Opportunity for rural development

Biodiesel can be produced from any vegetable oil. While leading producers Germany and France accept the high cost of making it from rapeseed, countries such as Indonesia and Brazil sacrifice rainforest for soya and palm oil plantations. India’s biofuel industry, on the other hand, uses the non-edible oil of jatropha curcas and pongamia pinnata.

These oil trees grow in poor, non-irrigated soil and thus do not compete for space with other crops. They also make for a better CO2 balance because they are mostly grown without fertiliser or irrigation, both of which are energy intensive. Moreover, cultivating these trees poses no threat to India’s forests. To the contrary, the jatropha and the nitrogen-fixing pongamia, in particular, are good for afforestation measures.

Multiple benefits

At present, biofuel crops are hardly produced on fertile farmland, so their cultivation does not replace crops that would supply food. In India, biofuel production has many advantages because it caters to two of this emerging economy’s primary needs: growing demand for energy and sustainable rural development. Oilseed cultivation can
– bring private and public investments to rural areas,
– help to diversify farming activity,
– create additional sources of income, and
– make sustainable use of resources.

Despite increasing rural exodus and urbanisation, the majority of Indians still live in rural areas. Sixty percent of the economically active population work in agriculture, a sector which so far is not benefiting from India’s high growth rates. The industrial and service sectors expanded by 11 % in 2006-2007; agriculture grew by a mere 2.7 %. Sustainable investment and higher productivity are urgently needed in rural areas. Jatropha and pongamia plantations can help to reclaim degraded farmland as well as reforest woodland, making the soil commercially productive.

By producing biofuel, moreover, India will become less dependent on energy imports, and the trade-balance deficit will shrink. Because of the country’s vigorous economic growth, demand for energy is rising. At the same time, crude oil prices on the world market are very volatile. This summer, oil accounted for around 45 % of Indian imports, and thus contributed massively to the country’s trade-balance deficit of around five to six percent of GDP.

Biofuels would also contribute to reducing greenhouse emissions. Less fossil fuel would be used, and carbon sinks would be created through afforestation. To profit from international emissions trading, India’s would only have to have its carbon savings certified. India’s biofuel industry is still in its infancy. Two factors are crucial for its future: the efficiency of the sector as a whole and the organisational modalities of value chains. Biofuel production is not commercially viable at present, partly because conventional diesel is heavily subsidised in India, and its environmental impact is not factored into the price. The production of biodiesel would currently be feasible at a retail price of around 45 to 50 rupees per litre. But to give it a competitive edge over conventional fuel, the price would need to be around 25 rupees a litre.

Because so many Indians rely on cheap fuel, there is no chance of policymakers reducing fuel subsidies substantially anytime soon. Moreover, jatropha and pongamia plantations are not very productive. Though these trees have been used for decades, systematic cultivation of suitable varieties still needs to be researched. Although trees planted in poor soil bear fruit, yields are low. So both small farmers and big agriculture businesses are cautious about investing in biofuel plantations. However, it is anticipated that research and development in the years ahead will not only improve the size of harvests and the oil content of the seeds. The production and investment costs of oilseed cultivation, moreover, are expected to go down.

Demand for biofuels will grow nationally and internationally. Oil reserves are limited, and energy demand will keep rising, so, sooner or later, the new technology will gain a competitive advantage. Industrialised countries have already created a lucrative international market. The EU Biofuel Directive, for example, targets a 10 % admixture by 2020.

Three dominant models

Economic viability, however, will not, in itself, mean that biodiesel production leads to inlcusive and sustainable rural development. That will depend on how cultivation is organised and how value chains are structured. India is a huge country and has many federal states. Accordingly, various kinds of value chain are emerging with different effects. The three main types are:

State-driven cultivation: Nearly half of India’s land is under state control. Large areas – especially woodland – are degraded, neither used for farming nor forestry. According to the government, 7.2 million hectares could be used for cultivating biofuel plants. The cost of seed, fertiliser and labour – the whole investment risk, in other words – is borne in full by the government. Some plantations are huge monocultures, others based on intercropping and yet others small plantations on public land. Typically, the committees in charge of the plantations are local, and therefore state-owned cultivation is also serving decentralisation of decision making. Local people pick the crops and sell the harvest. In many instances, the jatropha harvest is gathered by village women, thus providing an additional source of income for landless labour. Large areas of degraded land are made productive again. But if the state interferes too much in the biofuel market, the sustainable development of the sector can be impeded. The state government of Uttarakhand, for example, sought a deal with a single manufacturer, promising to sell all jatropha seeds grown on state-owned land for 3.50 rupees a kilo. But hardly anyone is prepared to grow biofuel trees for so little money. In this case, market dynamics have been hampered by a lack of demand-side competition and an ill considered public-private partnership.

Cultivation by small farmers: Small farmers plant oilseed on private land. Some create larger plantations on fertile ground. The problem is that less food may be produced as a result. Extensive cultivation on arable land is rare at present because more money can be made from most other crops. But if energy prices rise or the productivity of biofuel plants increases, competition with food will become an issue. In some states – Tamil Nadu is an example – contract-farming of biofuel trees is already developing. Private investors guarantee relatively high prices for harvests, thus stimulating production. From a development-policy viewpoint, the additional income of farmers, however, needs to be weighed against risks of food scarcity. At present, small farmers have mostly confined themselves to cultivating jatropha and pongamia in hedgerow plantings, in mixed crops or on previously unused, degraded land. Therefore, they indeed enjoy an additional source of income that does not crowd out food production.

Commercial cultivation: Private entrepreneurs invest in large-scale plantations. Since they bear the investment risk, they want to maximise profits. In rural areas, commercial cultivation paves the way for investment in both agriculture as well as processing businesses. Trees are grown on private land, sometimes even making productive use of plots held for speculation purposes. On the other hand, efforts have been made in Chhattisgarh to lease government land to state-owned oil companies. Both models create new sources of employment for rural people. However, poor communities have been illegally using government land for subsistence purposes and livestock farming, so they are now at risk of losing their livelihoods. It remains to be seen how and whether the government takes account of them and which form of land use benefits communities most in the long run.

Regardless of how biofuel plantations are organised, the harvest can be processed and utilised in two ways. If processing is centralised, the fuel will probably be sold on the international market or utilised in the national transport sector. An example of decentralised processing is found in Karnataka, where a network of decentral oil mills already exists. The state government of Chhattisgarh has even embraced a strategy of setting up oil mills and esterification plants in all districts in order to promote the local use of biofuels. There are village-level models of producing electricity from biofuels. Such decentralised utilities improve power supply, and the local people benefit.

Sustainability matters

Biofuel production certainly offers opportunities for rural development, but the opportunities will differ depending on how value chains are organised. The risks are that
– poor, but illegal land users will be displaced, and
– that biofuel plantations, once they become more profitable, will crowd out food production.

So far, the three models described above have been applied to only a few hundred thousand hectares. A new law sets the target of mixing conventional diesel with 20 % biodiesel. That would call for around 11 million hectares of land to be used for biofuel production – something India is a long way from achieving. Whether the oil-tree initiative will succeed is still not clear. Although there have so far been only a few isolated cases of jatropha and pongamia being grown instead of food crops, the Indian government’s initial enthusiasm has faded in the light of the current debate on food prices.

The direction in which the biofuel industry develops in India will hinge crucially on the policies pursued at national and state levels. What is needed are intelligent regulations that promote competition and, at the same time, protect the poor and the landless. India has now reached the point where value-chain models have been operational for long enough to appraise their economic, environmental and social sustainability. Several state governments have drafted sensible policies, which need to be supported and refined. Pragmatic approaches are more promising than the ongoing ideology-driven, polarising debate on biofuels.