Adds context on possible impact on markets and producers, background, in paragraphs 2-10

By Rajendra Jadhav

MUMBAI, Nov 14 (Reuters) - India allowed sugar exports of 1.5 million metric tons in the new season, the government said in a notification on Friday, as a decline in the diversion of sugar for ethanol production is expected to leave a larger domestic surplus.

Higher exports from the world's second-largest sugar producer could pressure benchmark New York and London futures SBc1, LSUc1, which are hovering near five-year lows.

Exports will help reduce sugar stocks in the country and support local prices, benefiting producers such as Balrampur Chini Mills BACH.NS, EID Parry EIDP.NS, Dalmia Bharat DALB.NS, and Shree Renuka Sugars SRES.NS.

A 1.5 million ton export quota has been shared among operating sugar mills on a pro-rata basis, based on their average sugar production over the last three seasons, the government said in the notification.

All grades of sugar are permitted for export.

India was the world's second-largest sugar exporter in the five years to 2022/23, with shipments averaging 6.8 million tons annually. But a drought led the government to ban sugar exports in 2023/24, and it allowed only 1 million tons to be shipped overseas last year.

India's net sugar output for the 2025/26 season that started on Oct. 1 is estimated at 30.95 million tons after diverting about 3.4 million tons for ethanol production, up 18.5% from last year, according to the Indian Sugar & Bio-Energy Manufacturers Association (ISMA).

ISMA last week demanded New Delhi allow exports of 2 million tons of sugar in the new season.

The industry body had earlier expected a diversion of 4.5 million to 5  million tons of sugar for ethanol this year, but only 28% of the total allocation for the biofuel went to sugar-based ethanol, with the remainder allocated to feed-based ethanol plants.

Sugar mills can export their allocated quota, either directly or through merchant exporters or refineries, until 30 September 2026, the notification said.

Mills that do not wish to use their export quota may surrender it by 31 March 2026, after which the government will reallocate the unused quotas to other mills.

India also removed its 50% duty on the export of molasses, the government said.

(Reporting by Rajendra Jadhav and Nishit Navin; Editing by Anil D'Silva; Editing by Anil D'Silva)

((Nishit.Navin@thomsonreuters.com;))