Ethanol price hike won’t help farmers: Experts

The proposed move to increase the price of ethanol — a byproduct of sugar molasses — to Rs 27 a litre from Rs 21.5 a litre may not guarantee higher prices to sugarcane growers and carries the risk of major losses for the government and oil marketing companies, industry experts said.

The principal aim
of the ethanol-blending programme (EBP) of benefiting the Indian farmer is unlikely to be achieved by increasing the ethanol price, as the sugarcane price is decided on the basis of the sugar recovery and bears no relation with ethanol pricing.

“In order to benefit the Indian farmer, there should be provisions laid down to provide direct subsidy to the farmer in the form of subsidy in cane prices and in turn preventing it from getting misdirected to the ethanol suppliers,” an expert tracking the developments said on condition of anonymity.

Farmers’ leaders supported this view.

“The proposed ethanol pricing policy appears out of sync with the principle of directed subsidies,” said P. Chengal Reddy, secretary general of the Confederation of Indian Farmers Association.

“The farmers would not get any benefits from a higher

price of ethanol.”

The proposed Rs 27 a litre price for ethanol is significantly higher than the present domestic price of Rs 18-20 a litre on account of a better sugarcane crop in 2009-10.

“The significant difference in the open market selling price of ethanol and the interim price of Rs 27 per litre for the doping purpose may distort the open market mechanism and will result in a loss of Rs 500 crore to the government and oil companies,” an industry official said.

In a communication to Finance Minister Pranab Mukherjee, who heads the five-member group of ministers that is discussing the matter, the Indian Chemical Council has pointed out that the interim price of Rs 27 per litre was

fixed at a time ex-mill sugar prices hovered around Rs 38 per kg.

In the current year, sugar production is expected to touch 18.5 million tonnes from 14.7 million tonnes in the previous year, resulting in a drop in ex-mill sugar prices to Rs 25 a kg.

Fixing the ethanol prices at Rs 27 a litre would thus result in a situation where a byproduct is costlier than the main product, oil and chemical industry officials said.

The proposed increase in ethanol prices for the 5 per cent ethanol blending programme in petrol and subsequently to 10 per cent programme could add to the financial woes of oil companies.

The Indian Chemical Council, the apex body representing the chemical industry, has asked the government to set up a market-determined mechanism for fixing ethanol prices rather than fixing it on an ad hoc basis for EBP.

According to experts, the government stands to suffer a major revenue loss because of high EBP prices.

For the implementation of the programme, the government has made provisions of excise duty exemption on the ethanol component of the blended fuel.

This is aimed at reducing losses of oil companies and thereby benefiting consumers.

The increase in the price of ethanol, however, would result in an unintended flow of the subsidy towards ethanol suppliers, resulting in an increased loss to the exchequer.

“The loss of revenue to the government is to the extent of Rs 1,000 crore on 5 per cent blending and Rs 2,000 crore on 10 per cent blending,” said an official.

Experts said it was important to first ensure steady and sustained availability of ethanol before pushing ahead with such an arbitrary price hike.

“Ethanol suppliers never honoured their supply commitments and last year provided only 12 crore litres of ethanol to the oil companies out of the total contracted quantity of 45 crore litres,” an industry official said.

Even in 2006-07 and 2007-08, when India had a bumper sugarcane crop, suppliers failed to provide necessary ethanol for the blending programme, the official said.

source: hindustantimes