Liquor companies are set to raise prices, thanks to the hike in the cost of molasses, a by-product of sugar used to make potable alcohol.

"Alcohol prices may rise as much as 20 per cent due to lower molasses production," said Abhishek Khaitan, managing director, Radico Khaitan [Get Quote], the country's second largest liquor producer.

"Liquor prices will go up by 15 to 20 per cent in the coming months," added VN Raina, secretary general, All India Distillers' Association.

The Vijay Mallya-promoted UB group, the country's largest liquor producer, too, could feel the pressure in the days to come, though long-term molasses contracts may enable it to hold its price line for the moment.

"The government should consider banning export of molasses or allowing duty-free import," said Vijay Rekhi, president (spirits division) of the UB Group and managing director of McDowell Ltd.

Raina said affiliates of the association have started lobbying with states like Maharashtra, Uttar Pradesh, Andhra Pradesh, Tamil Nadu and Kerala, where liquor prices are controlled by the government. In other states, companies are likely to exercise their free-pricing option soon.

Molasses prices have almost doubled from Rs 190 a quintal in November to Rs 375 now as production dropped nearly 15 per cent to 10.40 million tonnes in the last sugar season (November 2007 to March 2008). Prices could climb as the acreage under sugarcane for the next season has dropped sharply.

Liquor companies will also face stiff competition for molasses from motor fuel marketing companies. Last year, 2.5 million tonnes of molasses was processed to make ethanol for spiking with motor fuel.

This number will double this year as ethanol spiking has been doubled to 10 per cent, leading to shortage of the liquid for liquor companies, which consume about 4 million tonnes in a year.