After a delay of about a month, the ethanol-blending programme has finally started from the country's largest sugar producing state, Uttar Pradesh.
"Ethanol is already being delivered to the depots of oil marketing companies in the state. It should be at the retail outlets by tomorrow," an oil company executive told Business Standard.
Other states across the country are in various stages of negotiation to start blending 5 per cent ethanol in petrol, with Tamil Nadu next in line.
The procurement price for both these states is Rs 21.50 per litre of ethanol, and this is the benchmark for negotiations in other states. The oil marketing companies had been paying Rs 18.75 per litre so far in the nine states (and four Union Territories) that opted for ethanol blending last year.
The final price for oil companies, though, is likely to be anywhere between Rs 26 and Rs 32 a litre, with the addition of transport charges, excise duty (16 per cent), tax on inter-state movement, and the "import" and "export" levies imposed by states.
Export of ethanol from Uttar Pradesh to Delhi, for example, will attract a levy of Rs 1 per litre by Lucknow and an import levy of Rs 2 by the Delhi government.
Some states like Rajasthan have imposed an unrealistic import duty of Rs 6 per litre, which will need to be brought down through negotiations.
While the oil companies said the exercise would be revenue neutral because the landed cost of ethanol was "about the same" as the landed cost of petrol, other users of ethanol will be hit.
Take the chemical industry. According to a former president of the Indian Chemical Manufacturers' Association, the chemical industry is now paying Rs 18 for a litre of denatured spirit. This price is likely to go up to Rs 20, which means an impact of about Rs 188 crore (Rs 1.88 billion). The liquor industry, which consumes about 800 million litres of alcohol annually, is also likely to face a higher price.
At 5 per cent blending, the annual ethanol demand is estimated at about 580 million litres, which is less than half the installed capacity of 1,300 million litres. Industry observers say there is unlikely to be a supply constraint at any point of the sugar-to-ethanol chain. This blending programme will yield Rs 1,247 crore (Rs 12.47 billion) in revenue to the sugar industry.
While gainers like the sugar industry are looking forward to the next step of the ethanol programme - 10 per cent blending starting next October - user industries like chemicals are not only worried about a second round of price escalation, but also about a possible shortage of alcohol.
As for the consumer, it could mean having to retrofit his car, according to the director (technical) of the Society of Indian Automobile Manufacturers, KK Gandhi.