Effects of the Trade Policy Changes on Capital Structure of Textile Industry in India: An Empirical Investigation

Abstract

In this paper, we study the effects of trade policy changes on capital structure of Indian Textile industry. India became one of the leading exporters of textile and clothing in the world due to the implementation of the Agreement on Textiles and Clothing (ATC) since 2005. We find that with the changes in trade policy, the export competitiveness of Indian textile firms increased which led to increase profitability of firms in the pre ATC period and this factor, in tum resulted to decrease the dependence on debt financing of these firms. In the post ATC period though the profits seem to have not kept the pace and thereby a preference towards debt for financing has been observed where new firms found it more. feasible to go for debt based instruments and retained earnings. Thus there has been a tendency for the textile and clothing firms in India to have been more inclined towards the pecking order financing pattern, following the trade policy changes.