* Late start to monsoon hits output in top producing state
* India may lose its position as world's second-largest exporter
* High local prices, lower China demand to hit exports
MUMBAI, Sept 17 (Reuters) - India's cotton harvest is likely to fall this year after two successive record crops, but only marginally after late rains helped ease the impact of a slow start to the annual monsoon.
A survey of 10 traders pegged the average output for the year starting Oct. 1 at 34 million 170-kg bales, down by 3.7 percent from a record 35.3 million bales last year.
The smaller crop, combined with high domestic prices and slower Chinese demand, mean that while India will remain the world's number two cotton producer, traders expect it will lose its spot as the second-largest exporter.
China, the top consumer of the fibre and biggest buyer of Indian cotton, is seeing a slowdown in economic growth that is knocking its demand for a range of commodities. The USDA last week raised its estimate for the global cotton surplus to a record, in part due to a drop in imports from China.
Comparatively higher prices in local markets would also make it difficult to sell Indian cotton overseas, traders said.
"Cotton prices in India are now one of the highest in the world and it could impact exports from India," said A. Ramani, secretary Indian Cotton Federation (ICF), a trade body.
U.S. cotton futures, the global benchmark, are down by two-thirds from a peak hit in March last year.
A sharp decline in domestic cotton prices will most likely be met by government buying in the spot markets to protect farmers' interests, traders said, adding that Brazil and Australia will sell more cotton than India in the next marketing season.
Traders in India shipped a record 12.7 million bales, mostly to China and t o Bangladesh, in the current marketing year ending Sept. 30.
India's monsoon rains were 21 percent above average in the week to Sept. 12, the third straight week of heavier-than-normal rains, abating the threat of a widespread drought.
India's largest cotton producing state Gujarat, which accounts for around one-third of India's total output, saw plantings fall by over a fifth.
"Higher sowing in Andhra Pradesh and Maharashtra has compensated to some extent for the losses in Gujarat. Moreover, heavy rains since the beginning September could help standing crop and can improve yields," said Chirag Patel, CEO of Jaydeep Cotton, a leading exporter of the fibre.
Below are results of a Reuters poll from 10 respondents on likely cotton output in 2012/13:
Wisdom Cotton 34.0
Arun & Co 35.0
Prestige Group 35.1
Jaydeep Cotton 34.5
DD Ltd 34.0
Bajrang Cotton 34.0
Bhaidas Cursondas 34.1
G.Jawahar Enterprises 33.1 ------------------------------------------------
* 1 bale = 170 kg ** Indian Cotton Federation
*** Confederation of Indian Textile Industries. (Reporting by Deepak Sharma; Editing by Michael Urquhart) (email@example.com; 91-22-61807291; Reuters Messaging: firstname.lastname@example.org)