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UPDATE 1-India grants subsidy to promote raw sugar export over domestic refining

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* Indian decision could put pressure on global prices

* Incentive for raw output valid until March 31

* Move seen helping local mills to reduce losses

(Adds industry body chief's quote, details)

NEW DELHI, Feb 12 (Reuters) - India granted a subsidy for raw sugar output to tackle a chronic surplus of the refined product, in a move that is likely to boost exports of raws by the second-biggest producer after Brazil and put downward pressure on world prices.

By encouraging output of raw sugar over white, the 3,333 rupees ($53.52) a tonne subsidy should help cut oversupply of refined sugar, which has piled up unsold at Indian mills after four straight years of surplus production and unattractive prices domestically and abroad.

The incentive is valid until March 31 and will be reviewed for subsequent months, two senior government officials, who declined to be named, said after a cabinet meeting on Wednesday.

Indian mills traditionally produce white sugar but a global glut has made exports difficult. A rise in sugar refining capacity in Asia and Africa has now given an opportunity to export raws.

The market has been expecting the announcement for several weeks but it was delayed due to disagreement among ministers over the extent of the subsidy for sugar mills.

Exports of raws from the South Asian nation will eat into the share of top suppliers Brazil and Thailand.

Extra supplies could put added pressure on the benchmark raw sugar price in New York, which fell to a 3-1/2-year low of 14.7 cents a lb on Jan. 28 and was trading on Wednesday around 15.5 cents a lb.

Dealers said the Indian announcement had little immediate effect on prices as it had been expected and was already factored into prices.

Deterred by low global prices, mills have sold only about 700,000 tonnes of raw sugar for export so far in the 2013/14 season, despite industry expectations of 4 million tonnes.

Traders said the approved incentive would contribute about 12.6 percent towards the cost of domestically produced raw sugar which is estimated at around $426 per tonne.

The incentives should not attract the attention of the World Trade Organisation (WTO), which allows subsidies for production of half processed products like raw sugar but prohibits any direct incentives for exports to finished products, a senior government official has said.

In the past three years, cane prices - set by the government - have risen 70 percent, while sugar prices have gone up by only 8 percent, attracting complaints from mills.

"Market sentiment should now improve as domestic sugar prices will stop falling, helping sugar mills to reduce some of their losses," Abinash Verma, head of the Indian Sugar Mills Association (ISMA) said in statement.

Stocks of white sugar have piled up at mills as farmers produced bumper cane crops, with inventory of 8.8 million tonnes on Oct. 1, when the sugar season began. Output may be 25 million tonnes in 2013/14 against demand of 22-23 million tonnes in the world's biggest consumer of sugar.

India could find a buyer in Indonesia, as the United States Department of Agriculture believes the world's biggest sugar importer will consume 5.2 million tonnes of the sweetener in 2013/14, up about 1.3 percent year-on-year.

India is the only top producer to subsidise sugar but it is now gradually removing props for the industry. The government has supported sugar production because it was concerned about shortages, which in 2009/10 forced it to buy expensive imports.

In December, the government approved a scheme of interest-free loans to help mills pay government-set prices to cane growers. 1/8$1=62.27 rupees 3/8

(Editing by Mayank Bhardwaj and Anthony Barker)