The move smacks of impropriety and is threatening to snowball into legal dispute, manufacturers said. The government in a May 7 gazette notification stumped the sugar industry with the reduction, especially after it incentivized sugar mills to get into raw sugar exports to negate excess stocks. "The sugar industry is not only surprised but highly disappointed with the reduction in the rate of incentives for the period from April 1 to May 31, 2014," Abinash Verma, director general at Indian Sugar Mills Association or ISMA wrote in a letter to the food secretary.

"A change in position by the government without any notice or any ground whatsoever, in contravention to the provisions of the gazette notification (law prescribed in this regard) has created massive confusion in the market and a sense of betrayal amongst the millers of the country," ISMA's letter said.

After three years of surplus production and another expected surplus season in 2013-14, sugar prices were below their costs of production, mills were incurring losses, there were issues of cash flows and it was feared that cane price arrears would cross alarming levels delaying farmer payments.

After several meetings of state chief ministers and government with the sugar industry, a fiscal package and other measures were announced to mitigate the losses faced by the industry, which in turn would result in prompt repayment of dues to sugarcane farmers.

Subsequently, loans were given out to sugar mills against their excise duty payments of last three seasons, the group of ministers also said that incentives would be given out for raw sugar production to encourage mills to diversify their product mix and cater to the export market where the demand was more for raw sugar. It was also decided that the incentive rate would be re-calculated every two months, taking into account the rupee-dollar exchange rate.

"This is an indication of the fact that the operating ministry can overrule the decision of the cabinet. It is yet another example of the UPA's problem of good ideas and bad implementation," said A Vellayan, executive chairman, Murugappa Group, the makers of Parry Sugar.

"Companies will be affected as it hurts the credibility of India with foreign buyers who have contracted. There is no clue how such a calculation was made. ISMA has written to the minister regarding this and unless a decision is taken, the industry will have no option but to go to the court," Vellayan said.