Biofuels in India

The national government released its first ever national biofuel policy last week, which was perhaps most notable for its mandate that 20% of all diesel demand should be met using plant-based rather than fossil-based diesel by 2017. The policy also stipulated that 10% of all gasoline demand should be met using ethanol, compared with the current mandate of 5%.

The debate over biofuels is particularly interesting in the Indian context, where food security has consistently been one of the government’s major concerns. Finance minister P. Chidambaram memorably called the conversion of food crops into biofuels a “crime against humanity.” In light of the rapid inflation that has driven up food prices nationally, it is easy to understand why the idea of using potential food stocks to create fuel is politically controversial. But when we examine the full spectrum of costs and benefits of biofuels to the Indian economy, it seems that this controversy may actually be misguided.

One of the major factors contributing to recent global inflation has been the dramatic and sustained surge in oil prices. In addition to driving up the cost of production of various goods, it has also dramatically increased the cost of transporting these goods, resulting in higher consumer prices. It therefore seems logical that measures that attempt to reduce dependence on (mostly imported) oil and diesel might also serve as an insurance measure against future oil price volatility and therefore help stabilize price inflation of more basic consumer goods such as food.

The assumption that biofuel production will crowd out food production is also misplaced. Datropha, the plant which is the main source of biodiesel in India, is a hardy plant that can grow on land where traditional food crops would typically not grow, which means that arable land need not be sacrificed for fuel production. In addition, datropha production is estimated to use less than 1% of the water required for traditional agricultural crops, and most other crops used to produce biodiesel have similarly low inputs, suggesting that even large-scale production of biodiesel will not result in a significant diversion of scare water resources from food production.

It is a bit harder to make an unqualified endorsement of ethanol production in India. Since almost all Indian ethanol is produced from sugarcane, which is a water-intensive crop, concerns about food security appear to be a bit more founded in this context. The high variability of sugarcane yields from year to year also makes it difficult to draw generalizations regarding “appropriate” use of cane crops. However, recent scientific innovations suggest that the adoption of new production technologies, such as drip irrigation, might be able to dramatically increase sugarcane output per unit of water. Cellulosic ethanol, which is produced from “scrap” agricultural products such as wood chips, rice husk, straw, is currently not an efficient option but future technological development might make worthwhile.

The imperative for India to reduce its dependence on imported fuels is clear. Lalu Prasad Yadav, our beloved railway minister, is perhaps more familiar than anyone with the real costs of rising fuel pricies: Indian Railways alone consumes one third of India’s imported diesel fuel. In response to the clearly unsustainable price trajectory of imported diesel, Lalu has initiated a jatropha-growing progam that uses the millions of acres of wasteland held by the Railways to grow a renewable source of biodiesel. In my humble opinion, if Lalu is doing it then it’s probably worth paying attention to.

In spite of the recent gains in momentum for biofuels, there are considerable obstacles that must be overcome before they make a significant contribution to Indian energy independence. One of the most glaring such obstacles is the massive subsidy that the government provides for petrol, diesel, and LPG fuels. This massive subsidy costs roughly $18 billion USD, or approximately 2% of total Indian GDP. Although the stated goal of the subsidy is to insulate ordinary consumers from fuel price shocks, there is considerable evidence that in practice it amounts to a regressive subsidy of fuel consumption for the rich (the ISI recently estimated that 75% of the LPG subsidy went to the richer half of urban households. Given that vehicle ownership is densely concentrated among the rich, one expects the situation to be similar for petrol and diesel subsidies). The artificially low price of fuel in India, apart from costing the government an exorbitant amount of money, also dampens financial incentives to invest in biofuel innovation and production, as well public transportation and other public goods. (The government’s fuel subsidy is a massively complex issue that I hope to address with more completeness in future posts). In addition, it will be difficult to incentivize farmers to initially start producing biofuel crops, many of which do not yield returns for 5-10 years. The pervasive skepticism of Indian farmers towards change must be overcome before wide-scale production is possible.

Regardless of these obstacles, I think that it is only natural that investment in biofuels will increase as international fuel prices continue to fluctuate wildly. The Indian government’s mandate seems far more sensible than American biofuel policy, which amounts to a blatant subsidy of corn farmers at the expense of domestic consumers, international sugar-cane farmers, and the environment. One can only hope that the high political stakes and competing interests surrounding biofuels in India will not ultimately yield a policy as senseless as America’s.