Ameet, here are answers to some of your questions.

Cotton is a cash crop and per hectare earning is much more than cereals, hence preferred.

BT was developed for large scale cotton farming in US and has following pros and cons:
Pros:
- High resistance to common pests, so no pesticide requirements.
- High yields (claimed by some, refuted by some). But, I believe there is some.
Cons:
- It requires additional refuge land to divert the pests. The idea is that the susceptible pests will move to the refuge and other resistant pests will follow them for mating. Indian farmers with smaller holdings don't have this luxury and knowledge.
- High irrigation requirements. The crops have 100% failure in lack of water (20% for traditional seeds)
- Next generation seeds are not good. One needs to buy BT seeds again for the next season.

Problems pertaining to India:
- BT is meant for US and has no protection against leaf curl virus.
- The yields are not that high as promised. In Indonesia, the non GM (genetically modified) seeds have better yields.
- Some merchants in India are illegally selling second and third generation of BT seeds at much lower costs. Farmers are largely ignorant about this.
- and of course, the money lenders.

References:
http://www.cropchoice.com/leadstryfc7a.html?recid=888
http://www.sciencenews.org/articles/20030208/fob5.asp

Came across this interesting news: http://www.indianexpress.com/story/222012.html

Quoting from the article: BT-cotton seeds yield only high-quality medium and long staple cotton, and this has resulted in a severe shortage of low quality short staple cotton. This is adversely affecting the small-scale spinning and handloom sector, which employs 13 million workers and produces 20 per cent of India’s cloth. But interestingly, instead of asking for the usual dose of protectionist measures, the spinners have stressed that they are "not against the export of cotton if it is beneficial to farmers". It’s a sign of how India’s small-scale sector is maturing to the realities of a globalised world that they have asked the government to allow duty-free import of cotton to "create a balance in the market" to overcome the shortage and to bring down the cost of cotton. Interestingly, the south Indian spinners have asked for duty to be cut on all varieties.

My thoughts: Does this indicate that the fault is not with globalizing the market, but with not building sufficient safeguards to protect the farmers from global price fluctuations? This can be possibly be done through appropriate hedge funds, commodity futures trading, insurance schemes, and various other financial instruments. My point is that if India chooses to embrace the free-market ways of business, then it also needs to make sure that the associated risks are handled in the ways the free-market handles them. If not, then India has to operate in a totally different paradigm of socialist economies, or local economies, or something else, and handle the risks in that paradigm of economics.

I am sure things are way more complicated that this, but futures are essentially contracts between a buyer and a seller to buy/sell a certain product at a certain price at a certain date in the future. The contracts can then be traded on future-exchanges just like stocks are traded on stock-exchanges. So, you can imagine that farmers would agree to sell their produce at a certain price to some wholesaler. And then the contracts from many wholesalers and many types of produce would be aggregated by larger brokerage houses to hedge their risks from price fluctuations in some particular type of produce or from wholesalers in some particular geographical area. This is just like mutual funds have a portfolio of stocks, in a similar way commodity hedge funds have a portfolio of commodity futures.

India does have a commodity exchange http://www.iloveindia.com/finance/encyclopedia/multi-commodity-exchange.html but clearly, there is something amiss that it isn't able to handle global price fluctuations of cotton. This is something worth studying in detail.