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NEW DELHI (Reuters) - The government should allow fresh cotton exports when ministers meet on the issue in two weeks to help prop up falling domestic prices -- an indication of comfortable local supplies -- the chief of a leading trade body said on Tuesday.
But New Delhi may resist this call because textile mills are still worried that record exports from India, the world's No. 2 producer, could lead to a domestic supply shortage and are pressuring New Delhi to keep a controversial ban in place.
India on March 5 banned cotton exports to ensure supplies for domestic mills, reining in exports running ahead of expectations.
Commerce and agriculture ministries are at loggerheads over the issue, with influential coalition ally Farm Minister Sharad Pawar asking the Prime Minister to lift the ban to help farmers, Pawar's main constituency.
Pawar's colleague Trade Minister Anand Sharma, who also holds the textiles portfolio, has defended his decision to ban cotton exports, saying India needs to ensure higher stocks for local mills.
The tug-of-war between the two senior ministers of the Congress-led ruling coalition damaged India's already lacklustre reputation as a steady exporter of commodities, and spilled over into global markets.
China, India's biggest cotton customer, has criticised the ban. Bangladesh, India's No. 2 buyer, said its textiles mills could face a supply shortage of the fibre.
China could turn to other leading suppliers -- the United States, Australia and Brazil, said Wang Qianjin, a senior analyst of industry web site www.webtextiles.com
Traders said some of India's buyers could import from Pakistan, which has surplus stocks this year.
Qianjin said China has already bought two-thirds of its annual import needs of 1.5 million tonnes (8.8 or 9 million bales of 170 kg each).
India's trade ministry unexpectedly banned exports earlier this month. On Monday, after days of discussions, New Delhi agreed to ban fresh overseas sales but allow shipments which had already been committed to exports before the ban came into force, avoiding the risk of defaults by traders.
A panel of ministers is scheduled to meet in two weeks to review the issue.
"There is a strong case for free cotton exports and I expect the group of ministers to allow exports without any restriction," Dhiren N. Sheth, president of the Cotton Association of India, told Reuters.
Indian exporters have already shipped out a record 9.5 million bales since the season started in October and are now set to sell 12 million bales -- up 54 percent from last year -- before any fresh sales are made.
New Delhi had raised its cotton shipment forecast for the current cotton year to 8.4 million bales in January from 8.0 million.
Textile makers fear allowing further cotton exports this year would push up yarn prices and hurt their business, said M P Agrawal, managing director of Shri Lakshmi Group, a textile company.
But domestic cotton prices have fallen and textiles mills have stopped buying the fibre as they expect rates to drop further, traders and analysts said.
"Had there been a shortage, cotton prices wouldn't have been falling. The consistent fall in prices indicates adequate availability," said Sheth.
Raw cotton prices have fallen by over 1,000 rupees to less than 3,000 rupees per 100 kg since the government ban.
And global supply is outstripping demand this year, putting international prices under pressure.
On Tuesday, benchmark U.S. cotton futures were 0.85 percent higher at 88.75 cents per lb after posting five straight sessions of losses through to Monday as the market digested the gyrations India has taken on its cotton exports.
"Global prices are likely to fall further and we should allow exports as soon as possible to avoid losses. Delay in exports cost us dearly last year," said Sheth.
Exporters had already been saddled with huge stocks last year after similar government manoeuvring delayed overseas sales and hit profitability.
Additional reporting by Siddesh Mayenkar in MUMBAI, Zheng Xiaolu in BEIJING, Ruma Paul in DHAKA; Writing by Mayank Bhardwaj; Editing by Jo Winterbottom and Keiron Henderson