The domestic oil industry is not in favour of the proposed hike in the price of ethanol, a sugar byproduct.
The government is considering fixing the price of ethanol at Rs 27 per litre, far higher than the current domestic price of Rs 20 per litre and imported price of Rs 21.34 a litre.
Oil marketing companies — Indian Oil Corporation (IOC) and Bharat Petroleum Corporation Ltd (BPCL) — stand to lose immensely on account of the ethanol prices, as they are required to blend 5 per cent ethanol with petrol under the ethanol blending programme (EBP).
A proposal is under consideration to raise is to 10 per cent.
"The move will only benefit the sugar industry," said a senior oil company official requesting anonymity. "For us, this would mean an additional outgo of nearly Rs 600 crore to procure around 80 crore litres of ethanol for mixing it with petrol under the government’s 5 per cent ethanol blending programme."
Under the proposed 10 per cent EBP, these revenue losses would double to Rs 1,200 crore, he said. Moreover, with the de-regulation of petrol prices, it is unjustified for the government to fix the price of ethanol, he added.
"It should be left to market forces to decide the prices. We will only be able to get ethanol at competitive prices, which would be much lower than the proposed Rs 27 a litre price to be fixed by the government."
The chemical industry has also strongly opposed the move raise prices of ethanol.
In a July 1 letter to Finance Minister Pranab Mukherjee, who heads the five-member Group of Ministers that is discussing the matter, the Indian Chemical Council (ICC), the apex body representing the chemical industry, has asked the government to set up a market-determined mechanism for fixing ethanol prices rather than fixing it on an ad hoc basis for EBP.
It said that the Rs 27 per litre ethanol price would result in a major outgo of funds for oil marketing companies since they would have to pay far more than the prices of imported or domestic ethanol.
The ICC also noted that the domestic ethanol prices had fallen due to higher production of the sugarcane crop in 2009-10.
"If the ethanol is available in the range of Rs 18-20 per litre in the open market, we fail to understand why the price for ethanol can be fixed by the government for EBP at Rs 27 per litre," the ICC letter, a copy of which is with Hindustan Times, said.
It pointed out that the interim price of Rs 27 per litre was fixed at a time when ex-mill sugar prices hovered around Rs 38 per kg.
In the current year, sugar production is expected to touch 18.5 million tonnes from 14.7 million tonnes in the previous year, resulting in a drop in ex-mill sugar prices to Rs 25 a kg.
For the implementation of the programme, the government has made provisions of excise duty exemption on the ethanol component of the blended fuel.
This is aimed at reducing losses of oil companies and thereby benefiting consumers.
The increase in the price of ethanol, however, would result in an unintended flow of the subsidy towards ethanol suppliers, resulting in an increased loss to the exchequer, the ICC said.