(Adds market reaction, prices in paragraphs 8-11)
By Mayank Bhardwaj
NEW DELHI, April 4 (Reuters) - India has taken steps to remove curbs on domestic sugar supplies after months of debate as the world's second-biggest producer hopes to iron out sharp swings in output that have triggered volatility in global prices.
India, the biggest sugar consumer, will no longer force mills to sell sugar to the government at a discount and will not limit the amount they can sell in the open market, Food Minister K.V. Thomas told journalists on Thursday after the cabinet agreed the changes.
The restrictions were in place partly to keep a lid on local prices and maintain cheap supplies for India's half a billion poor, and partly as a legacy of a planned economy in which the state regulated most sectors.
Analysts have said the tight regulations have caused sharp swings in output, which have led to large-scale imports and exports every few years. India's frequent imports and exports can trigger volatility in global prices.
"By arriving at the decision in the cabinet, we've kept the interest of all stakeholders - farmers, consumers and the industry - in mind," Thomas said.
Thomas and Farm Minister Sharad Pawar, who previously sparred over trade policies, have both supported freeing up the sector after a report in October 2012 recommended lifting curbs.
Until now, the government has decided the quantity of sugar mills can sell in the open market and has bought 10 percent of their output at a big discount. Thomas said the government could review purchasing policy after two years.
Deregulation of the world's biggest sugar market is likely to end a boom-and-bust cycle in plantings, although in the long term farmers may seek to increase revenue by increasing output, analysts said.
"You might see lower volatility (in Indian production cycles) if the Indian sugar industry is tied more to international prices," said Keith Flury, a senior soft commodities analyst with Rabobank in London.
In New York, prices are languishing near three-year lows below 18 cents per lb, close to break-even for higher-cost producers, as the global market braces for a hefty global surplus amid record production and stagnant demand.
May raw sugar on ICE Futures U.S. settled up 0.17 cent, or 0.97 percent, at 17.67 cents a lb on Thursday, recovering from their lowest levels since July 2010 hit a day earlier. In London, May white sugar on Liffe slid 50 cents, or 0.10 percent, to $504.4 a tonne.
The sugar sector reforms follow changes in other sectors such as steel and cement as well as other measures such as raising the price of subsidised fuels to cut the budget deficit and opening up the retail sector to foreign supermarkets.
Some government officials had argued that costs of food subsidies would go up if the sector was liberalised, because the state would have to buy sugar on the open market, further fanning food inflation, which is above 11 percent.
As a result of the reforms, the government's bill for supplying sugar at cheaper rates to the poor will rise to 53 billion rupees ($966.4 million) from 26 billion now, Thomas said.
But he added that there would not be any extra burden because the food and farm ministries have proposed raising the excise duty, or production tax, on sugar by 1.5 rupees per kg.
The finance ministry will decide on any changes to the production tax, Thomas said on Thursday.
India, ranking second only to Brazil, is expected to produce at least 25 million tonnes of sugar in the year through September, Thomas has said, while annual consumption is about 22 million tonnes.
India has turned into a net importer of sugar for the first time in two years, despite surplus stocks at home, as global prices have slumped. Millers have demanded an increase in the import tax to curb cheaper imports. ($1 = 54.8450 Indian rupees) (Additional reporting by Chris Prentice in New York and David Brough in London; Editing by Jo Winterbottom, Jane Baird and Jim Marshall)