ETHANOL POLICY: Economic Survey Flags Food-vs-Fuel Tension

In what could signal an impending policy review, the Economic Survey 2025-26 has explicitly warned of an "emerging tension between Aatmanirbharta in energy and Aatmanirbharta in food," suggesting that India's aggressive ethanol blending program may require recalibration as it begins to affect food crop patterns and prices.

The warning, buried in the Survey's agriculture chapter but carrying significant implications for automotive fuel policy, represents the government's most direct acknowledgment yet that the push toward E20 (20% ethanol blending in petrol) may be creating unintended consequences for food security.

For the automotive sector, which has invested in flex-fuel compatible engines and celebrated ethanol blending as both an environmental and energy security win, the Survey's caution suggests that fuel policy assumptions may need to be revisited.

The Survey begins by acknowledging ethanol blending's achievements: as of August 2025, the program has saved India more than ₹1.44 lakh crore in foreign exchange and facilitated the substitution of about 245 lakh metric tonnes of crude oil.

These are substantial gains that have reduced India's oil import bill and provided an additional income stream for farmers through ethanol feedstock cultivation.

However, the Survey then introduces a critical concern: "As blending targets rise towards E20, the programme has necessarily expanded beyond traditional sugar-based feedstock to include food grains, particularly maize."

This shift—from using sugarcane byproducts to diverting food grains—is where the "tension" emerges.

The Survey notes that maize has become increasingly important as an ethanol feedstock as blending targets have risen. But this creates a direct competition between fuel and food uses of the crop.

"This highlights an emerging tension between Aatmanirbharta in energy and Aatmanirbharta in food," the Survey states explicitly, framing it as a tradeoff between two national priorities.

The document warns that using food grains for fuel can expose "food prices to greater volatility during supply shocks," essentially creating a new transmission channel where energy policy affects food inflation.

For an economy where retail inflation remains a political sensitive issue, this is not a minor concern.

Perhaps most significantly, the Survey cites international experience to support its caution. It references OECD-FAO analyses showing that "biofuel mandates and feedstock-specific price incentives can lead to long-term alterations to cropping patterns and food price dynamics when not periodically recalibrated."

This is a direct citation of research showing what happens when biofuel programs are allowed to run on autopilot without policy adjustment. The Survey notes that "countries with mature biofuel regimes have increasingly relied on adjustment mechanisms, feedstock caps, or a shift towards second-generation biofuels to mitigate competition with food crops."

The message is clear: India should learn from others' experience rather than discovering these problems on its own.

"Early Warning Signals"

The survey suggests that the effects are already becoming visible in terms of cropping pattern changes or price dynamics, though the Survey does not provide specific data on these indicators. It warns that the Indian experience now displays similar early warning signals.

The phrase "early warning signals" implies the government is catching the problem before it becomes severe—but also that action is needed sooner rather than later. "The policy challenge, therefore, is the concentration and durability of incentives that may unintentionally favour one set of crops over others."

This refers to the price support mechanisms and procurement guarantees that make ethanol feedstock cultivation attractive to farmers. The Survey suggests these incentives may be too concentrated (favoring specific crops) and too durable (not adjusted as conditions change).

"As the ethanol programme matures, continued reliance on food grain diversion without complementary diversification towards non-food feedstocks or lignocellulosic options may amplify these distortions," the Survey warns.

The Survey's reference to international experience with "periodic recalibration" is significant. It suggests that blending mandates and incentives should not be treated as fixed targets but as flexible tools that adjust based on:

For the automotive industry, this implies that the road to E20 may not be as linear or as rapid as previously assumed. Blending percentages could vary year-to-year based on agricultural conditions rather than following a fixed timeline.

The Survey's mention of "lignocellulosic options" and international moves toward "second-generation biofuels" points to a potential solution: ethanol produced from agricultural waste, forest residue, and other non-food biomass.

Second-generation ethanol avoids the food-fuel competition entirely, using materials that would otherwise be burned or discarded. However, these technologies are more expensive and less commercially mature than first-generation (food crop-based) ethanol production.

The Survey's implicit message seems to be that India needs to accelerate second-generation ethanol development rather than continuing to rely on food grain diversion to meet blending targets.

Implications for Industry

For automotive OEMs, the Survey's warning creates several uncertainties:If ethanol availability becomes more variable, the business case for flex-fuel vehicles (capable of running on high ethanol blends) becomes more complex. Long-term assumptions about fuel composition for engine design and emissions certification may need to accommodate more variability, and ethanol availability could vary more significantly by state based on local agricultural conditions and policies.

The uncertainty around ethanol scaling may strengthen the relative case for electric vehicles, CNG, or other alternative fuels. OEMs may need to track development of advanced biofuels more closely as policy potentially shifts emphasis
 

Moreover, oil marketing companies (OMCs) have made substantial investments in ethanol blending infrastructure based on E20 timelines. The Survey's warning suggests they may face more variable ethanol availability than planned, potentially affecting capacity utilization and economics of blending investments.

OMCs may also face pressure to pay higher prices for ethanol if feedstock costs rise due to food-fuel competition, affecting their margins unless retail prices adjust.

Farmer Income vs. Food Security

The Survey's concern highlights a fundamental tension in agricultural policy. Ethanol feedstock cultivation provides farmers an additional income source beyond traditional food crop markets. Rolling back incentives for ethanol feedstock would affect farmer incomes in states where maize-for-ethanol has become significant.

However, allowing food prices to become more volatile affects a much larger population of consumers, particularly lower-income households for whom food represents a large share of spending.

The Survey seems to be flagging that this tradeoff will become more explicit as the program scales up.

Interestingly, the Survey does not discuss the climate/emissions implications of potentially slowing ethanol blending targets. Ethanol blending has been positioned as part of India's climate strategy, reducing both fossil fuel use and tailpipe emissions.

Any policy shift that slows ethanol adoption would need to be squared with India's climate commitments and the automotive sector's emission reduction roadmap. This could create pressure to accelerate other decarbonization pathways—potentially favoring electric vehicles.

Since agriculture is primarily a state subject, and ethanol production facilities are often state-supported, the Survey's warning has implications for state governments as well. States that have aggressively promoted maize-for-ethanol cultivation may face pressure to diversify feedstock sources or moderate expansion plans.

The Survey's framing of "tension between Aatmanirbharta in energy and Aatmanirbharta in food" is particularly apt. Both objectives—energy self-reliance and food self-sufficiency—are core government priorities. The ethanol program was meant to serve both by reducing oil imports while supporting farmers.

The emerging realization is that beyond a certain scale, the program may advance one form of self-reliance (energy) at the cost of another (food), creating a zero-sum tradeoff rather than a win-win.

For the automotive sector, this creates both challenges and opportunities. The challenge is increased uncertainty around fuel composition and availability timelines. The opportunity is to engage constructively in developing sustainable biofuel pathways that can support both energy security and food security.