In the next decade, India is likely to witness changes in its cotton and textile sectors as many of the constraints on production, marketing, and trade of cotton and textile products are set to be eliminated. Some of the internal constraints include export constraints on yarn, government fixing of cotton ginning and pressing fees, and subsidization of raw cotton production. Similarly, one of the most important external constraints includes export restrictions on textile products to developed markets through the Multifiber Arrangement. In light of these impending changes, this paper examines the efficiency of cotton production in five major producing states in India using a modified policy analysis matrix (PAM) approach. The results indicate that cotton is not efficiently produced in the second largest cotton producing state in the country. Without government interventions, it is likely that acreage in this state will move away from cotton to more profitable crops, such as sugarcane and groundnut. It is also concluded that cotton is not the most efficiently produced crop in the other four states; however, there is at least one crop in each state that is produced less efficiently than cotton. These findings suggest that Indian policies directed at maintaining the availability of cheap cotton for the handloom and textile sectors have induced major inefficiencies in the cotton sector.