Biofuel is any fuel that is derived from biomass - recently living organisms or their metabolic byproducts, such as manure from cows. It is a renewable energy source, unlike other natural resources such as petroleum, coal, and nuclear fuels.

Ethanol is manufactured from microbial conversion of biomass materials through fermentation. Ethanol contains 35% oxygen. The production process consists of conversion of biomass to fermentable sugars, fermentation of sugars to ethanol, and the separation and purification of the ethanol. Fermentation initially produces ethanol containing a substantial amount of water. Distillation removes the majority of water to yield about 95% purity ethanol, the balance being water. This mixture is called hydrous ethanol. If the remaining water is removed in a further process, the ethanol is called anhydrous ethanol and is suitable for blending into gasoline. Ethanol is "denatured" prior to leaving the plant to make it unfit for human consumption by addition of a small amount of products such as gasoline.

Biodiesel fuels are oxygenated organic compounds - methyl or ethyl esters - derived from a variety of renewable sources such as vegetable oil, animal fat, and cooking oil. The oxygen contained in biodiesel makes it unstable and requires stabilization to avoid storage problems. Rapeseed methyl ester (RME) diesel, derived from rapeseed oil, is the most common biodiesel fuel available in Europe. In the United States, biodiesel from soybean oil, called soy methyl ester diesel, is the most common biodiesel. Collectively, these fuels are referred to as fatty acid methyl esters (FAME).

India is the sixth largest and one of the fastest growing energy consumers in the world, with a rapidly growing economy, rising population and an expanding number of middle-class consumers. Due to limited domestic crude oil reserves, India meets about 72% of its crude oil and petroleum products (diesel, aviation fuel, etc.) requirement through imports, which are expected to expand further in coming years. In the last three years, India's oil import expenditure has nearly doubled due to the escalation in global oil prices.

Given the escalation in global oil prices and continued growth in consumption of petroleum products, the consequent burgeoning expenditure on oil imports is of serious concern to the Government of India (GOI). The GOI is looking at ways to limit rising oil imports by promoting use of biofuels.

Biofuels are going to play an extremely important role in meeting India's energy needs. The country's energy demand is expected to grow at an annual rate of 4.8% over the next couple of decades. Most of the energy requirements are currently satisfied by fossil fuels – coal, petroleum-based products and natural gas. Domestic production of crude oil can only fulfill 25-30% of national consumption. In fact, the crude oil imports are expected to total 147 million tons (Mt) in 2006-2007.