The central government is looking at various options, including barter trade and export of surplus sugar, in a bid to ease the burden of unsold stocks on sugar mills and help them find money to pay pending cane price dues to farmers.
The proposal would also mean mills offloading millions of tonnes of sugar into the world market at a time when a flood of supplies have pushed down prices to 6-1/2-year lows.
But that would also mean more losses to sugar mills that are already losing crores of rupees in buying sugar cane at high support prices, and, consequently, more burden on the exchequer to support loss-making mills.
In the past six years, government-set prices of sugar cane have soared by 70 per cent, raising the average cost of production of sugar to Rs3,100 per tonne, even as sugar prices have slumped to Rs2,200 per tonne.
Sugar mills in the country are expected to produce 28 million tonnes in the next sugar season starting 1 October, which would push up mills' inventories to 10.3 million tonnes, up from 7.5 million tonnes at the start of the current season.
But, with average annual consumption of 24-25 million tonnes, this would leave a surplus of 3-4 tonnes, adding to the buffer stock.
Sugar exports from the country, however, failed to make any headway despite an export incentive of Rs4,000 per tone. India's sugar exports are expected to be around 800,000 tonnes in the 2014-15 sugar season against 2.2 million tonnes in the previous year.
Higher cane prices have helped the country produce more sugar and remain in perpetual surplus but that has also left mills with huge inventories and Rs14,000 crore arrears in cane prices to farmers.
At a meeting convened by Prime Minister Narendra Modi last week to discuss the crisis in sugar sector, there was also discussion on an additional tax on sugar to prop up domestic prices that have hit six-year lows, officials said.
A final decision on the politically-sensitive issue will be taken by the prime minister at a meeting with ministers, officials and sugar mill bosses, said the two government sources.
The mandatory export rule, which could be introduced from the start of the next crop year, would, however, apply only when output was higher than local demand, officials said.