Bitter reality: Sugar industry faces Rs 40,000 crore meltdown despite govt’s big ethanol push
India’s ethanol blending rose from 1.5% in 2014 to 20% in 2025, five years early. Grain-based ethanol now leads with 72%, reducing sugarcane’s share to 27%, pressuring mills. Stagnant ethanol prices, rising cane costs, and shrinking margins strain finances. Stakeholders urge price revisions to prevent defaults, stabilize banks, and secure farmer payments.
When the government launched the Ethanol Blended Petrol (EBP) programme in 2003 to encourage the use of alternative and environmentally friendly fuels and reduce dependency on energy imports, the sugarcane industry rejoiced; it created a new revenue stream for the struggling sugar mills and improved their financial capacity.As a result, the blending of ethanol with petrol has increased from a mere 1.5% in 2014 to 20% in 2025—five years ahead of the government’s target, despite some recent concerns regarding its effects on mileage and vehicle longevity. Ethanol, a biofuel derived from starch-rich crops such as sugarcane, maize, and wheat, has traditionally depended heavily on sugarcane as its main source. Until recently, sugarcane-based ethanol accounted for more than 70% of India’s ethanol blending programme. However, with the increase in foodgrain production and emphasis on diversified feedstocks, grain-based ethanol has now emerged as the top contributor, accounting for nearly 72% of the blend, while sugarcane’s share has dropped to 27%, leaving sugar mills.
In 2024-25, grain-based ethanol production climbed to 650 crore litres, while sugar-based output stood at 250 crore litres. This marks a sharp shift from 2017-18, when grain-based ethanol was almost negligible and sugar was the primary feedstock, as per data from the National Federation of Cooperative Sugar Factories (NFCSF). This sharp change, as per industry stakeholders, has placed considerable pressure on the sugar industry.Bitter taste
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Thanks to the ethanol blending programme, the sector has attracted investment of more than Rs 40,000 crore since 2018, resulting in a 140% increase in India’s ethanol production capacity, as per the Indian Sugar & Bio-Energy Manufacturers Association (ISMA). However, this rapid expansion has raised concerns about the ability of sugar mills to adapt to the shifting dynamics as well as the potential risks for banks with significant exposure to the sector. With grain-based ethanol production now dominating the market, demand for sugarcane has weakened, directly affecting mill revenues. iStock Thanks to the ethanol blending programme, the sector has attracted investment of more than Rs 40,000 crore since 2018.
While the sugar industry has welcomed the government’s move on September 1, 2025, to allow unrestricted ethanol production from sugarcane juice, syrup, and all types of molasses during the 2025-26 ethanol supply year, starting November 1, stagnant ethanol prices continue to erode margins, making it harder for mills to remain financially sustainable.Harshvardhan Patil, President of NFCSF, during the industry leaders’ meeting in Pune, noted that the surge in grain-based ethanol production has posed a major challenge for sugar mills, many of which have invested heavily in ethanol infrastructure. Industry stakeholders highlight that the ethanol production capacity is being underutilised, with sugar mills producing less ethanol due to unviable prices.
Deepak Ballani, Director General of ISMA, says that the sugar industry’s challenges are evident if one looks at the sector’s balance sheet. “The problem of financial viability is bound to surface. This is a fully regulated industry where the government decides both the raw material cost and the price of the end-product and co-product. If the cost of sugarcane keeps rising but the end-product/co-product prices remain unchanged, how are mills expected to manage? That is where the core issue lies.”Ethanol prices have remained unchanged for the past three years, while the fair and remunerative price (FRP), the minimum price mills must pay farmers for sugarcane, has increased by nearly 17%, and the cost of producing ethanol from juice has also risen significantly. The minimum selling price of sugar, last revised in 2019, has also remained static despite a 27% rise in cane prices since then, putting additional pressure on mill finances and, consequently, on banks.“If ethanol prices are not revised in line with sugarcane prices, proper diversion of cane towards ethanol won’t happen. Without this diversion, excess sugar will be produced, pushing domestic prices down and hurting the overall viability of the sector. The entire cycle needs to work in sync. With investments of nearly Rs 40,000 crore already made in the sector for putting ethanol capacities, mills and those who have taken bank loans could face serious stability issues,” says Ballani.According to ISMA, the cost of producing ethanol from sugarcane juice is nearly Rs 71 per litre, and it expects the government to revise juice-based ethanol prices to around Rs 71-72, bringing them in line with maize-based ethanol rates. Similarly, it suggests revising the price of ethanol from B-Heavy molasses to about Rs 66 per litre, which essentially reflects the rise in sugarcane costs (see chart).Vivek Saraogi, Chairman & Managing Director of Balrampur Chini Mills Limited (BCML), echoes Ballani’s concerns, noting that the stress in the sugar sector stems largely from a policy vacuum on ethanol pricing and an excessive tilt toward grain-based ethanol, which he says is distorting the original framework of the ethanol blending programme.For five years, ethanol prices moved in tandem with the FRP of cane, providing mills with stability and investment confidence, says Saraogi. However, since 2023-24, prices for sugarcane-based feedstocks, particularly juice, syrup, and B-Heavy molasses, have remained frozen. Over the past two years, the prices of B-Heavy and syrup-based ethanol have remained unchanged, while ethanol derived from C-Heavy molasses has seen only a marginal price increase, despite the FRP rising by nearly 11.5%.“This break in the pricing linkage is choking returns,” notes Saraogi.
“An expert committee even proposed a price increase last year, but the recommendations were eventually set aside. In contrast, grain-based ethanol, particularly maize, has seen rapid policy and pricing support, which has led to its share in ethanol production surging, overtaking sugar-based ethanol,” says Saraogi.A few sugar mill promoters from Uttar Pradesh, who spoke to ET Digital, echoed similar concerns. Sugar mills are now grappling with rising input costs and shrinking ethanol revenues, leaving their viability dependent on swift policy correction, they say. Without a meaningful diversion of surplus sugar into ethanol at remunerative prices, the sector risks sliding back into its old boom-bust cycle, where excess sugar floods the market, prices crash, and farmer payments are disrupted, they add.“The banks have heavily financed ethanol-linked projects in the sugar sector. If ethanol pricing doesn’t support viability, these assets risk turning non-performing. As noted during internal deliberations, a failure to ensure full diversion at fair prices would be tantamount to pulling the rug from under an industry financed by banks, seriously denting banking confidence in the sector,” says Saraogi.Despite the lowest closing stock in decades, sugar prices remain weak, indicating that domestic consumption growth is plateauing and price support via diversion is inadequate. Shrinking profitability, rising arrearsIndia’s sugar sector is reeling under severe financial pressure, with stakeholders pointing to a widening gap between production costs and selling prices. The recent hike in the FRP has pushed cane costs to around Rs 38-39 per kg of sugar, while mills are managing to sell at just Rs 40-41. Margins have nearly vanished, industry players say, as the minimum selling price remains frozen at Rs 31—a level unchanged since 2019 despite rising input costs. The stagnant selling price, they say, is squeezing profitability and threatening the sector’s financial viability.
Source: ISMA*SS is Sugar Season which for the Indian sugar industry refers to the annual period from October to September.“The stress is showing in mounting cane arrears, especially at smaller standalone mills that lack distilleries or power plants. Banks are exposed to these weaker units, though larger integrated mills remain relatively stable,” says Alok Saxena, Executive Director & Unit Head, SPE Division (GSMA), Zuari Industries Limited, a diversified firm with businesses in agrochemicals, engineering, infrastructure, real estate, and services.Although ethanol blending offers some relief, stakeholders believe that its support is limited. They point out that prices for B-heavy and juice-based ethanol have remained unchanged for years despite rising costs of sugarcane. Additionally, grain-based ethanol has expanded rapidly in recent times, increasingly displacing demand for cane-based ethanol.Stakeholders contend that the mills are just breaking even at current ex-mill prices, implying even a small dip in recovery or demand can wipe out margins. The cash flow is tight, leading to mounting cane arrears, they add.“India’s sugar sector is showing clear signs of financial strain, and banks are showing concern for the same. Mounting sugarcane arrears among major cane-producing states like Uttar Pradesh, Karnataka and Maharashtra is a cause of concern for industry, bankers and governments. Recently, in some cases, legal action has been initiated against senior officials of UP sugar factories for cane arrears of Rs 561 crore due to farmers,” says Saxena.The shift toward higher ethanol production is triggering a financial stress across the sugar industry as mills pour capital into expanding distillery capacities, while traditional sugar production facilities sit underutilised.
This operational imbalance is not only straining the financial health of mills but also sounding alarm bells among banks exposed to the sector. And, with the demand for sugarcane-based ethanol now showing signs of decline, the situation gets more complicated for sugar mills.“With Rs 40,000 crore invested, banks have significant exposure to sugar-linked ethanol capacities. As stated, this is no longer about profitability; it’s about preventing systemic stress in the sector and the lenders backing it. This challenge goes beyond a single industry; it reflects broader systemic pressures resulting from policy misalignments, delays in pricing adjustments, and evolving dynamics within the ethanol feedstock ecosystem,” says Saraogi.Debt, credit pressureSince 2018, the sector has attracted significant investments, primarily financed through bank debt, with most of it directed towards expanding ethanol production capacity. “Debt-funded capex may have an adverse impact on credit profiles. Further, lower returns may affect the financial risk profile and capacity to service this debt for small players,” says Ravleen Kaur Sethi, Director, CareEdge Ratings.“High cane procurement costs, subvention loans, and weaker cash flows with lower profitability from the ethanol segment can lead to delayed farmer payments/rising short-term borrowing needs,” explains Sethi. “Cooperative mills are particularly vulnerable.”According to Sethi, the sector is more influenced by policies than by market forces. In the absence of price adjustments or alternative revenue streams, many mills, especially smaller cooperative ones, are likely to face medium-term financial stress. However, larger integrated players with cogeneration, distilleries, and better capital structures remain more viable, he notes.CareEdge Ratings expects a slight improvement in the margins in FY26 for sugar mills, with a marginal increase in revenue, as diversion is lifted and the share of ethanol produced from sugar syrup and B-Heavy molasses is expected to increase.Ethanol demand for blending is projected to double to 9.3 billion litres in ethanol supply year (ESY) 2025 compared to ESY 2022 (the ethanol supply year runs from November 1 to October 31 of the following year). However, procurement from sugarcane-based sources has declined by 7% to 3.3 billion litres during this period, reducing its share to about one-third of total allocation, down from over 80% in ESY 2022, as per data from India Ratings & Research. The entire growth has been absorbed by grain-based ethanol, it says.Even some of the large sugar companies are feeling the heat. “Declining sugar recovery and weakening ethanol margins have pushed overall EBITDA margins for large integrated sugar companies to a multi-year low of around 8% in FY25, compared to 10% in FY24 and a 5-year average of 10-11%,” says Khushbu Lakhotia, Director, India Ratings & Research.Lakhotia notes that although this has weakened operating performance and financial profiles, the industry remains resilient, with nearly three-fourths of large sugar companies maintaining a comfortable financial position and an interest coverage ratio above two times, even at reduced profitability. She further adds that many of these companies also hold liquidity buffers in the form of undrawn working capital limits from banks.“Having said that, pockets of stress are building up in the sector, particularly in MSMEs that have a lower margin profile (average of 5-7%) and a limited headroom to absorb pain in the operating performance.
Around one-third of MSMEs reported interest coverage of less than 1x in FY25, and with sugar prices likely to remain range-bound in the next season, there can be more pain in the sector if ethanol prices are not increased,” says Lahotia. Analysts maintain that ethanol volumes are expected to remain range-bound, with any upside largely dependent on sugar surplus availability. While significant near-term growth appears unlikely, a reduction in allocated quantities is also not anticipated. However, the share of sugarcane-based ethanol may continue to decline as the overall base expands with additional allocations toward grain-based ethanol.With sugarcane procurement prices expected to rise in the 2026 season, Lakhotia believes a hike in ethanol prices will be crucial for a recovery in profitability. iStock Since 2018, the sector has attracted significant investments, primarily financed through bank debt, with most of it directed towards expanding ethanol production capacity.
The ability of sugar companies to diversify their revenue streams beyond sugar and cane-based ethanol plays a crucial role in shaping their credit profile and financial health. “Mills that diversify into power cogeneration, multifeed distilleries, chemicals, and by-products will be better placed to withstand shocks,” feels Sethi.Road AheadThe relatively higher allocation to maize-based ethanol over the past two years was driven by lower sugar production and previous restrictions on sugar diversion. However, with sugar production rebounding and diversion limits lifted, sugarcane-based syrup is expected to regain its position as the dominant feedstock for ethanol production in the coming year, believes CareEdge’s Sethi. According to her, the revision in ethanol prices remains critical to support the profitability of the distilleries and the sugar industry.NFCSF’s Patil emphasised the need for a revision in ethanol procurement prices. He urged the central government to take timely action to ensure that sugar mills remain competitive and financially sustainable in the face of evolving market dynamics.With the upcoming sugar season just a month away, prospects for production look promising,” says Uppal Shah, Managing Director of JK India eAgriTech Ltd. He notes that the government is closely monitoring the industry and is likely to extend all necessary support.Shah also expects the industry’s key demands, including an ethanol price hike and a possible revision in minimum selling prices, if required, will be considered. “As you know, ethanol procurement prices for B-Heavy and Sugarcane Juice (SCJ) have remained stagnant, and the industry is expecting an upward revision. Such a move would strengthen the financial health of mills and enable timely payments to farmers. I believe the government should introduce a policy to ensure that any increase in FRP is accompanied by a corresponding positive review of ethanol prices and minimum selling prices,” says Shah
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Source : The Economic Times
