What lies beyond India’s E20 push

A litre of E20 petrol consists of 80% motor gasoline and 20% anhydrous ethanol. According to a press release by the Ministry of Petroleum and Natural Gas, India first introduced it on February 6, 2023, when public sector oil marketing companies (OMCs) began selling it at select outlets across the country.E20 promiseE20 has been scaled up this year because of rising crude prices resulting from unilateral American aggression against Iran and the closure of the Strait of Hormuz in response. The government has made three broad claims in favour of using the E20 blend — savings for the consumer, lower carbon emissions, and forex savings. However, if the E20 blend reduces mileage, these claims may not hold. That the loss in mileage is real was accepted in a written reply to the Lok Sabha by Road Transport and Highways Minister Nitin Gadkari, who stated that E20 reduces fuel economy by “2% to 6% depending on vehicle category and vintage,” citing a joint ARAI–SIAM–IOCL study. There is also anecdotal evidence from many car users, especially those using cars of vintage 2022 or earlier, that E20 has brought mileage down, perhaps by far more than 6%, as well as caused damage to their engines and oil tanks. It is difficult to quantify the possible engine damage this blend may cause, but these three claims are empirically verifiable.Has it saved Indians some cash?The first claim is that since the E20 blend uses less crude, which is expensive, and more ethanol, which is cheaper, a higher share of ethanol will save Indians money. This, it is claimed, would also help keep inflation in check. But what this claim does not take into account is the loss in mileage (km/litre) that a higher ethanol blend leads to. Since ethanol releases less energy per litre burnt than pure gasoline, there is a consequent loss of mileage per litre, especially in engines that are not compatible with the E20 blend.Let us say E10 blend petrol used to cost ₹100, and E20 was introduced while keeping prices the same, which is what happened.Consider an average mileage of 15 km/litre for a standard car running on the E10 blend. If there is a 6% loss in mileage with E20, the car would now need 1.06 litres to travel those 15 km. This means shelling out ₹106 instead of ₹100 for the same distance travelled. Aggregate this over many customers and many kilometres, and you get the loss that households have to bear. The greater the loss in mileage, the greater the cost to the household would be.An extensive report prepared by The Reporters Collective and authored by Ayushi Kar shows that, instead of savings, the households had to spend extra as a result of this loss in mileage. Chart 1 shows that over the last three years, Indian consumers had to shell out an additional ₹88,234 crore, with the burden rising every year. If the defence is that prices would have been much higher had the E10 blend continued, there are other ways in which prices could be kept under check, at least in the short run.The question of emissionsOn the face of it, E20 is definitely a cleaner fuel simply because less carbon is embodied per litre of ethanol (Box 1). But, as we saw above, with a loss in mileage, the same 15 km now requires 1.06 litres of petrol, which means emissions could be higher for the same distance travelled. Box 1 shows the difference in emissions if there is such a loss in mileage.In Chart 2, we present the rise or fall in emissions using this calculation for the entire range of mileage losses given by the Minister. The calculations show that emissions would rise (red bars), rather than fall, if the loss in mileage is in the range of 4% to 6%. Emissions fall only if the loss in mileage is less than 4%.To be sure, overall emissions per km would depend on the mix of cars of different vintages running on Indian roads. For newer cars compatible with E20, emissions are likely to decline. For older cars, on the other hand, emissions would be greater, depending on the extent of the loss in mileage. Thus, average emissions per km would depend on the weights of different vintage cars.E20 and foreign exchangeAny substitution away from crude will indeed save India foreign exchange since oil constitutes a significant part of the import bill.However, the position needs to be more nuanced. First, a fall in mileage may at least partially cancel out the advantage of the blend as far as forex savings are concerned. Second, the ethanol required for E20 blending needs diversion of crops and grains in favour of ethanol production. The diversion of food grains for fuel has serious implications for food security. Since E20 blending is here to stay, this is more of a long-term adjustment in the supply of such crops and grains.A demand-production mismatch for an agricultural commodity will either be met by rising prices, cross-border trade management, or both. The resulting fall in exports, or increase in imports, or both, represents a loss of foreign exchange, undermining the very purpose that initiated the policy shift. It might be too early to ascertain the long-term impact of this policy on forex earnings, but some preliminary evidence may give us a sense of where this is headed.The two main sources of ethanol production are sugarcane and maize (Chart 3(a)).While India has gradually shifted away from sugarcane to maize, both crops have been affected by this policy. In the case of sugar, the government had to ban exports in 2023 as well as this year, amid rising domestic demand because of ethanol diversion. This led to a drastic fall in India’s dollar earnings from sugar exports (Chart 3(b)). As for maize, with a rising share as a source of ethanol production, export earnings have similarly plummeted over the last couple of years (Chart 3(c)). India was a net importer last year.So, even in the narrow sense of improving forex earnings, the E20 policy may not have been entirely successful.The cost beyond the pumpTo keep prices under control when crude prices rise, a countercyclical indirect tax policy could be introduced to insulate consumers, something that the government itself was doing until the Bengal elections were over.As the Chief Economic Adviser (CEA) himself has argued, consumers should, at the very least, be given a choice between E10 and E20 instead of forcing a fleet of vehicles — cars and motorcycles — that are not ready for E20 to use it.The government should also develop reliable and subsidised public transport with last-mile connectivity, along with cycling and walking options. All of these would reduce the need for cars and motorcycles, and hence emissions and pollution.(The authors are a part of the DevMac (Development Macroeconomics) network, which seeks pluralism in Economics; Additionally, Shouvik Chakraborty is Research Associate Professor at the Political Economy Research Institute, Amherst, U.S.)