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Hike in ethanol prices bad economics

business Updated: Apr 19, 2010 23:24 IST
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With no pricing policy behind it, the recent decision by a group of ministers (GoM) to increase ethanol prices by 26 per cent — to Rs 27 per litre from Rs 21.50 per litre — for sale to oil companies may not quite serve its purpose.

The hike, considered to be arbitrary, may not assure availability to oil companies but is expected to deliver sweet dividends, financial or political, to politicians with interests in sugar.

While the hike is being pushed ostensibly to benefit sugarcane farmers, little-known beneficiaries have gone unnoticed — Maharashtra-based politicians who are stakeholders in sugar co-operatives
and mills.

Two of the GoM members Minister of Heavy Industries Vilasrao Deshmukh and Agriculture Minister Sharad Pawar, both from Maharashtra, have direct interests in the sugar co-operatives and mills. Deshmukh’s son Amit owns sugar mills in the western state.

Petroleum Minister Murli Deora, another Maharashtra politician — with no interest in sugar mills — is also part of the five-member GoM, with the other two ministers being Finance Minister Pranab Mukherjee and Chemicals and Fertilisers Minister M.K. Alagiri.

Doubts are already being expressed, both within the government as also user industry, over the modus operandi followed by the GoM to fix the ethanol prices.

As against the price fixed for domestically produced ethanol, the cost of imported ethanol is comparatively lower at around Rs 25.50 a litre.

“It is an arbitrary price hike, which is not supported by any pricing policy,” a UPA minister said, requesting anonymity.
What is even more surprising that instead of following a transparent market mechanism, the increase in ethanol prices, as
per sources, was decided by the GoM through negotiations, and not reason.

“Oil companies wanted a price of Rs 23-24 a litre,” a senior government official said. This is in tune with the imported price of ethanol. “But ethanol producers wanted Rs 28 and following intervention of the petroleum ministry, the price was finally fixed at Rs 27.”

The cost of this largess will be borne by state-owned oil marketing companies that have now been mandated to mix 5 per cent ethanol in petrol as part of the government’s ethanol-blending programme (EBP).

India’s largest oil refining and marketing company Indian Oil Corporation will bear the biggest brunt. “The move (price hike) will impact the oil companies already reeling under huge financial burden,” said its Chairman and Managing Director B.M. Bansal.

Within the GoM, Alagiri’s ministry had all along opposed the increase, saying it would affect demand of liquor and chemical companies — the two main consumers.

“In view of the shortage of alcohol being faced by ethanol-based chemical industry, implementation of the mandatory EBP
(ethanol-blending programme) may be deferred,” a ministry note to the GoM had said.

Additionally, “the savings on the oil import bill by mandatory blending would be neutralised as approximately Rs 4,500 crore would be needed to import chemicals,” the note, a copy of which is with Hindustan Times, said.

“It is an adhoc mechanism followed by the GoM and a pricing policy should have governed this,” senior BJP leader and former petroleum minister Ram Naik told HT.

State-owned oil companies — Indian Oil, Bharat Petroleum and Hindustan Petroleum —are of the view that the price hike “alone” would not ensure the implementation of the EBP for petrol, as product availability to oil companies is not assured.