Profitability Analysis of Indian Readymade Garment Industry

Abstract

India is among the world’s largest producers and exporters of textiles and Ready-Made Garments (RMG). This research aims to establish a causal association between Return on Assets (ROA) and key operational metrics such as the cash conversion cycle, fixed asset turnover, and physical capital intensity, to investigate their influence on the profitability of the Indian RMG industry. The Auto Regressive Distributed Lag (ARDL) cointegration is applied to study impact on profitability. This study identifies a long-term relationship between profitability metrics, such as ROA, and operational factors including sales, fixed asset investments, and Working Capital Management (WCM) strategies, utilizing data from CMIE Prowess spanning from 1988–89 to 2018–19. The results suggest that (i) decreasing physical capital utilization in generating sales, leading to reduced profitability, and (ii) lengthening of the trade cycle increasing profitability, albeit with diminishing returns. Porter’s Diamond model for national competitive advantage in RMG is proposed. The empirical results highlight, the importance of enhancing technology in fixed assets, optimal management of the cash conversion cycle, and debt management.