(Repeats to widen distribution)
* Indian output in year ending Sept. 30 seen falling
* Stocks seen adequate for now - trade
By Rajendra Jadhav and David Brough
MUMBAI/LONDON, May 25 (Reuters) - Indian authorities are expected to hold off before cutting or cancelling a 40 percent raw sugar import duty as a last resort to tackle surging domestic prices as the country shifts from net exporter to importer.
Soaring domestic sugar prices in the world's second-biggest producer, where drought has cut yields in the main growing regions such as Maharashtra, mean that mills will increasingly spurn the export market.
The south Asian nation's production in the current year ending Sept. 30 is likely to drop following two drought years in a row.
The federal government has asked state governments to impose stock limits on sugar to avoid hoarding by traders.
Traders spoke of market talk that India could move to either reduce or cancel the raw sugar import duty.
However, no imminent action was expected.
"I don't think the government will scrap the import duty any time soon," said Rohit Pawar, chief executive of Baramati Agro, which operates sugar mills in Maharashtra.
"Yes, sugar prices have risen in the past few months but now they are running just above production cost. In the past few years mills have incurred huge losses as they were forced to sell sugar below production cost.
"In such a situation duty-free imports can depress local prices and cane payment arrears will start rising."
A government official, who declined to be identified, said, "Right now there is no proposal (to scrap the import duty) on the table."
A Mumbai-based dealer with a global trading firm said the government had to maintain a delicate balance between the interests of farmers and consumers.
Aggressive steps to dampen prices, such as a cut in the raw sugar import duty, could damage the central government's image among farmers.
"Duty-free import is the last weapon the government has to control price rises," the dealer said.
"It will do it in phased manner. From 40 percent, it will first reduce the duty to 20 percent. If prices rally even after the reduction, only then it will allow duty-free imports."
European traders said they also doubted that Indian authorities would move soon to cut or cancel the duty, as stocks in India were sufficiently high to make such a move unnecessary for now. (Additional reporting by Mayank Bhardwaj in New Delhi; Editing by Greg Mahlich)