Nov. 7 (Bloomberg) -- Sri Lanka, South Asia's biggest sugar importer, may boost purchases next year after the government cut import tax to stem inflation and drought damaged the local crop.

Imports may exceed the government's estimate of 550,000 metric tons for this year, said Chaminda Nawarathne, manager at CW Mackie & Co., the nation's biggest supplier of the sweetener to industrial customers.

Higher purchases may help India, the world's second-biggest sugar producer, cut record reserves that have made the sweetener the worst-performing agricultural commodity in the past year. Sri Lanka can save freight by buying from neighbor India than from traditional suppliers in Brazil, Australia and Thailand.

``India remains the best bet as they have a surplus and prices are lower compared to other suppliers,'' Nawarathne said.

Sri Lankan buyers are paying between $275 a ton and $300 a ton for refined Indian sugar, compared with $325 a ton quoted by Thai suppliers, because of the nation's proximity to mills in the southern Indian states of Tamil Nadu and Karnataka, D.LD. Jayantha, deputy general manager at Pelwatte Sugar Industries Ltd. said. The country consumes about 62,000 tons of sugar every month, of which only 15 percent is produced locally.

``Imports from India are mostly of lower quality sugar,'' Nawarathne said.

White sugar for December delivery, the contract closest to delivery on London's Liffe exchange, fell $1.50, or 0.5 percent, to $276.50 a ton yesterday. Sugar has declined 31 percent in the past year on expectations supply will outpace demand this year and next. Raw sugar traded in New York rose 0.15 cent, or 1.5 percent, to 10.05 cents a pound.

Pest Attacks

Sri Lanka's government cut taxes on sugar imports by 5,000 rupees a ton in August to check prices after inflation in July rose for the first time in four months. Inflation unexpectedly quickened to a nine-month high in October.

Production in the island nation may decline by a third to about 40,000 tons after a drought and pest attacks cut the cane output this year. In comparison, India is set to bypass Brazil as the world's top sugar producer this year. The country held reserves of 11.9 million tons on Sept. 30, enough to meet demand for more than seven months.

``Local production may not increase next year as farmers have no real incentive to plant sugar cane,'' said H.K. Sunil, director of Sri Lanka's Sugar Research Institute.

To contact the reporters on this story: Thomas Kutty Abraham in Colombo at tabraham4@bloomberg.netAnusha Ondaatjie in Colombo at anushao@bloomberg.net;

Last Updated: November 6, 2007 22:11 EST