The reduced output could add to food inflation and discourage New Delhi from allowing sugar exports, supporting global prices which are already near their highest in more than a decade.

Higher domestic prices will, however, improve margins for producers such as Balrampur Chini, Dwarikesh Sugar, Shree Renuka Sugars and Dalmia Bharat Sugar, helping them make payments on time to farmers.

The western state of Maharashtra, which accounts for more than a third of India's sugar output, could produce 9 million metric tons in the 2023/24 season (which begins on Oct. 1), down from 10.5 million tons in 2022/23, said B.B. Thombare, president of the West Indian Sugar Mills Association.

"The sugar cane crop didn't receive ample rainfall during the crucial growth phase this year. In almost all districts, the crop's growth is stunted," he said.

Maharashtra, which often surprises the global sugar market with wide swings in production, received 59% lower rainfall than normal during August.

Maharashtra's sugar commissioner Chandrakant Pulkundwar said he had been informed by representatives from sugar mills during a review meeting that cane yields would be lower this year due to a prolonged dry spell and higher temperatures.

The crop badly needs good rainfall in September to limit damage caused by the dry spell, Pulkundwar said.

India is likely to receive an average amount of rainfall in September, the state-run weather department has forecast, after the driest August in more than a century.

Maharashtra's output is crucial to India's ability to export, making the outlook for overseas shipments dismal for the coming season, a Mumbai-based dealer with a global trading house said, declining to be named due to his company's policy.

In 2021/22 Maharashtra produced a record 13.7 million tons, allowing New Delhi to export a record 11.2 million tons.

As Maharashtra's output fell to 10.5 million tons in 2022/23, India curtailed exports to 6.1 million tons.

New Delhi is expected to ban mills from exporting sugar in the season beginning October, halting shipments for the first time in seven years, three government sources told Reuters last month.

(Reporting by Rajendra Jadhav; Editing by Simon Cameron-Moore)

By Rajendra Jadhav