A sugar rush that could fuel the economy

The public and media were outraged recently after a suggestion that petrol stations could be closed from 8 p.m. to 8 a.m. to curb consumption. Oil import is the heaviest burden on India’s foreign exchange, at $144 billion last year. The situation could get worse, given the potential for an increase in crude prices with further destabilisation in West Asia. India needs to think beyond 8 p.m. to 8 a.m. and look for long-term, indigenous, sustainable solutions — solutions innovated in Brazil.

Flexi-fuel engines

One way to reduce petrol consumption is to use ethanol as a fuel. Brazil has already done it successfully, reducing petrol consumption by 30 per cent. All new cars produced in Brazil have flexi-fuel engines which run on 100 per cent ethanol or 100 per cent petrol or any combination of the two. In addition, there is a 20 per cent mandatory ethanol addition to petrol.

Brazil is the global leader with 16 million of the world’s total 27 million flexi-fuel vehicles in December 2011. Brazil uses ethanol in motorcycles, light commercial vehicles and even agricultural aircraft. It is now experimenting with ethanol in buses, trucks, tractors and harvesters. Indigenously-developed sugar cane diesel is now used in some Sao Paulo buses. The Brazilians are now moving into cellulosic ethanol technology, which uses waste material and bagasse from sugar mills. The use of fuel ethanol has created a synergy between the agriculture and energy sectors and a win-win for farmers, industry and government. It has also improved the quality of air in Brazil’s cities as ethanol is less polluting than petrol.

Oil crisis

How did Brazil do it? In 1974, hurt by the oil crisis, the government brought together all stakeholders — sugar cane farmers, sugar mills, car manufacturers and oil companies besides the ministries of agriculture, industry and energy — and formulated a policy that would ensure energy independence. The government then oversaw its implementation rigorously as a strategic priority. It provided three important initial drivers: guaranteed purchases of ethanol by the state-owned oil company Petrobras, low-interest loans for sugarcane farming and ethanol production, and fixed gasoline and ethanol prices. The policy has evolved over the years through learning from experience. Today, fuel ethanol is the centrepiece of Brazil’s energy, agricultural and industrial strategy and Brazil is a role model for the world.

The success of the policy has encouraged the oil companies to become stakeholders in ethanol production in Brazil. Multinational oil companies such as Shell and traders like Louis Dreyfus and Bunge have invested in ethanol, besides Petrobras, the state oil company.

Conscious of the cyclical nature of sugar cane production and weather risks, the government has a flexible policy of exporting the product when there are surpluses and importing during times of shortage. Brazil is working quietly to create a global ethanol market with standardisation of specifications and market mechanisms in collaboration with the U.S. It is also encouraging and collaborating with other Latin American and Caribbean countries to produce fuel ethanol; Brazilian ethanol companies have started investing in other countries.

India has the potential to replicate the success of Brazil; we are the second largest producer of sugar cane in the world. And the risk and investment involved in ethanol production is far lower than in oil exploration and production.

Hostage to policy

Ethanol has been considered before. In 2006, the government of India launched a programme of five per cent mandatory ethanol blending. But it has not taken off largely because the oil companies have shown little interest in ethanol. They offer unattractive prices to local ethanol suppliers even as they pay top dollar for foreign oil supplies. The ethanol producers naturally prefer the better prices offered by chemical and alcohol companies as well as foreign importers.

It is a mistake for our government to have held the ethanol policy hostage to this conflict of interest between the oil and the sugar companies. On their part, neither see the national interest. The petroleum ministry is biased in favour of the oil companies.

Blending

This can change if the government as a whole — and not just the oil ministry — takes charge of the new idea, and like Brazil, brings all the stakeholders together and evolve a long-term policy, treating it as a national energy security imperative. The mandatory blending should be increased to 10 per cent immediately, with the target of 20 per cent in the next three years. New Delhi can compel the oil companies to invest in ethanol production, so they have a stake in its development. The car manufacturers too must be brought on board to modify the engines. Some foreign car makers in India such as Ford, GM, Volkswagen, Honda, Toyota, Renault and Fiat are already producing flexi-fuel cars in Brazil, and can easily do so in and for India.

Benefits

The use of ethanol as fuel has multiple benefits for India besides reducing petrol consumption — all politically positive. We will save on foreign currency — money will stay with Indian farmers and industry in rupees instead of the dollars that foreign oil suppliers receive. Ethanol will help farmers sustain their income during the cyclical bumper harvests and their lower sugar prices, as is the prevailing situation this year. India will reduce its trade deficit and foreign exchange outflow. And there will be less pollution. Most importantly, fuel ethanol will be a sustainable, long term, India-centric solution.

Ambassador Viswanathan is Distinguished Fellow, Latin America Studies, Gateway House. He is the former Indian Ambassador to Argentina, Uruguay, Paraguay and Venezuela, and Consul General in Sao Paulo.

This blog was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.