By Rajendra Jadhav and David Brough
MUMBAI/LONDON (Reuters) - India is likely to approve raw sugar export incentives soon, but a cabinet decision risks being delayed by the government's insistence that mills pay cane arrears to farmers.
A decision on raw sugar incentives could weigh on global sugar prices as additional Indian supplies will hit the world market at competitive prices. Mills are holding white sugar stocks and will produce raws if the government sets a subsidy.
Several traders expressed surprise that the Indian cabinet last week did not approve the export incentives for 2014/15 (October/September), expected to apply to 1.4 million tonnes of raws at 4,000 rupees ($63) per tonne.
Traders said the cabinet held back because the Food Ministry wanted mills to make cane payment arrears to farmers. The arrears had arisen because of weak local prices after years of surpluses and as the government raised the mandatory cane price.
Local sugar prices are depressed in India, with huge stocks of around 7.5 million tonnes held at the start of 2014/15.
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Export incentives would hike local prices and mills' income.
"It is not possible for mills to pay the stipulated price to cane farmers unless local sugar prices rise," said Sanjeev Babar, managing director of the Maharashtra State Co-operative Sugar Factories Federation.
"The only way to trim inventory and boost local prices is to sell sugar in the world market. But exports are not possible unless the government restores subsidies."
To help mills, India gave a 2,277 to 3,371 rupees a tonne subsidy for production of raw sugar for export in 2013/14.
"My guess is that the authorities will pass it (export incentives), maybe not this year, but possibly in January or February," said Claudiu Covrig, an analyst with Platts Kingsman.
Analyst Stefan Uhlenbrock of F.O. Licht said he expected export incentives to be introduced as part of a compromise, as mills would not be able to pay all the cane arrears immediately.
"How do you ask people with empty pockets to pay?" he said.
An export incentives deal could take prices below Friday's 2-1/2-month low of 14.96 cents a lb, traders said.
"If harvests go well in Asia, the added India sugar will stress prices," Covrig said.
He said No. 2 sugar producer India could seize market share from Brazil, the world's top exporter, to destinations such as the Al Khaleej refinery in Dubai.
India is likely to produce 25 to 25.5 million tonnes of sugar in the current year, against local demand of 24.7 million tonnes, according to the Indian Sugar Mills Association (ISMA).
($1 = 63.1650 rupees)
(Reporting by Rajendra Jadhav and David Brough; Editing by David Evans)