It also scrapped a 1 percent drawback, or rebate, to reduce the incentive for raw cotton exports.
The decision to end the 14 percent customs duty on raw cotton, announced late Wednesday, may result in higher imports from the U.S., Brazil and African nations, industry analysts said.
"This announcement will have a psychological impact and prices of cotton will come down," said D.K. Nair, secretary general of the Confederation of Indian Textile Industry.
Cotton prices have risen 40 percent since January, having a negative impact on the spinning industry and other sectors already reeling from the rupee's appreciation against the dollar. Analysts attributed the rise in prices to strong demand from China.
Indian cotton imports have been declining in recent years. In the fiscal year ending March 31, imports fell to 500,000 bales from 1.7 million bales four years ago. Imports in the 2007-2008 fiscal year are estimated at about 650,000 bales.
India's cotton production has been rising, but so have exports, reducing availability of the raw material to local mills. In 2006-2007, production was 27 million bales, but exports were 5.8 million bales. Exports reached 6.5 million bales in 2007-2008, with production going up to 31.5 million bales.
About 3,000 spinning mills in India closed for a day on Wednesday to demand scrapping of customs duty on raw cotton and a ban on its exports. Later, industry organizations welcomed the government decision.
Reports said the steep rise in cotton prices had forced at least 20 textile mills in the country to close, throwing 20,000 workers out of jobs.