India’s fuel-blending machine enters its next costly phase

**Akshara** (0:04)
In today's episode, we'll break down two important stories. First, we'll talk about India's fuel-blending machine entering its next costly phase. And then we'll talk about India's wet waste problem being a $50 billion opportunity. Welcome back to The Daily Brief by Zerodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Thursday, 4th June. Coming to the first story.
So on 29th May, the Road Transport Secretary of India, V. Umashankar, said that India is likely to bring a mandate for blending a biofuel named isobutanol into diesel later this year. A week before that, the Bureau of Indian Standards had notified fuel specifications for E22, E25, E27, and E30 petrol blends, all of which contain higher proportions of ethanol than the E20 that India currently uses.
And then later this week, Maruti Suzuki is expected to launch India's first mass market flex fuel car that runs on any levels of ethanol, be it E20 or E100. All of these announcements took place within a span of a week. Some of these moves may have been in the works for years, but there's also an unmistakable sense of urgency involved. Now we've covered India's ethanol blending program before. It dates back to a national policy on biofuels in 2018
And that policy has achieved a key milestone of 20% ethanol or E20 in all petrol-based vehicles, in an attempt to reduce our oil import bill. So the straight-of-hormones crisis to which India has found itself acutely exposed speeded up some of those timelines. Petroleum Minister Hardeep Singh Puri told parliament in March that the disruption was unlike anything seen in modern energy history. It is in that context that biofuels are no longer just a climate or farm policy. They are being framed as a strategic hedge to preserve independence. However, the ethanol blending program has proven to be a very costly affair on multiple fronts. While those costs are yet to go away, India is seriously considering what comes after E20.
This story attempts to make a cohesive narrative out of all of these announcements. So let's dive in.
India went from 1.5% ethanol blending in 2014 to 20% by November 2025 From April 2026, E20 is mandatory nationwide. Now, over the last decade, as per government statistics, the program has substituted around 245 lakh metric tons of crude oil. And as far as these objectives matter, this has been a successful industrial policy.
But the incentive machine that made it possible doesn't have an off switch. See, starting in 2018, the Centre rolled out an interest subvention scheme where the government bore up to 6% per annum or approximately 50% of the interest rate, whichever was lower, on loans taken to build new ethanol distilleries or expand existing ones. Over 1,100 sugar mills received in-principle approval. Oil marketing companies or OMCs like IOCL, BPCL signed long-term procurement agreements at government fixed prices. So, investors saw three things at once. Subsidized capital, a captive buyer, and a government target, E20 by 2025, that implied demand would keep rising. Everyone bid at once.
However, this has now caused overcapacity in ethanol. India has now installed ethanol capacity of roughly 2,000 crore liters against E20 demand of only about 1,100 crore liters. Another 400 crore liters of capacity is expected to come online by FY27.
OMC's are absorbing only about 60% of the ethanol being offered to them, and KREG expects utilization to stay at 65-75% for the next three years. So in other words, the government aggressively expanded supply, but without adequate support on the demand side. Part of this also stems from government fixed price flows for farmers. Now, this surplus is the engine driving everything that follows. The policy system has to find new demand or watch those investments go bad. Meanwhile, the procurement agreements are still in place and the subsidies and administered prices still apply. That will certainly keep capacity coming. So the most intuitive answer to the surplus problem is to put more ethanol into fuel. That's what the new ethanol standards launched by BIS solve. At the same time, the government is pushing flex-fuel vehicles, cars and motorcycles that can run on E85 or 85% ethanol or even E100, pure ethanol. The central motor vehicle rules have been amended to recognize these fuels, and E100 is now part of official testing and certification standards in April 2026 And Indian Oil already sells E100 at 183 retail outlets. But how meaningful is this? Really?
The practical constraints are significant. E85, for instance, delivers nearly 30% worse mileage than petrol simply because ethanol has less energy per liter, about two-thirds of gasoline's calorific value. Additionally, a flex-fuel upgrade adds an estimated Rs. 40,000 to 50,000 to a vehicle's price. Maruti's own executive, Rahul Bhati, has cautioned that flex-fuel volumes are unlikely to be significant in the near term due to limited models and limited pump availability. This is a chicken-and-egg problem. OEMs won't build flex-fuel cars without fuel at pumps, and OMCs won't invest in E85 or E100 pumps without enough cars on the road. Even if India raises ethanol blending from E20 to E30, the incremental energy security gain diminishes with each step up. As per Nithi Aayog's own planning assumptions, E20 requires 1,016 crore litres of ethanol, while E30 would require above 1,520 crore litres. And those extra 500 crore litres of ethanol displace only about 339 crore litres of petrol on an energy-equivalent basis. Naturally, these crude numbers assume there won't be technological innovation to ensure higher ethanol blends work. But even then, innovation also requires a lot of risk capital. And OEMs will be hesitant to spend huge amounts of money on such innovation without a short supply, especially when other proven technologies like EVs and CNG already exist. More importantly, petrol is not where India's real oil vulnerability lies. We consume more than double the diesel compared to petrol. Trucks, buses, agricultural equipment, railways, gensets, all of them run on diesel. A petrol-blending strategy, no matter how ambitious, can only address a fraction of India's crude oil dependence. Now, India did try to do for diesel what it did for petrol. The government ran trials blending ethanol into diesel and failed, and the reasons for this are entirely technical.