Although the country is world's largest consumer and second biggest producer of sugar, the sector "suffers from policy inconsistency and unpredictability," it said.
Pitching for decontrol, the Survey said: "The sugar industry in India is over-regulated and prone to cyclicality due to price interventions... the government should come into the picture only in situations where absolutely necessary."
Export bans and controls could be replaced with small variable external tariffs to stabilise prices.
Stating that the issue of sugar decontrol has been widely debated for a long time, the Survey said: "From a purely economic point of view, greater play of market forces would provide better prices and serve the interests of all stakeholders."
Listing out the major recommendations made by the Rangarajan committee on sugar decontrol, the Survey said: "A stable, predictable, and consistent policy reforms have to be brought about in a fiscally neutral manner and issues considered for implementation in a phased manner."
The key recommendations of the Rangarajan committee report included phasing out cane reservation area, dispensing with minimum distance criteria, removal of the levy sugar system and allowing states procure sugar from open market and subsidising it for PDS sale at their own cost.
Other suggestions were doing away with the regulated release mechanism for sugar meant for open market sale, stable trade policy, no quantitative or movement restrictions on by-products like molasses and ethanol, besides dispensing with compulsory jute packing.
According to official estimate, sugar production is likely to decline to 24.3 million tonnes in 2012-13 marketing year (October-September), from 26 million tonnes in the last year. The annual domestic demand is about 22-23 million tonnes.