* India cabinet could approve move on Thurs
* Possible cotton export tax could encourage shipments of finished textiles
* India expected to have bumper cotton harvest
* Industry body slightly raises India cotton output f'cast on Thurs
NEW DELHI, Sept 12 (Reuters) - India could slap a 10 percent duty on cotton exports as early as Thursday as it wants to boost overseas sales of value-added textiles to take advantage of a weak rupee and help reduce a yawning current account deficit, government sources and industry officials said.
It hopes the tax would encourage the sale of more cotton in domestic markets, which would be used to make textiles and garments that could be shipped overseas, generating more money than simple cotton exports.
India, the second-biggest cotton producer after China, is expected to have a bumper harvest this year as ample rains are likely to increase yields. The government will decide how much is surplus and available for export. Any curb on cotton exports could boost flagging global prices.
The government is trying to reduce its current account deficit, which hit a record 4.8 percent in the year ending March 31, 2013, taking advantage of what is otherwise a damaging fall in the rupee of some 16 percent against the dollar since June 1.
Other measures being discussed for approval at a cabinet meeting later on Thursday include raising India's access to World Bank loans by $4.3 billion and a long-standing plan to build two microchip factories with government subsidies to attract an estimated $4 billion investment.
India earned about $8.94 billion from cotton exports in 2012/13, equivalent to some 2.97 percent of total exports.
Cotton sales overseas were already expected to drop by a fifth to about 10 million bales of 170 kg each in the marketing year that ends this month because of high domestic prices and a lack of interest from China, which has massive stocks.
The Cotton Association of India (CAI) on Thursday increased its estimate for Indian cotton output in the year starting this October by 0.3 million bales to 37.5 million, compared with 35.7 million a year ago. Domestic consumption is likely to be 27-28 million bales.
"The government is taking steps to promote value-added textile exports. Any kind of duty on cotton exports would hit overseas demand for Indian cotton and would reduce farmers' returns," said Arun Kumar Dalal, a trader from Ahmedabad, a key cotton market in Gujarat.
India's agriculture ministry favours unrestricted cotton exports to support farmers, while the textile ministry opposes that as it wants to protect the domestic textile industry.
Demand from India's domestic yarn and textile industry has already pushed domestic prices above export offers. Rival supplies from South Africa and Pakistan are available at 86-90 U.S. cents per lb compared with New Delhi's 91-93 cents per lb.
And cotton purchases by China, India's biggest buyer, fell 36 percent in the first seven months of this year. The United States is the No. 1 supplier to China ahead of India.
Measures discussed on Thursday could also include other steps for increasing cotton availability for textiles mills, which have been complaining of higher prices for the fibre, said government sources directly involved in decision making.
India's government has scrambled to find ways to prop up the rupee, which hit a record low last month, and curb its current account deficit by promoting exports and reining in imports of non-essentials such as gold. ($1 = 63.30 rupees) (Reporting by Mayank Bhardwaj and Manoj Kumar in NEW DELHI and Meenakshi Sharma in MUMBAI; Editing by Jo Winterbottom and Joseph Radford)
