Mumbai: Weak sugar prices and hopes of a bumper output may prompt India to speed long-pending reforms in the sector in 2010/11, though the politically sensitive nature of the commodity and double-digit food inflation may impede change.

The world’s biggest consumer of the sweetener is likely to produce over 25 million tonnes sugar in the year ending September 2011, compared with just 18.8 million tonnes a year ago.

The government now controls the cane price, directs mills to sell a certain part of output at a big discount for welfare schemes, sets the quantity to be sold in the market and imposes limits on stocks that can be held by big buyers.

Sugar millers, whose profitability is affected by the current system, are lobbying hard against it.

Here are possible ways the government could take to free the sector, to aid millers in a year when realisations from core sugar operations are likely to be weak.

Will India allow exports?

Probability: Very high

The country is likely to have a sugar surplus of 7 million tonnes in 2010/11 with total supplies seen at more than 30 million, including the carry-over stocks from the previous year.

Even if India aims to maintain the opening stock at 4 million tonnes for 2011/12 season, it will have 3 million tonnes of exportable surplus.

Despite thin production last year, the government managed to keep prices artificially low by curbing exports. In the July-Sept quarter, the market price fell below the cost of production, pinching millers’profit margins.

Overseas prices offer a premium of more than $225 per tonne over domestic prices. International sugar prices are ruling near 30-year highs, but if the export ban continues, prices could fall as much as 20%.

This would be in addition to a fall of more than a third from the record hit early this year.

As a result, millers would find it difficult to meet cane growers’ demand for a higher cane price, further hurting profits.

Will government cut levy quota or pay a higher price?

Probability: Likely

In 2009/10, the government doubled the quantity of sugar millers have to sell at a discount for welfare schemes to 20%, due to lower output, but it restored the limit to 10% in 2010/11.

Still, millers have been lobbying to abolish this system. While they agree to the 10% quota, they are demanding to be allowed to sell at market rates. The government will probably trim the levy sugar quota and also raise the levy sugar price.

It set the price of levy sugar at Rs17.5 a kg, lower than the production cost, but it may raise the price to a level where mills do not incur losses.

However, the government’s ballooning fiscal deficit owing to food and fertilizer subsidies could limit steep measures.

Will government tweak non-levy sugar release mechanism?

Probability: Likely

India decides the quantity a mill can sell in the open market every month, also called non-levy sugar quota.

Since prices have been stable for the past three months and the country is set to reap a bumper crop this year, the government may change the release mechanism by switching to a quarterly cycle to test how the market works without controls.

But it is unlikely to give mills a free hand as food inflation is still in double digits, one of the biggest concerns for the government.

Will it allow mills to decide cane price?

Probability: Unlikely

The cane price makes up more than half the cost of sugar production for mills.

The federal government fixes the minimum price mills should pay farmers but usually state governments raise prices further to win over cane farmers, who form the bulk of their vote bank.

Millers have been demanding that the cane price should be market-driven so that they can control input costs.

However, very few legislators, including those in the ruling Congress party, are in favor of decontrolling the cane price.

The government is unlikely to make any changes in the current cane pricing mechanism as it may invite political backlash in Uttar Pradesh and Maharashtra, which make up more than 20 percent of lawmakers in the lower house of parliament.