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India is considering curbing ethanol production from sugar cane as the world’s largest consumer of the sweetener battles domestic shortages.

Authorities are studying a proposal to restrict the use of sugar-cane juice to produce biofuel for the current season, according to people familiar with the matter, who asked not to be identified as the discussions are private. No final decision has been made, and plans could still change, the people said. 

The potential move would be in line with government efforts to control domestic food prices before national elections next year, when Prime Minister Narendra Modi seeks a third term in office. India has ramped up restrictions on exports of rice, and recently extended curbs on overseas sales of sugar.

Shares of Indian sugar companies slumped on Thursday. Balrampur Chini Mills Ltd. tumbled as much as 7.6% in Mumbai, extending a loss of more than 7% a day earlier. Shree Renuka Sugars Ltd. was down 5.5%, while Bajaj Hindusthan Sugar Ltd. fell 7.4%. Those moves followed a plunge of almost 8% in New York sugar futures on Wednesday, the most in 10 months.

Poor rainfall has harmed cane crops in India, prompting the world’s second-biggest producer to prolong curbs on sugar exports beyond Oct. 31. Limiting ethanol output would keep sugar inventories in India from falling further, said Michael McDougall, managing director at Paragon Global Markets.

Sugar production dropped more than 10% from a year earlier to 4.32 million tons in the first two months of the season that started on Oct. 1, according to the National Federation of Cooperative Sugar Factories Ltd., a millers group.

The group said earlier this month that, according to government estimates, about 4 million tons of sugar will be diverted to produce ethanol in 2023-24. Therefore, net sugar production during the year will be only 29.15 million tons, compared with 33.1 million tons a year earlier, it said.

While the proposed measure could help tame food inflation, it may have limited impact, the people said. That’s because some ethanol was already sold at a tender earlier this year and will need to be produced, according to the people.

The Food Ministry didn’t respond to a request for comment.

--With assistance from Atul Prakash, Pratik Parija, Megan Durisin and Kevin Orland.

(Updates to add political context in third paragraph, share moves in fourth, and Indian output estimates in sixth and seventh)

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