2026-27 supply season: Government sets sugar diversion for ethanol to zero. Here's why

In a major policy shift aimed at curbing domestic sugar inflation and stabilising market supply, the Indian government has directed oil marketing companies (OMCs) to set sugar diversion for ethanol production at zero for the upcoming 2026-27 supply year.

The new ethanol procurement tender issued by OMCs completely excludes sugarcane juice, sugar syrup, and B-heavy molasses. The decisive move comes as retail sugar prices hit record highs across the country, triggered by reduced rainfall and weak agricultural yields in major sugarcane-producing states like Maharashtra and Karnataka.

By halting the diversion of sugarcane-based feedstocks, the administration aims to maximise sugar output for human consumption, shoring up national buffer stocks ahead of the upcoming festive season. Net sugar production in the previous cycle barely met the domestic requirement of 280 to 285 lakh tonnes, forcing the government to intervene early to prevent local shortages.

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Despite the total bar on sugar-based feedstocks, the government remains committed to its long-term biofuel blending roadmap. Oil marketing companies have invited bids for 11 billion litres of ethanol for the 2026-27 supply year starting in November, fully shifting procurement toward grain-based alternatives. The biofuel program will now rely primarily on maize, broken rice, and surplus foodgrains to sustain blending targets.

Why was the decision taken?

The decision to set sugar diversion for ethanol production to zero for the 2026-27 supply year stems from several critical domestic economic and agricultural factors:

• Cooling record-high sugar prices: Retail sugar prices across India have surged significantly. Eliminating sugar diversion to distilleries ensures that the entire crop yield is routed directly into the sugar supply chain to curb domestic price inflation. 
• Deficit concerns due to poor rainfall: Key sugarcane-producing states, notably Maharashtra and Karnataka, experienced deficient rainfall and uneven weather patterns during the monsoon. This led to lower crop yields and heightened fears of domestic supply shortages.  
• Securing national buffer stocks: Net sugar production in the preceding season barely matched domestic consumption requirements. Setting the diversion limit to zero allows the Centre to build adequate buffer stocks ahead of major demand periods. 
• Pivoting to grain feedstocks: The government is shifting its ethanol blending strategy toward grain-based alternatives. Oil marketing companies are instead sourcing their 11-billion-litre ethanol tender from maize, damaged foodgrains, surplus FCI rice, and lower-grade C-heavy molasses. 

India has reached a landmark phase in its Ethanol Blended Petrol (EBP) Programme, having officially achieved its 20% ethanol blending target (E20) nationwide ahead of the original 2030 timeline.

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Total national ethanol production capacity stands at nearly 2,000 crore (20 billion) litres, with oil marketing companies (OMCs) issuing tenders exceeding 11 billion litres annually to maintain the base 20% mandate.

With E20 fully deployed, the government is laying the groundwork to explore E25, E27, and higher flex-fuel options (up to E85) alongside auto manufacturers.