MSME Briefing

By Haresh Jhala

After investing ₹40,000 crore on policy promises, ethanol MSMEs face oversupply, debt and shrinking market access.

Government-led investments created capacity. Government inaction created a crisis.

A few years ago, India’s ethanol programme was presented as a national mission. The objectives were compelling—reduce crude oil imports, strengthen energy security, support farmers and build a green industrial economy. Encouraged by government incentives, subsidised financing and an accelerated E20 blending roadmap, entrepreneurs and MSMEs responded enthusiastically.

They invested.

Collectively, private investors poured more than ₹40,000 crore into grain-based distilleries, storage facilities and logistics infrastructure, believing that government policy would create a sustainable market.

Today, many of those investments are turning into stranded assets.

India’s ethanol production capacity has surged to nearly 1,990 crore litres annually, while the domestic market under the E20 blending mandate requires only around 1,050 crore litres. In recent procurement cycles, ethanol suppliers offered 1,776 crore litres against OMC demand of 1,050 crore litres, exposing a market burdened by severe oversupply.

Yet the problem extends beyond excess capacity.

The real concern is that when the market tightened, the system favoured the largest players. Public sector oil marketing companies understandably prioritise logistics efficiency, supply reliability and proven delivery records. However, the practical outcome is that large integrated sugar-based producers continue securing a disproportionate share of procurement opportunities, while newly established grain-based MSMEs struggle to obtain allocations.

What appears to be a neutral procurement framework has effectively created a market where scale determines survival.

The contrast is stark. Large sugar companies can shift between sugar production, ethanol and other revenue streams depending on market conditions. Independent grain-based distilleries have no such flexibility. When ethanol allocations shrink, their tanks remain full, plants operate at a fraction of capacity and bank repayments continue uninterrupted.

Many entrepreneurs feel they are being punished for responding to government policy.

After encouraging aggressive capacity creation, policymakers altered feedstock availability, imposed restrictions, changed market dynamics and then stopped short of creating the additional demand required to absorb new production. The result is an ethanol economy divided into two classes—large incumbents with alternatives and MSMEs trapped in a shrinking market.

The solution does not require another subsidy.

It requires market expansion.

New Delhi must establish a clear roadmap towards E27, E85 and flex-fuel vehicle adoption, creating domestic demand beyond the current E20 ceiling. Equally important, India should immediately permit and encourage fuel-grade ethanol exports, allowing surplus capacity to access global markets rather than remain idle.

India cannot afford to leave thousands of crores of productive industrial assets underutilised. A policy that persuaded MSMEs to invest must also ensure they have a market in which to survive.

Otherwise, India’s green transition risks becoming a cautionary tale—not of environmental progress, but of how small businesses were encouraged to build capacity for a future that never arrived.