* Panel favours steady sugar export, import policy
* Govt should give up fixing quantities mills can sell
* Mills should not be forced to sell 10 pct of output to govt (Adds details, quotes, background)
By Mayank Bhardwaj
NEW DELHI, Oct 12 (Reuters) - India should lift curbs on its tightly controlled sugar sector, an advisory panel recommended on Friday, a step analysts believe will help end cycles of overproduction and shortage and stabilise exports and imports.
The recommendations to free up the sugar sector follow close on several wider reform measures, such as raising the price of subsidised fuel to cut the budget deficit and opening up the retail sector to foreign supermarkets.
India, the world's top sugar consumer and the biggest producer after Brazil, should stop buying 10 percent of mills' output at a big discount to be supplied to the poor at cheaper rates, the prime minister's economic advisory council said.
"Sugar is like any other commodity," panel chairman C. Rangarajan told reporters. "Why should there be so many restrictions?"
The federal government should also stop fixing the quantity mills should sell in the open market, Rangarajan's panel said in its report, which will be submitted to Prime Minister Manmohan Singh for cabinet approval.
Another restriction the panel sought to end was the practice of setting the prices mills must pay to farmers, which leads to some state governments forcing mills to pay farmers a premium over that rate, in order to please a major group of voters.
Many experts say higher minimum cane prices set by the government raise cultivation, and therefore sugar output, reducing retail prices of the sweetener. As sugar prices fall, mills delay payments to farmers.
To protect their income, farmers in turn shift to other crops in future years, leading to scarcity -- and high prices. That cycle forces India to flip between exports and imports.
The panel also favoured a steady trade policy on sugar.
"We should be able to export if global prices are attractive or import when it makes sense," Rangarajan said, arguing against abrupt bans on exports and imports.
India has been exporting sugar for the past two years after a severe drought in 2009 forced it to import large quantities of the sweetener, driving global prices to 30-year highs. (Additional reporting by Rajendra Jadhav in MUMBAI, Editing by Clarence Fernandez)