India's drive to scale ethanol production has run into a supply glut that threatens the economics of the green fuel sector valued at Rs 500 billion (bn).

Installed capacity of ethanol distillation plants nationwide now stands at nearly 20 billion litres, with another four billion litres likely to come online soon and demand under the mandatory ethanol-petrol blending programme, capped at 20 per cent, requiring about 11 billion litres this year under the existing policy framework.

Distillers and sugar mills that invested on expectations of rising offtake report that plants are utilising only about a quarter to a third of capacity and that many units are operating well below sustainable levels. With offtake subdued and inventories building up, approvals for new distillery projects have been put on hold and capital expenditure plans have been deferred. Industry representatives warn that prolonged underutilisation could erode margins, strain cash flows and reduce the farm-linked revenue streams that underpinned the expansion.

The situation poses risks for energy security goals and rural livelihoods that the blending programme was designed to support. Policymakers are being urged to revisit blending targets and to accelerate mechanisms for absorbing surplus output, including regulatory and infrastructure measures. One sector proposal is to raise the blending threshold beyond 20 per cent, although technical concerns and consumer apprehension about fuel performance and vehicle compatibility have limited progress. Automakers have remained cautious and are reluctant to commit to mass production of flex fuel vehicles until stable demand signals and clear fiscal incentives are in place.

For now the ethanol industry faces operational uncertainty and a pressing need for policy recalibration if it is to fulfil its economic and environmental promise. The mismatch between capacity and consumption has turned a high profile element of the clean energy transition into a challenge that could affect farmers, sugar mills and investors. A coordinated approach is required to align incentives, resolve technical barriers and restore investor confidence in the sector.