India’s ethanol sector is currently at an interesting turning point. After a few years of rapid capacity expansion and investments made to support E20 blending, the industry is now facing the question not only of increasing production, but also of finding sufficient demand for the available capacity.
On one hand, the existing domestic market is not able to absorb the full ethanol capacity, while on the other hand, higher blending options such as E25 and E30 can rapidly increase demand in the future. Along with this, the rising demand for feedstock, especially maize, has also intensified the debate regarding the use of resources between the poultry and ethanol industries.
Let us understand this supply-demand gap that has arisen in India’s ethanol sector in detail and know whether the current surplus can turn into a larger growth opportunity going forward.
What’s Happening?
India’s installed ethanol capacity has reached approximately 20 billion litres, and according to the industry, around 4 billion litres of additional capacity can be added this year. In comparison, around 11 billion litres of ethanol is needed annually for E20 fuel blending, while non-fuel sectors such as alcohol, pharmaceuticals and chemicals use around 3-3.5 billion litres.
Due to this gap, a clear market is not available for around 7 billion litres of capacity. Distilleries are currently operating at around 60% capacity, and utilisation is estimated to remain between 65-75% over the next three years. In Maharashtra alone, a surplus of 2.77 billion litres has been estimated.
By August, suppliers had delivered 8.95 billion litres of ethanol to oil marketing companies, while 10 billion litres had been contracted for the 2025-26 ethanol supply year.
Where Can New Demand Come from for Surplus Capacity?
At present, there is no clear mandatory roadmap for higher blending. The E20 programme is at the current level until 31 October 2026, and the government has told the Supreme Court that its long-term impact will become clearer by 2027. There is also discussion in the industry about differential pricing for different blends such as E10, E20 and E85.
Exports are also a limited solution at present because there is a ban on the export of first-generation ethanol, and permission for the export of only second-generation ethanol has been given since September 2025. Non-fuel supply goes to markets such as Tanzania, Angola and Kenya, while Nepal is moving ahead in the direction of 10% blending.
Bio-isobutanol blending in diesel can also become a new opportunity. According to the industry, projects worth more than Rs 3,000 crore can be created from only 2% bio-IBA blending. Non-fuel ethanol accounts for about 18.7% of total demand, while the related extra neutral alcohol market was around 3.80 billion litres in 2025 and is growing at about 5% annually.
Rising Dependence on Maize and the Feedstock Challenge
With the growth of the ethanol sector, the feedstock mix has changed rapidly. The share of maize-based ethanol was 0% in 2021-22, which rose to approximately 37% in 2025-26. For this reason, concern regarding rising feed costs in the poultry sector has come to the fore.
On the other hand, the Distillers Association says that the ethanol industry is not competing with any other sector for maize and that its use supports value addition in agricultural production and energy security. Therefore, two different viewpoints are emerging regarding the availability of maize and its different uses.
According to Fortune India, in ESY26 Cycle 1, the share of grain-based routes was 72%, while sugar-based routes were at 28%. Maize alone accounted for 45.7% of total allocation. The EBITDA margin of grain-based distilleries fell from 9.2% in FY21 to 6.7% in FY25, which reflects the pressure of feedstock costs.
What Does This Mean for Investors?
For investors, the current situation is contradictory. On one hand, additional capacity and low utilisation can put pressure on profitability in the near term, while on the other hand, with higher blending, the same additional capacity can prove useful in the future.
According to Brickwork Ratings, India’s current distillation capacity is 18.25 billion litres. If E20 continues until FY31, demand can remain around 14.3 billion litres and capacity utilisation around 78%. In an E25 situation, demand can reach 17.9 billion litres and utilisation around 98%.
The sector had also received sanctioned financing of more than Rs 42,000 crore by October 2025. In such a situation, for investors, not only capacity growth, but also feedstock mix, OMC allocation and capacity utilisation can become more important indicators.
What’s Next?
Until FY31, the picture of the ethanol sector will mainly be decided by blending policy. In an E30 situation, demand can reach 21.5 billion litres, which will be around 18% more than the current installed capacity and can create the need for around 3.25 billion litres of new capacity.
In Brickwork Ratings’ three scenarios, FY31 EBITDA is estimated at Rs 5,100 crore, Rs 10,400 crore and Rs 19,200 crore. The related EBITDA margins can be 6%, 8.8% and 12.5% respectively, while revenue can be Rs 85,800 crore, Rs 1.19 lakh crore and Rs 1.53 lakh crore.
Therefore, today’s ethanol surplus is not necessarily a story of permanent oversupply. If blending moves towards E25 or E30, the current additional capacity can be absorbed rapidly. However, its next phase will depend on feedstock availability, cost efficiency and the ability to create new demand.
Disclaimer: This article is for educational and informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The companies mentioned are cited as examples within the context of market developments. Investors are advised to conduct their own due diligence and consult their financial advisor before making any investment decisions.
Investments in the securities market are subject to market risks. Read all related documents carefully before investing.
