This paper attempts to examine the effectiveness of the distribution of yarn in the handloom sector in its historical and contemporary perspective. It finds that there is a persistent shortfall in the total availability of cotton yarn in the country in terms of quantity, quality, count and variety. This shortfall very often intensifies and converges towards crisis owing to frequent disruptions and distortions in the supply of yarn. In the face of repeated efforts made by the government institutions, market mechanism has been the prime mover of the distribution of yarn in the handloom sector. It finds that institutional mechanism instead of curbing the involvement of the middlemen traders and controlling the market forces has been virtually instrumental in paving the way for the market mechanism to be more active but inefficient. By and large, the system of yarn distribution has been historically ineffective in meeting the diverse yarn requirement of the handloom enterprises. The paper contends that there is a clear need for controlling the yarn market and emphasizes that an all-out effort be made to improve the quality of the locally produced yarns to international standard and to diversify production.