mills to raise a Sugarcane Development Fund (SDF), which is used to support research, extension, and technological improvement in the sugar sector. The SDF is also often used to support sugar buffer stocks operations, provide a transport subsidy for sugar exports, and provide an interest subsidy on loans for the installation of power generation and ethanol production plants. In March 2008, the GOI enacted the Sugar Development Fund (Amendment) Bill, 2008 that enables the government to include the use of the funds for debt restructuring and soft loans to the sugar mills. The GOI follow a policy of partial market control and dual pricing for sugar. The local sugar mills are required to supply 20 percent of their production to the government as levy sugar at belowmarket prices, which the government distributes through the Public Distribution System (PDS) to its below poverty line population at subsidized rates. Mills are allowed to sell the balance of their production as free sugar at market prices. However, the sale of free sale sugar and levy sugar is administered by the government through periodic quotas, designed to maintain price stability in the market. On March 12, 2009, the central government advised the state governments to impose stock and turnover limits on traders to prevent hoarding of sugar. Khandsari sugar has also been brought under the ambit of stockholding and turnover limit from July 17, Most state governments imposed stock and turnover control orders in their respective states. On August 22, 2009, the government imposed stock holding limits on large consumers (food and beverage companies) who consume more than 1.0 ton of sugar per month. Initially these consumers were asked to maintain stock necessary to meet not more than 20 days requirement; which was further lowered to 10 days requirements in February These limits are effective up to Sept 30, With the improvement in domestic sugar supplies, there is growing pressure from the domestic sugar mills and traders to remove these stock limits Molasses based ethanol industry Molasses is a byproduct of sugar industry. The production of sugarcane is related to sugar production which in turn is related to the production of molasses. The production of molasses in the last decade is as follows. From the above table it can be seen that the molasses production has fluctuated significantly in the last one decade. This is primarily due to the cyclic nature of the sugar industry which follows of a three to five year cycle. This consists of higher production leading to glut of sugar and molasses followed by a shortage and then by another increase in production. However, the sugar/molasses production has significantly increased on a long term basis. In India the molasses produced is heavy from which as much sugar as possible has been extracted. However, heavy molasses can also be produced which can produce much larger quantity of alcohol per tonne of molasses.

11 Alcohol Production Alcohol can be commercially produced from sugar and starch based feedstocks. While grain and tuber based alcohol is primarily used for producing potable alcohol because of its high cost of production, molasses is the dominant feedstock and is used for potable, industrial and for blending purposes. It has been estimated that about 95% of the molasses produced in India is used for the production of Alcohol. Since the alcohol production is related to molasses production, therefore its production also becomes cyclic. The production of Khandsari also leads to production of molasses. This source and grain based alcohol also contributes to production of alcohol but is often not taken into account while estimating the total production of alcohol. While there is a general agreement on estimated production of alcohol based on molasses, estimates of alcohol based on grain as well khandsari molasses is not reflected in estimates by three prime Associations representing various sectors of Industry, which recently made presentation to the committee examining the price of Ethanol for Government of India. However, there is no consensus on the utilization of alcohol for various sectors. Source: Indian Chemical Council From the above table it can be seen that the estimates of Alcohol production for 2010 and 2011 are much lower than estimates of the Industry Associations. It appears that the production statistics of the industry associations are more accurate because the 2010 estimates have been jacked up considerably based on real time data and significantly higher molasses projections have been made by the ISMA for 2011 because excellent monsoon and feedback from the industry Ethanol Program India s ethanol program is based on producing ethanol from sugar molasses, a by product of the sugar industry and not directly from sugarcane or corn as in most countries. The GOI raised the levy sugar ratio from 10 percent to 20 percent from October Normally, the central government announces a three month quota allocation for free sale and levy sugar with specific allocation to each sugar mill. However, the GOI shifted to announcing monthly quota from February India is the fifth largest primary energy consumer and fourth largest petroleum consumer in the world. Growing population and rapid socio economic development has spurred an increase in energy consumption across all major sectors of the Indian economy. Given limited domestic energy resources, most energy requirements are met through imports. Provisional estimates indicate that India meets more than 76 percent of its petroleum demand through imports. Import expenditures on petroleum products in fiscal 2009/10 is currently estimated at over $83 billion, up four times the value in fiscal 2003/04. Consequently, Indian petroleum consumption has also gone up from 84 million tons in Indian Fiscal Year (IFY) 1997/98 to 134 million tons in IFY 2008/09 and is expected to grow over 136 million tons in IFY 2009/10. Source: Petroleum Planning and Analysis Cell, Government of India (GOI)

12 From the above graph we see the burgeoning demand for crude oil. With India growing at a fast pace, the demand for oil is set to rise. India and China will account for 45 per cent of the increase in global primary energy demand by India has become a significant consumer of energy resources. Its oil consumption has risen to 3.3 million barrels per day in 2009, from 643,000 barrels of oil per day in 1980, making it the worldʹs fourth biggest consumer of oil Source: Petroleum Planning and Analysis Cell, Government of India (GOI) Ethanol is produced in India from sugar molasses for blending with petrol. Beginning January, 2003, the GOI mandated the use of 5 percent ethanol blend in petrol through its ambitious Ethanol Blending Program (EBP). Since Indian sugarcane production is cyclical, ethanol and alcohol production in India depends on the availability of sugar molasses (a by product of domestic sugar production). Lower sugar molasses availability and consequent higher molasses prices have impacted ethanol s cost of production, thereby causing a disruption in the supply of ethanol at pre negotiated fixed ethanol prices. Presently, the government is unable to implement compulsory blending of 5 percent ethanol in petrol (gasoline) due to the short supply of sugar molasses in 2009/10 and 2008/09 on low sugarcane crop production. With a bumper sugarcane and sugar production outlook for 2010/11, the government is likely to renew its focus and implement the mandatory 5 percent ethanol blending in petrol. Industry sources report that the GOI is likely to take a decision on providing a hike in purchase price of ethanol for the Ethanol Blending Program (EBP) for upcoming 2010/11 season Augmenting ethanol supply Currently, the government does not allow use of imported ethanol for the EBP program, as the focus is on developing domestic production capacities. To augment supply, the GOI has permitted ethanol production directly from sugarcane juice while ensuring that the move does not constrain production of sugar or ethanol for industrial use. Efforts to produce ethanol from sweet sorghum, sugar beets, and sweet potatoes, however, are at the experimental stage. The government does not provide any direct financial assistance or tax incentive for the production or marketing of ethanol or ethanol blended petrol. The GOI is offering subsidized loans (through sugarcane development funds) to sugar mills for building ethanol production units. The loans would cover a maximum of 40 percent of the project cost to sugar mills for development of ethanol production unit. Impediments: Higher taxes and levies in different states have impacted the Ethanol Blending Program. Rules and regulations (high excise duty, inter state charges etc.) applicable to the control of alcohol for potable industry use are equally applicable for ethanol blending with petrol, thereby constraining its availability and utilization for the EBP Bio diesel policy On April, 2003 the GOI launched a National Bio diesel Mission (NBM) identifying jatropha curcas as the most suitable tree borne oilseed for bio diesel production on wastelands. The Planning Commission of India had set an ambitious target of covering 11.2 to 13.4 million hectares of land

13 under jatropha cultivation by end of 11th Five Year Plan (2011/12). The central government and several state governments provide fiscal incentives for supporting planting of Jatropha and other non edible oilseeds Bioethanol and Biodiesel Ethanol: Currently, India produces conventional bio ethanol from sugar molasses and production of advanced bio ethanol is still in the research and development phase. India has 330 distilleries which produce 4 billion litres of rectified spirit (alcohol) per year. Of the total distilleries, about 115 distilleries have the capacity to distill 1.8 billion litres of conventional ethanol per year sufficient to meet the 5 percent blending mandate. Production: With an outlook of bumper sugarcane and sugar production in 2010/11, the government is likely to renew its focus and strongly implement the mandatory 5 percent ethanol blending in petrol. This will, however, be dependant on whether or not the government takes a decision on the purchase price of ethanol for EBP. Higher sugarcane and sugar production in 2009/10 improved ethanol production but total supply remained at 2008/09 level mostly due to short stocks carried forward from the previous year (2008/09). Short supply of sugar molasses in 2008/09 severely constrained ethanol production and the consequent higher prices made it unviable to supply ethanol to petroleum companies at the negotiated prices. Consumption: Strong growth in the consumption of ethanol across the chemical and potable liquor industry is expected to raise total ethanol consumption close to 2 billion litres in 2010/11, up 140 million litres over the previous year. The growth in consumption across these sectors would severely constrain its supplies for EBP. Consequently, the availability of ethanol in 2010/11 for blending with petrol is roughly estimated at 200 million litres, against the target of 800million litres set by the Ethanol Manufacturers in India. Ethanol consumption in 2009/10 was drawn down to 50 million litres from 100 million litres in 2008/09, mostly due to a short supply of molasses and higher demand for ethanol from competing industries. According to trade sources, higher market prices for ethanol were attractive for the suppliers to divert there supplies from EBP. Trade: India does not import ethanol or other bio fuels for fuel purposes. During years of low sugar production, and consequent shortage of molasses and alcohol, India imports alcohol, mainly for industrial and potable liquor production. India exports small quantities of ethanol mostly for nonfuel use, to Sri Lanka, U.A.E and some African countries. Although there are no quantitative restrictions on imports of bio fuels, high duties make imports economically unviable. The GOI does not provide any financial assistance for bio fuel exports (biodiesel and ethanol). Current trade regulations allow duty free imports of feed stocks for re export by certified export oriented units, but no such operations are in place Snapshot of India s National Policy on Bio fuels Setting up a National Bio fuel Coordination Committee under the Prime Minister for a broader policy perspective and set up a National Bio fuel Steering Committee (NBSC) to provide policy guidelines.

14 Strengthen India s energy security by encouraging use of renewable energy resources to supplement transport fuels. A 20 percent target for blending of bio fuel for both bio diesel and bio ethanol by 2017 is proposed. Derive bio fuels from non feed stock that would be raised on degraded land or wastelands that are not suited to agriculture, thus avoiding a possible conflict of fuel verses food security. Facilitate and bring about optimal development and utilization of indigenous biomass feedstock for the production of bio fuels. The policy also envisages development of next generation, more efficient bio fuel conversion technologies based on new feed stocks. Minimum Support Price (MSP) mechanism to ensure a fair price for bio diesel oilseed growers. The implementation of the proposal would be considered carefully after consultation with stake holders, central and state governments and then by the Bio fuel Steering Committee and finally decided by National Bio fuel Coordination Committee. Oil Marketing Companies propose to purchase bio ethanol at a Minimum Purchase Price (MPP) based on the actual cost of production and the import price of bio ethanol. In the case of biodiesel, the MPP should be linked to the prevailing retail diesel price. As necessary, the GOI proposes considering a National Bio fuel Fund for providing financial incentives, including subsidies and grants, for new and second generation feed stocks, advanced technologies and conversion processes, and production units based on new and second generation feed stocks. Except for a concessional excise duty of 16 percent on bio ethanol, no other central taxes and duties are proposed for on bio diesel and bio ethanol. A thrust for innovation, (multi institutional, indigenous and time bound) on research and development of bio fuel feedstock production, including second generation bio fuels. Bio fuel technologies and projects will be allowed 100 percent foreign equity through automatic approval routes to attract Foreign Direct Investment (FDI), provided bio fuel is for domestic use only, and not for export. Plantations of non edible oil bearing plants would not be open for FDI participation.

15 7. Main Findings Bio fuel Policy: India s bio fuel policy is comprehensive and gives a broad outline to all the major areas that need attention. These guidelines have to be translated into a bio fuel program and a series of projects to reap the potential benefits. Given the vast differences in the economic performances and cross sectoral implications of ethanol and biodiesel, the bio fuel policy can serve better if these two sectors are dealt with separately. Potential for Producing Bio fuels: Simple natural resource accounting shows that 20% blending of ethanol with petrol can be achieved by 2017, only if sugar cane juice is converted to ethanol to supplement molasses ethanol. Sweet sorghum (SS) and tropical sugar beets (TSB) are still at the initial stage of development and face major technological and financial constraints. About 32 million hectares of wasteland are required for biodiesel production together with yield improvements to meet a 20% blending target with petroleum diesel. However, it is unlikely that India can achieve the 20% blending target by 2017 given the current infant stage of the biodiesel industry in the country. Food Security: At the current level of productivity, a 20% blending of sugar cane based ethanol cannot be achieved without affecting the food sector. SS and TSB will also compete with the food sector for land and water. However, molasses based ethanol blending does not have any impact on the food sector. If confined to wastelands and using only limited irrigation during the establishment phase of the crops, biodiesel production will not have any adverse impact on the food sector. Technological Constraints: The sugarcane sector is well organized and there are no major technological or other constraints, which prevent meeting the blending targets. The SS and TSB supply chains are yet to be fully developed and they face a major bottleneck at the juice extraction segment of the supply chain making juice extracting units financially unattractive. In contrast to sugarcane, the biodiesel supply chain is in its infancy and understanding the agronomy of the crops and development of nurseries and plantations with high yielding varieties are major constraints, which need to be removed for the sector to take off. Impact on Water: Sugarcane is a water intensive crop but if confined to existing sugarcane lands or to molasses based ethanol, ethanol production will not add to the irrigation water demand. Biodiesel crops most likely will not add to the water problems if confined to limited irrigation in the early stage of the crop establishment. Environmental Impacts: Both ethanol and biodiesel crops have limited negative environmental impacts which can be easily mitigated using available technologies and regulatory measures. Compared to ethanol, biodiesel crops have a number of positive environmental effects and their carbon benefit potential is also large. There are no foreseeable negative social impacts of biodiesel. Financial Feasibility Ethanol: Ethanol production is not profitable under the administratively determined price of Rs21.5/liter. The recent price revision may provide adequate profits to producers. Financial Feasibility Biodiesel: Biodiesel production is also not financially feasible under the current pricing mechanism. The current administratively determined price of Rs26.5/liter needs to be revised to provide financial incentives along the supply chain. Economic Feasibility Ethanol: Molasses based ethanol is economically feasible at the current price of oil and increases of oil prices make molasses based ethanol economically more attractive. The diversion of ethanol from current uses in industry and as potable alcohol is not economically viable. The cost of sugarcane juice based ethanol exceeds the social benefits, hence, sugar cane juice ethanol

16 is not economically justifiable. Higher oil prices do not make sugarcane juice based ethanol economically attractive. Therefore, sugarcane based ethanol will not be economically viable even in the future. Alternative feed stocks such as TSB and SS are not economically feasible at current oil prices. Therefore the ethanol sector should revise its national targets to an economically beneficial target up to 5% blending only using molasses ethanol. Economic Feasibility Biodiesel: Both jatropha and pongamia provide acceptable economic returns at current oil prices, and an increase in the price of diesel makes biodiesel economically more attractive. Employment generation and CDM benefits are also significant in the case of biodiesel. Therefore, the expansion of biodiesel production is socially desirable and the results of this report support an aggressive program for biodiesel in India. Economy Wide Impact of Biodiesel: The Indian general equilibrium model, with only biodiesel interventions, shows that biodiesel could provide India with an opportunity to enhance economic growth and the well being of rural populations. The national bio fuel program has the potential to create a significant number of jobs with substantial real wage increases; hence, it is a potential avenue for poverty reduction within an inclusive growth policy framework. The negative effect of the program, i.e. higher fiscal deficits, seems not to dampen the growth effect. In contrast, the 20% ethanol blending does not add much value to the economy. 8. Recommendations Separate Policies for Ethanol and Biodiesel: Separate policies for ethanol and biodiesel would serve the two sectors better given the difference in economic performance and other issues. Focus on Molasses based Ethanol: Ethanol production should be limited to molasses based ethanol. Research on Second Generation Bio fuel: There is limited scope for first generation ethanol in India. However, there seem to be a large potential for second generation ethanol. Therefore, research efforts on second generation ethanol should continue. Public Sector Support for biodiesel: The main focus of public support should be on biodiesel. Following are the specific areas that require immediate attention: a) Land use mapping and land allocation study and for formulating a strategy for the necessary legal, institutional, and other provisions to make wasteland available for biodiesel production. b) Revision of biodiesel and oil seed prices and provision of a stable policy environment for the biodiesel sector to develop. c) Accelerated research program on agronomy, selection and breeding, pest and diseases control, other management practices, and the propagation of high yielding planting materials for plantation development. d) Incentive packages for the private sector to mobilize private investment resources for the development of the biodiesel sector. e) Further studies to examine the potential synergy between Indiaʹs rural development programs and biodiesel sector development particularly focusing on the long gestation period of biodiesel crops. f) Establishment of a national agency with branches in relevant states to design and implement the above stated public support program, oversee and monitor the biodiesel industry, periodically review the cost of production and prices, and design and recommend subsidies and taxes based on changes in oil prices.

17 Bilateral and regional trade agreements have emerged as more reliable mechanisms to remove tariffs and non tariff barriers that may affect bio fuels trade than the Doha negotiations. Standardization of trade classifications is necessary, as well as ways to certify and label bio fuels and feedstock to ensure that sustainability criteria contribute to global environmental goals, particularly those related to climate change mitigation. Furthermore, the emergence of carbon trading programmes related to ratification of the Kyoto Protocol may enhance the competitiveness of bio fuels, particularly ethanol. Ethanol consumption, particularly sugar based, results in reduced greenhouse gas emissions, thus, earning carbon credits that can be sold through the carbon markets. Japan and the EU have launched carbon trading programmes, and similar carbon schemes may continue to emerge worldwide. Subsidized ethanol production and supports to domestic industries tend to provide justification for high import tariffs and the protection of infant industries, certainly the stage of emerging ethanol industries at the current time. Fuel ethanol supplies, particularly, will continue to volatile in the absence of an effective international exchange and trade. Despite some possible constraints, ethanol production, particularly fuel ethanol, is expected to continue to increase globally, with a greater number and diversity global producers and suppliers. There are signs that ethanol is becoming an internationally traded commodity, with the promise of contributing to climate change mitigation, rural development and environmental sustainability.

18 9. Bibliography Sugar Consumption and Production Data from bio fuels annual report show/2010/jul/27/slide show 1 why india must push for ethanolblended petrol.htm Background paper for the Competitive Commercial Agriculture in Sub Saharan Africa (CCAA) Study SUGAR BASED ETHANOL International Market Profile by Jennifer Nyberg, Trade and Markets Division, Food and Agriculture Organization of the United Nations 10. Databases used TRAINS Trademap.org WITS