India has directed state-owned fuel retailers to cease purchasing ethanol derived from sugar and critical sugarcane-based feedstocks, a move aimed at controlling sweetener prices, effective November 1, after dry summer weather hit sugarcane production, leading to a global spike in prices.
The move, announced in a tender document dated October 16, 2026, excludes ethanol produced from sugarcane juice, sugar syrup, and B-heavy molasses, marking a shift toward grain-based feedstocks like corn and surplus rice Moneycontrol. This follows record sugar prices and concerns over dwindling supplies after poor rainfall in key producing states like Maharashtra and Karnataka.
Ethanol Policy Prioritizes Corn, Rice over Sugar
The government’s directive, cited in multiple reports, reduces sugar diversion for ethanol to zero for the 2026-27 supply year. The Oil Marketing Companies (OMCs) invited bids for 11 billion liters of ethanol, prioritizing corn, broken rice, and damaged food grains ChiniMandi. Ethanol from sugarcane juice, sugar, and B-heavy molasses will not be accepted, a departure from previous years when surplus sugar was diverted to fuel production.
The shift reflects a strategic balance between energy goals and food security. India’s E20 ethanol-blending standard, mandated to cut oil imports and pollution, now faces constraints as sugar output drops to about 28 million tonnes in 2026-27—down from 31 million tonnes last year, when roughly 3 million tonnes of the crop was diverted to ethanol Ainvest. The Indian Sugar & Bio-energy Manufacturers Association (ISMA) forecasts net sugar output for the 2026-27 season at approximately 28 million tonnes, a decrease from 31 million tonnes in the previous year, when around 3 million tonnes of the crop was redirected to ethanol.
The tender document specifies distinct procurement rates for eligible feedstocks. Ethanol made from maize has a base rate of ₹66.07 per litre, plus an additional incentive of ₹2.79 per litre, excluding Goods and Services Tax (GST). The base procurement rate for ethanol from damaged food grains is ₹64 per litre, while surplus rice procured by the Food Corporation of India (FCI) is priced at ₹60.32 per litre. Ethanol from C-heavy molasses has a base rate of ₹57.97 per litre, with transportation charges and GST payable separately CNBC TV18.
The companies reduced the incentive for corn-based ethanol to ₹2.79 per litre from ₹5.79 per litre, lowering the procurement price to ₹68.86 per litre from ₹71.86 per litre, as reported by Business Standard. This adjustment aligns with the government’s effort to balance ethanol production with sugar supply stability, as record-high prices have pressured both industries.
Court Cases May Alter Ethanol Allocations, OMCs Retain Right
The policy has triggered legal challenges. A pending Supreme Court case (SLP [C] No. 22411 of 2026) and other litigation could alter allocations, with OMCs reserving the right to revise quantities based on court rulings ChiniMandi. The tender also notes that ethanol allocations for the first quarter of the 2026-27 supply year remain subject to the outcome of pending legal proceedings concerning the OMCs’ ethanol allocation methodology.
Industry sources indicate that grain-based feedstocks already supplied 71% of ethanol in 2025-26, with maize accounting for 41% Ainvest. The tender allows suppliers to bid for ethanol produced from eligible indigenous feedstocks at their own registered or approved distilleries, prohibiting third-party sourcing. Offers for ethanol made from surplus FCI rice will not be accepted for the fourth quarter CNBC TV18.
The tender encompasses four supply quarters, spanning from November 2026 to January 2027, February to April 2027, May to July 2027, and August to October 2027. However, offers for ethanol made from surplus FCI rice will not be accepted for the fourth quarter CNBC TV18. The OMCs have retained the right to adjust, decrease, withdraw, or cancel allocations in accordance with court orders, without owing compensation to suppliers, as outlined in the tender document.
Current Policy Mirrors Past El Niño Ethanol Measures
India has implemented similar measures before—during late 2023, a comparable El Niño-induced scarcity and ethanol competition prompted it to limit sugar exports, with the diversion initiative resuming once supply levels recovered, as noted by ChiniMandi. The current policy mirrors those efforts, prioritizing sugar availability over ethanol production amid El Niño’s expected decline by early 2027. The World Meteorological Organization indicates that the current situation is expected to last only until early 2027, with India’s monsoon historically recovering following such disruptions.
For investors involved in the global sugar complex, the trajectory of the upcoming monsoon holds more significance than any individual tender. The Indian Sugar & Bio-energy Manufacturers Association (ISMA), through the Financial Express, forecasts net sugar output for the 2026-27 season at approximately 28 million tonnes, a decline from 31 million tonnes in the prior year, when roughly 3 million tonnes of the crop was redirected to ethanol, as reported by Ainvest. The surplus that sustained the program has disappeared. Sugar diversion is a policy aspect worth examining, as it illustrates how a food price crisis can directly affect an energy initiative.