Case Study: India

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Biofuel Policy and Potential in India

Due to increased energy demand, India must import energy to meet current demand. There is potential for biofuels to leverage indigenous sources of inputs, potentially increasing income and opportunities in rural areas. Yet the development of a biofuel sector could increase staple food prices and increase food insecurity for poor consumers.

Currently, biofuel production is minimal, accounting for only one percent of global production. Supporting a future bioenergy sector will likely require policy support (such as stimulus packages), community and local interest, technological breakthroughs, and cost-effective feedstock production.

Why is India important in this conversation of biofuels?

Biofuels are potentially important to India because of the significant number of lives they could impact and the economic changes they could cause. India is currently the second most populous nation in the world with a growing population of over 1.147 billion people. As of August 2008, the Indian government and the World Bank both estimated that 26% of India’s population was classified as poor despite efforts made to alleviate the problem. However, there are possibilities to ameliorate poverty through economic growth. According to the International Monetary Fund, the Indian economy is growing at over 7% a year, which means there are opportunities to invest in new industries such as biofuels that could help resolve some of India’s economic problems.

As the fifth largest energy consumer in the world, India additionally provides a good market for biofuels. 70% of its crude oil is imported from around the world and experts anticipate that over 94% of its crude oil will be purchased from abroad by 2030 if energy trends continue on their current trajectory. Biofuels offer potential opportunities to decrease the nation’s dependence on foreign energy imports.

In India, biofuels are an alternative energy option due to the availability of feedstock crops. Since the sugar industry is one of India’s largest industries, sugar cane and its processing byproduct are available for bioethanol production. Other feedstocks such as oil-seeds for biodiesel are not yet widely available, but it is expected that trees such as jatropha curcas that produce these seeds will thrive in India’s climate and environment.

What are biofuel options in India

The term biofuels refers to several different types of fuels, including bioethanol and biodiesel, which are both viable options in India. Bioethanol is the most common form of biofuel. It it likely that India would use molasses, a by-product of its sugar processing industry, to drive ethanol production.

On the other hand, there are major impediments to larger-scale production and use of bioethanol in India including price competitiveness and production limitations. The price of bioethanol must be competitive with oil or other current energy sources in order to be successful. However, current production technologies force biofuel prices higher than those of traditional fuels. One way to lower prices is to couple India’s sugar production with its bioethanol production so that the sugar industry absorbs some of the costs. However, it is likely that additional costs from biofuel production would cause the price of sugar products to rise for the general population. Additionally, bioethanol production from molasses might be hindered by the fact that the sugar industry is volatile as a result of its dependence on monsoons. More specifically, when monsoons are weak, less sugarcane grows and therefore, less molasses is available for bioethanol production. This effect was apparent in 2003 and 2004 when monsoons were more subdued than normal and, as a result, both sugar production and bioethanol production decreased dramatically.

Biodiesel from oil seed plants are also an option for India’s biofuel industry. Recently, Indian scientists, economists, and politicians have become increasingly interested in jatropha, a plant that grows in arid or semi-arid tropical regions, and produces seeds containing anywhere between 21% to 48% oil. It is speculated that jatropha could be the answer to the food-versus-fuel debate because it grows on marginal land or around crops as a protective barriers without competing with them for natural resources. Moreover humans, and animals for that matter, do not normally eat jatropha, and thus there is little concern that jatropha will be diverted from food markets to fuel the energy industry.

There remain numerous questions about the feasibility of commercial jatropha production, because the concept to use the crop for biodiesel is relatively new. For example, how well could it be grown for commercial production and how efficient can the conversion from oil seed to biodiesel be? However, at a glance jatropha seems like a potentially viable option to research for India’s biofuel industry. Initial studies show that the oil from jatropha might support a good fuel economy because its production is economically competitive with diesel when fuel prices are high. In 2006, jatropha production was $0.47/liter while oil production was $0.46/liter.

Debate: Food vs. Fuel

Over the past few years, biofuel critics have argued that investments in biofuels will decrease food security in developing nations where there are already many people who cannot afford to buy food at current prices. It is expected that if grains and other staple foods are diverted from food markets into energy markets to produce biofuels, food prices will rise. As a result, basic sustenance will be less accessible to the poor around the world.

India is particularly vulnerable to food security issues. As of 2008, the United Nations Development Programme estimated that over 27% of Indians live below the poverty line and lack access to enough calories per day to sustain a healthy lifestyle. As recently as 2006, India imported 2.2 million tons of wheat in order to ensure food availability. If more food is siphoned off from the food markets into the energy market to grow the biofuel industry, it is likely that the food-versus-fuel conflict will come into play.

Sugar cane and edible vegetable oils such as palm oil are two of the most common feedstocks for biofuel production around the world. However, there are concerns that India must steer clear of these two feedstock sources in order to avoid serious problems of food insecurity. India is already the largest consumer of the sugar in the world. If sugar were then additionally diverted to the biofuel industry, the food industry would be less able to meet its demand. UN researchers suggest that sorghum and tropical sugar beets would be better suited to drive India’s bioethanol production. Similarly, India’s demand for vegetable oil already outstrips its supply. However, non-edible oils could be used instead to produce biodiesel.

Pro-biofuels experts claim that the impacts of biofuels can be mitigated through two major types of technological innovation. First, nations can focus on cellulosic biofuel technologies that use byproducts or waste products of food and other crops to create biofuels. Technologies necessary for this option to be feasible are just starting to become available but are relatively expensive. Similarly, investments in existing technologies that increase agricultural productivity could soften the impact of biofuels especially when coupled with technologies for cellulosic biofuel production. The choice does not necessarily need to be between food and fuel. However, the elimination of this conflict is highly dependent on India’s willingness to invest in new technologies.

Debate: How will biofuels impact poor and small farmers in India?

The biofuel industry could have significant positive impacts on the health, education, and productivity of the rural poor population in India. Some anticipate that the biofuel industry will create new jobs for the poorest communities in India because biofuel production requires mostly unskilled labor, which is widely available in rural areas. Although many people worry that biofuels decrease food security, others counter that the opposite is true. Their argument is that food security is determined by one’s ability to purchase food at the market price rather than by the abundance or shortage of food. If higher incomes result from increased employment, the rural poor will have more access to food even if prices rise. Furthermore, biofuel production has the potential to increase access of rural communities to cleaner, more reliable energy.

Although biofuel production has the potential to benefit India’s rural poor, there is also the possibility of causing harm. If land is transferred from its current use for biofuel production, the poor will benefit from employment but may risk losing fodder for their livestock or materials for their houses and other structures. The Indian government cited that there were over 30 million hectares of wasteland available for jatropha production around the nation. However, a lot of this wasteland is also considered Common Property Resources (CPR), land that is collectively owned by rural villages and communities. This land is generally a source of food, fuel, fodder, timber, and thatching for the poorest in India. One study reports that 12-25% of poor household incomes depend on CPR.

The wellbeing of the urban poor could be particularly endangered by the biofuels, in contrast with the rural poor who may have some opportunities to benefit. Although the urban poor do not risk losing their land to biofuel production, they don’t gain employment opportunities or income increases from an expanded biofuel industry either. If India produces biofuels from food commodities on a large-scale or if other countries around the world decide to do so, global food prices will likely rise. The rural poor may be less affected by increased food prices as a result of their ability to produce their own food and live outside the global food market or due to their increased income as a result of biofuel production in rural areas. The urban poor have more at stake because their food security is more tightly linked to fluctuations in the global food market and because they are unlikely to reap any benefits or additional income from the biofuels industry.

There are also numerous questions concerning exactly who will benefit from the biofuel industry — small farmers or large corporations? As a result of the fact that so little is known about jatropha, small farmers are unlikely to risk planting jatropha, which will not reap any profits for 2 to 3 years, if at all. They are more likely to plant more conventional crops such as sugarcane, which can better ensure benefits but potentially endanger the food security of the entire poor population. For these reasons, larger companies might become the larger stakeholders in the biofuel industry, which could lead to greater losses but also greater gains. The question seems to be, whether biofuels widen or narrow the inequality gap?

Jatropha: Myth of Miracle

Some have hailed jatropha as the answer to India’s energy conundrum. According to many sources, jatropha has long been used as a small-scale energy source. In Central America, where it originated, people often use the plant to create lamp oil. Proponents expect this small shrub-like plant to fuel the biofuels industry, supporting energy security and independence of the future. However, how much is actually known about this plant, and why are politicians and scientists alike considering it to be the “Holy Grail” of biofuel feedstocks.

Jatropha has numerous advantages over other feedstocks, which supports the notion that jatropha could be used as the primary feedstock for Indian biodiesel. The plant species grows on wastelands with minimal water or nutrients, and has a relatively high oil yield per plant. According to estimates, one hectare of jatropha could yield about 1,892 liters of oil. Additionally, the plants produce seeds for a predicted 30 years. Jatropha contributes negligibly to the “Fuel vs. Food” debate because it is not edible for humans or other animals. Thus growing jatropha for biofuel production neither pulls away nutrients from the food market nor requires valuable croplands due to its preference for arid soils.

Although jatropha comes with a host of positive attributes, it is important to keep in mind that decision-makers lack crucial information about jatropha, which is still essentially a wild plant. Questions still remain about how much water the plant requires in its first years of growth and whether plant density changes its growth potential. Since jatropha has never been fully domesticated, it is more difficult to predict its yield year after year. Additionally, it still remains to be seen whether or not jatropha will actually the poor. Experimental results indicating low yields and financial returns have shed doubts on the pro-poor jatropha miracle. As a result, it is necessary to study the plant in depth in order to better understand its optimal growing environment and growth potential. Experts are therefore hesitant to recommend heavy investment in jatropha for commercial use before the plant is fully domesticated. Different jatropha varieties need to be explored in the future before it is planted and harvested like a conventional crop. However, in the meantime, jatropha can be used as a good fallow crop because it stops ground erosion and increases water storage in the soil.

The Policy Environment

Much support for Indian biofuels has come directly from the Indian national government. Its pro-biofuels policy agenda emphasizes an optimistic outlook of biofuels, indicating that these alternative fuels will bring greater energy security and independence to the nation. The development of a domestic biofuel market is anticipated to improve lives of the poor by creating more rural employment opportunities. Improved rural employment rates have the potential to have cascading effects that will contribute to the overall improvement of the health and wellbeing of the population. Lastly, the government hopes biofuels will be more environmentally friendly than other current energy sources by decreasing air pollution and possibly greenhouse gas emissions.

The government started moving its agenda on biofuels in 2003 with the introduction of the National Mission on Biofuels and the Ethanol Blending Programme (EBP). Under the National Mission, jatropha would be planted on 500,000 hectares of government land, and later expanded onto more land. Simultaneously, the government hoped to begin privatizing the biodiesel industry to become completely separate from the government by 2012. However, these plans did not come to fruition as a result of limited financial and policy support. EBP also encountered significant barriers. The program mandated that oil companies produce fuel with 5% ethanol in certain regions of the nation. The program almost immediately grinded to a halt because there were there wasn’t enough ethanol to meet this mandate between 2003 and 2004. Interestingly, the National Mission on Biofuels and EBP demonstrated to private investors that the Indian government is serious about testing the feasibility of biofuels. Numerous sources report that jatropha planting and other biofuel development has started despite unsuccessful government programs.

In September 2008, the Indian government announced the National Biofuels Policy. The policy aims to blend conventional fuels with 20% bioethanol or biodiesel by 2017. The government recommends that biodiesel be produced only from non-edible oil seeds, preferably those grown on marginal lands so as to minimize the food-versus-fuel debate. Emphasis is placed on developing the domestic growth and production of non-edible feedstocks and their resulting oils by creating a Minimum Support Price and Minimum Purchase Price, as well as by removing all taxes and duties levied on domestic biofuels. Finally the National Policy calls for the creation of a Bio-Fuel Steering Committee, which may lend this project significant political clout.

Barriers to the Biofuel Industry in India

Although biofuels may be a good energy alternative option in the future, there are a lot of barriers that keep the Indian biofuel industry from getting off the ground in the present. Experts from all over the world have a spectrum of opinions about the most important barriers that prevent the biofuel industry from growing rapidly. The following are a few major stumbling blocks.

From a logistical standpoint, India is not ready to invest heavily in fuels because the political and physical infrastructure necessary to support the industry currently does not exist. Although the Indian government proposed the National Mission on Biofuels in 2003, the government still lacks the political backing to realistically implement a program of that magnitude. The Mission provides governmental suggestion on developing the biofuel industry. However, there is little policy to make sure these guidelines are followed. Moreover the physical infrastructure to support a proposed biofuel industry of that size is lacking. While there are a significant number of industrial plants that can process bioethanol, there are very few capable of producing biodiesel. In India the demand for diesel is over five times higher than the demand for petrol. Thus if India is serious about biodiesel from jatropha or other oil seed plants, it must invest significantly in acquiring additional and advanced technologies in oil extraction, transesterification, and storage for biodiesel oil. For example, prior to 2006, there were no transesterification plants capable of producing commercial biodiesel. Now there are only a handful of transesterification plants in operation and they do not operate at full capacity. India needs to scale up its efforts drastically if it hopes to produces fuels with 20% biofuel by 2017.

There are environmental barriers and concerns to large-scale biofuel production and use in India. The availability of both land and already scarce water resources may greatly limit biofuels. Currently, it takes 3,500 liters of irrigation water to produce one liter of ethanol from sugarcane. Many experts say that as a result, India must look to drought resistant crops such as jatropha to avoid enormous water shortages as a result of biofuels. However, it is unclear how much water jatropha needs to produce its maximum yield. If jatropha requires a significant amount of irrigation to reach its potential, it is almost assured that water shortages will increase in frequency. It is also possible that the biofuel industry’s demand for water would take water away from food production, which could further exacerbate food insecurity in India. Additionally, it is still unclear whether or not biodiesel from jatropha will help decrease India’s greenhouse gas emissions. Jatropha may be a source or a sink for greenhouse gases depending on numerous factors such as its efficiency in taking up carbon dioxide (which still remains unknown) and the amount of fossil fuels burned to process jatropha into biodiesel (which will depend on the technology and processes used).

On a more local level, the biofuel industry is hindered by Indian farmers’ lack of confidence in biofuels. In order to enlarge the biofuel industry at a significant rate, the Indian government needs to find a way to show that it is serious about the biofuel industry and that it is ready to support small and large farmers’ investments. The government has begun to do so by establishing Minimum Support Prices and Minimum Purchase prices. However, it needs to continue to find new ways to convince farmers to invest.

The Future of Biofuels

In light of the fact that commercial biofuel production and use is a relatively new concept, all stakeholders – including the Indian government, small farmers, investors, researchers — have an array of possible actions and stances regarding biofuels. There are numerous different opinions about what the logical next steps are. The following are a few potential options for India.

Much research is undoubtedly necessary to better understand the capabilities and downfalls of biofuels. A huge number of questions remain and more are still surfacing. For example, whether jatropha will be economically viable compared to oil, whether indirect and environmental costs of biofuels will outweigh the direct benefits, or whether impoverished farmers will significantly benefit, all are still unanswered. Some believe that research needs to come before the Indian government invests major sums into biofuel development policy particularly those policies based around jatropha. Others have indicated that India must work to improve its agricultural practices before it moves forward with the rest of its biofuel agenda.

There are improvements the government could start making in order to give the biofuel industry a solid support system from which it can grow. Advances in agriculture through water saving methods, intercropping, seasonal planting, and crop rotation could create more efficiency in the agricultural sector and therefore increase yields. These improvements could create a variety of positive effects downstream in the biofuel industry and the rest of Indian society.

Investing time and money studying and domesticating jatropha also has potential benefits. The Indian government has indicated through its policies and public statements that it hopes to make jatropha a central part of the biofuel industry. Unfortunately, however, there still is not enough information about jatropha to ensure that the Indian government would get a substantial return on its investment.

India Team and Collaborators

Ramesh Chand

Director of the National Centre for Agricultural Economics and Policy Research
Email: rc@ncap.res.in
Phone: +91 11 258 430 36

Biofuels Project Team Portrait
Dr. Ramesh Chand is the director of NCAP, and has had more than 25 years of experience in research and teaching. His research focuses on agricultural trade policy, and issues relating to India’s accession to the WTO, as well as broader issues of growth and development of India’s national economy.

Praduman Kumar

Former professor and head of the Indian Agricultural Research Institute, New Delhi
National Centre for Agricultural Economics and Policy Research
Email: pkumariari@rediffmail.com
Phone: 91.11.25848731 (x 111)

Biofuels Project Team Portrait
Dr. Kumar’s research interests include: Total factor productivity, demand supply projections, price policy models, small farmers and household food and nutritional security.

S.S. Raju

Senior Scientist
National Centre for Agricultural Economics and Policy Research
Email: raju@ncap.res.in
Phone: 91.11.25848731 (x 111)

Biofuels Project Team Portrait
Dr. Raju’s research focuses on biofuels, agricultural risk and insurance, desertification, livestock economics, agriculture growth and development.

P. Shinoj

Scientist
National Centre for Agricultural Economics and Policy Research
Email: pshinoj@ncap.res.in
Phone: 91.11.25843036

Biofuels Project Team Portrait
The research of Dr. P. Shinoj focuses on various aspects of marketing and external trade of agricultural commodities in India. His research interests also include demand analysis of major agricultural commodities in the country. Presently, he is working on developing a decision support system for commodity market outlook in India as a part of the ongoing research project ‘National Agricultural Innovation Project’.

Karl Rich

Assistant Professor of Economics (AUC); Senior Research Fellow (NUPI)
Agricultural economist at the International Livestock Research Institute, Nairobi, Kenya
American University Cairo
National Centre for Agricultural Economics and Policy Research
Email: karlrich@aucegypt.edu
Phone: +20-2-2615-3184

Biofuels Project Team Portrait
My research interests encompass areas of agricultural and development economics, with particular specializations in agribusiness, supply chain management, animal health economics, and policy modeling. A particular interest of mine has been the application of quantitative techniques to assess the impacts of alternative policy interventions. These tools have been used in the context of studying supply chains in developing countries and building integrative, multidisciplinary models that blend techniques from epidemiology, decision science, and economics. Most recently, this has included research on the costs, risks, and benefits for countries, small-scale producers, and other poor stakeholders that arise from greater compliance with animal disease and food safety control measures necessary to access domestic and international markets.