Unintended consequences: Ethanol-blended fuel may be saving forex, but it is denting food security

The law of unintended consequences suggests that what governments aim for through a particular policy and what they ultimately achieve may be something quite different. Moreover, there may be side-effects that no one may have bargained for.

Exhibit A comes from the laudable policy of the Centre to reduce dependence on imported crude oil by steadily increasing the ethanol content in automobile fuels. The goal is to reach 20 percent.

According to estimates made by the Economic Survey 2025-26, till August 2025, ethanol blending saved India “more than Rs1.44 lakh crore in foreign exchange and facilitated the substitution of about 245 lakh metric tonnes of crude oil.” Ethanol-blended fuel may also have reduced overall urban vehicular pollution.

But this saving has been achieved at the cost of vehicle owners, many of whom have reported lower fuel efficiency and increased wear and tear of some parts. There is, as yet, no study which suggests that the savings on imports are greater than the losses suffered by vehicle owners. One can justify, at least partly, this policy if the gains for the country are greater than the losses to private citizens owning cars that were not built for blended fuels.

A larger tradeoff is, however, the one between food security and energy security. This is primarily because government incentivises ethanol production not on a neutral basis, but on the basis of the feedstock used. If the feedstock is maize, the administered price is higher; if it is rice, it is lower. The rest come of the feedstocks somewhere in-between. Not surprisingly, maize production and acreage are booming.

The Survey points out the consequences of this incentive structure.

“Agricultural outcomes…reflect a rational response to these incentives. Maize has recorded rapid growth in both production and cultivated area between FY22 and FY25, growing at a CAGR of 8.77 percent and 6.68 percent, respectively. During the same period, pulses have experienced a decline in output and acreage, while both oilseeds and cereals, excluding maize, have shown modest growth. The area cultivated for oilseeds grew at a CAGR of 1.7 per cent over the last four fiscal years, and cereals excluding maize recorded a CAGR of 2.9 per cent over the same time.”

Another purpose of incentivising maize as feedstock for ethanol was to prod farmers to shift from rice (which is now grown in excess and also uses up more water than maize), but this has simply not happened. Says the Survey: “Shifts in cultivation patterns are particularly visible in states such as Maharashtra and Karnataka, where maize increasingly competes directly with pulses, oilseeds, soyabean, millets, and cotton for land, water, and labour. The expected reduction in paddy acreage has not materialised.”

This implies that from a food security perspective the ethanol pricing policy has led to some adverse developments, as farmers are less inclined to expand cultivation of pulses and oilseeds which are critical in the average Indian’s food intake. And rice mountains are refusing to come down. In the first week of February 2026, our rice stocks were surging at nearly 43 million tonnes, nearly three times the prescribed buffer. Food security in pulses and oilseeds is slipping, while cereals are taking up the bulk of the taxpayer’s funds. The forex savings on imported crude may well be slightly neutralised by imports of pulses.

Even if one were to ignore the complaints of vehicle owners, there is a clear tradeoff between energy security and conservation of foreign exchange reserves and food security. We need to rethink and recalibrate our incentive structures.