When ethanol blending is allowed, rather encouraged by the government, it would result in demand pick up for ethanol. Ethanol, as you all know, is manufactured from molasses, which is a by-product of the sugar manufacturing process. Right now instead of manufacturing ethanol, the sugar factories are producing RS (Rectified Spirit) which goes into the production of IMFL – Indian Made Foreign Liquor. If producing ethanol gives the sugar factories more money, they would naturally be interested in producing ethanol. As the companies get to see an increase in revenue and possibly thereby profit, they would be in a better position to rejig pricing of other products like sugar being manufactured by them.
Unlike other commodities whose prices are allowed to be determined by the forces of demand and supply, sugar prices in India are the result of a complex system of controls, governing everything from the area within which sugar mills must procure their cane, to how long they must continue to procure, to how much the mills can release in the free market and so on. The result is that price signals to farmers and industry are woefully distorted.
A carefully worked out policy in regard to the by-products of the sugar industry could make substantial difference to the sugar industry. The increased profitability, better production planning for sugar and other products [change in product mix] could benefit the growers, help in stabilizing sugar prices, save in foreign exchange [use of ethanol] by reducing oil import bill and help the sugar industry. (This para is an excerpt from the 2nd report of the National Commission on Farmers. Take a look at it here.)
Incidentally one more important report on sugar industry is given by the Committee on Revitalization of Sugar Industry [Tuteja Committee Report-2004].
It is also worthy of note that there is a sugar institute at Pune which goes by the name -- Vasantdada Sugar Institute. And the Indian Institute of Sugar Research is at