The Cabinet Committee on Economic Affairs on Tuesday will consider the Food Ministry's proposal to unshackle the sugar sector from government control, a move billed as a major reform.

The Centre controls the sugar industry from production to distribution. The industry has to sell 10 per cent of its output to the government at state-determined prices for sale through PDS. The government also determines the quantity of sugar mills can sell in open market at regular intervals to check hoarding and to keep supplies steady.

The Food Ministry, in light of the C Rangarajan Committee report, has proposed dispensing with both the regulatory release mechanism and the levy system, in other words, the obligation on the part of mills to sell 10 per cent of their produce to the government.

While doing away with the "obligation of levy on sugar mills for sugar produced after October 2012", the ministry proposed that the "requirement of sugar for PDS may be procured by states from open market and states be given a fixed subsidy based on their existing allocations". But getting states to buy sugar at "ex-mill prices will increase the subsidy burden by an estimated Rs 3,120 crore, excluding distribution cost, taking the overall burden to Rs 5,676 crore.

To meet the additional subsidy burden, the ministry has suggested an increase in excise duty. Sources said while states will be permitted to fix prices for distribution at ration shops, subsidy will be frozen on the basis of share of states on levy sugar as at present.

The report had suggested doing away with rules requiring 15 km distance between two sugar mills and obligating a mill to buy cane from growers within the reservation area, but the ministry has left it to the states to take a call on this.