India has steadily raised the price that sugar mills must pay for sugarcane
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Critics say the recent surge in sugar prices is the result of the government’s ethanol push. The argument is straightforward: by diverting sugarcane towards ethanol to meet the E20 target, the government reduced sugar availability and is now importing sugar to solve a problem it created.The government rejects this argument. It points to lower-than-expected sugar production, crop damage, festive demand and speculation, and says the share of sugar diverted to ethanol has actually fallen from around 12 per cent in 2022-23 to 9 per cent in 2025-26. The government is right about one thing: The immediate backdrop to the current price surge is a production deficit. Sugar output is now estimated at 306 lakh tonnes, against an initial estimate of 343 lakh tonnes — a downward revision of nearly 11 per cent.But this is where the debate should move beyond ethanol.Asking whether ethanol caused the spike misses the larger question: Why has ethanol become such an attractive escape route for sugar mills? The answer lies in India’s distorted cane and sugar economics.Cane pricesIndia has steadily raised the price that sugar mills must pay for sugarcane. The Fair and Remunerative Price has risen from ₹230 a quintal in 2016-17 to ₹365 for 2026-27 season. Several major sugar-producing States — for instance, Uttar Pradesh —also announce State Advised Prices (SAP), which are typically ₹25-35 higher than the FRP.There is nothing wrong with ensuring that farmers receive a remunerative price. The problem arises when the government raises cane prices but does not allow mills similar freedom to price and sell the sugar produced from that cane. When sugar prices rise, it intervenes through monthly release quotas and export restrictions to improve domestic availability and rein in prices. But mills cannot negotiate lower cane prices with farmers even if sugar prices fall. Therefore, mills face rising and inflexible input costs, while their ability to benefit from higher output prices is constrained, whether in the domestic market or through exports.This creates a peculiar asymmetry that, over time, has made sugar milling an increasingly unattractive and unpredictable business. And that is where ethanol comes in. For a sugar mill, ethanol, with administered prices and a government-backed procurement market, offers something that sugar increasingly does not: revenue certainty. Ethanol prices are administered by the government, while oil marketing companies provide a large, government-backed procurement market. This gives mills a more predictable revenue stream than sugar, whose economics remain exposed to domestic price controls and trade restrictions.Mills are therefore not necessarily choosing ethanol because they want to produce less sugar. They are choosing it because India’s sugar policy has made an alternative revenue stream more predictable.That does not mean ethanol diversion has no impact on sugar availability. It does. As much as 3 million tonnes of sugar — roughly 10 per cent of the total — have been diverted towards ethanol this season. However, the sharp downward revision in sugar output from 343 lakh tonnes to 306 lakh tonnes — raises questions about the reliability of supply forecasts on which policy decisions are based.That matters because sugar policy is highly interventionist. Decisions on exports, imports and domestic availability are based on estimates of how much sugar India will produce and how much it will need. If those estimates change substantially during the season, policy responses can easily end up being mistimed.The question of hoardingThere is also the question of hoarding. The government has cited stocking and speculative activities among the reasons for the recent surge in sugar prices. Industry representatives have also argued that the current rally is driven largely by speculation rather than a genuine shortage.That may be true, but the mere announcement of export curbs can signal a shortage and encourage hoarding and speculation, especially when imports are effectively shut out by a prohibitive 100 per cent import duty.The government has now allowed one million tonnes of raw sugar to be imported duty-free. The decision is itself an acknowledgement of how difficult it is to manage a shortage when trade is heavily controlled. The government restricts exports to protect domestic availability, but a high import barrier simultaneously prevents the market from responding easily when domestic supply tightens.Structural issueThe larger problem, however, is structural. India has tried to solve the sugar industry’s problems through a growing web of interventions: politically determined cane prices, restrictions on sugar exports and controls over domestic sales. These may help manage prices in the short term, but they also distort the incentives mills face.The government should therefore resist cane-price populism and focus instead on improving the economics of the sugar sector. If it wants farmers to receive higher cane prices, the industry must be allowed greater freedom to realise market prices for sugar.That means ending the routine use of export restrictions and allowing trade policy to become more predictable. Export curbs may protect consumers when prices are rising, but they also prevent mills from benefiting when global prices are favourable. The result is that mills are asked to absorb rising cane costs while being denied the full upside from higher sugar prices.The long-term solution lies in better sugar economics — a genuine revenue-sharing mechanism between farmers and mills, freer trade in sugar and, ultimately, much greater decontrol of the sector.The government cannot keep raising input (cane) prices, deny mills the opportunity to benefit from high output (sugar) prices, and then question why mills increasingly find ethanol attractive.Ethanol is not the cause of India’s sugar policy mess. It is a consequence of it — and, increasingly, an escape route for the industry.Singh is a business economist and CEO, Indonomics Consulting Pvt Ltd, and Padakandla is a faculty at IMT, HyderabadPublished on September 11, 2026
