Faced with its worst-ever financial crisis owing to a glut, the sugar industry is working on ways to mix ethanol with diesel by leveraging new technology that allows ethanol to be directly produced from sugarcane without producing sugar.

The Indian Sugar Mills' Association, the industry lobby group, will take the proposal to Food & Agriculture Minister Sharad Pawar soon, sources close to the development said.

Currently, ethanol is blended with petrol at 5 per cent in most states and a proposal to raise it to 10 per cent is awaiting Cabinet approval.

At 5 per cent blending, 550 million litres of ethanol is required a year.

If the government agrees to the ISMA's proposal, the demand could increase by four times, or 2,200 million litres annually, because the sale of diesel is four times that of petrol in the country.

One snag in implementing the proposal is that the sugar industry's ethanol production capacity is only 1,500 million litres. The new technology, said the ISMA, would meet both expanded ethanol production and a cutback in sugar production.

Internationally, ethanol is blended with diesel in countries like Sweden and Poland. In India, the Karnataka State Road Transport Corporation is running a pilot on ethanol-doped diesel for its buses.

Ethanol reduces the dependence on imported gasoline and, being a green fuel, also reduces environmental pollution.

Sugar prices have fallen almost 35 per cent in the last one year, thanks to the record output of 28 million tonnes in the production season (October 2006 to May 2007).

With bumper sugarcane crops ready for harvest in Maharashtra and Uttar Pradesh, the two of the country's largest sugar-producing states, prices are expected to fall further. Most sugar stocks have fallen 50 per cent or so on the stock markets in the past year.

An official in Indian Oil's [Get Quote] Research & Development division said that an ethanol-diesel blend was unstable and emulsifiers would need to be added to make the blend work.

"Also, manufacturers of fuel-injection systems for cars are circumspect about using an ethanol-diesel blend, which they say will corrode the vehicle's system," he added.

"So far, an ethanol-petrol blend is a good commercial thing. But a lot of work needs to be done before ethanol can be commercially blended with diesel," the official added.