Adds details, background, industry official's comment in paragraphs 3-8

MUMBAI, Sept 1 (Reuters) - India has allowed production of ethanol from sugarcane juice, syrup and all types of molasses without any restrictions on volumes in 2025/2026, the government said in a notification on Monday.

The world's second-biggest sugar producer had restricted production in the current marketing year because of a drop in sugarcane supplies.

In the new ethanol supply year starting from November 1, sugar mills and distilleries are allowed to produce ethanol without any quantitative restriction, the Ministry of Consumer Affairs, Food & Public Distribution said.

The government will periodically review sugar diversion to ethanol to ensure year-round domestic availability of the sweetener, it said.

In the new season, sugarcane supplies are expected to jump as ample monsoon rains for two straight years have helped farmers to expand area under the crop.

"This is a welcome move. The government should also raise the ethanol procurement price so that mills can pay farmers the government-fixed cane price," said a sugar miller based in the western state of Maharashtra.

Indian sugar mills such as E.I.D.-Parry EIDP.NS, Balrampur Chini Mills BACH.NS, Shree Renuka SRES.NS, Bajaj Hindusthan BJHN.NS and Dwarikesh Sugar DWAR.NS have increased their ethanol production capacity in the last few years.

India, the No.3 oil importer and consumer of petroleum products, aims to increase the blending of ethanol into gasoline to 20% by 2025/26.

(Reporting by Rajendra Jadhav; Editing by Tomasz Janowski and Jan Harvey)

((shilpa.jamkhandikar@thomsonreuters.com;))