Industrial Sickness

Chapter Outline=
11.1 Introduction
11.2 Sickness among Small Scale Industries (SSIs)
11.3 Factors Responsible for Sickness of Small Scale Industries
(SSIs)
11.4 Governmental Efforts to Deal with Industrial Sickness
11.5 Conclusion

"The God which all the countries worship is the God of industrialisation,
the God of machines, the God of high production and utilisation of
natural power and resources for greater advantage"
Jawahar Lal Nehru

11.1 INTRODUCTION

Industrialisation plays a pivotal role in the economic development of any

country and especially ofan underdeveloped country like India. This appears
to be the only effective answer to the problems of less developed countries
(LDCs). In fact, the term 'industrialisation' and economic development have
come to be regarded as synonyms. No doubt agriculture offers the essentials
of life, but industry cannot be regarded less important, for that caters to the
diverse human needs beyond the parameters of survival. Industrialisation
contributes to better and fuller utilisation of the factor endowments of the
cOuntry. Industrialisation, productivity and economic prosperity move
Torward in tendem. It contributes to the overall development of an economy.
Hardly one can imagine of a sector that remains untouched by the pace of
industrialisation. Truly speaking industrialisation improves the quality of
human life.
11.2 Business Environment

Industrial sickness is an offshoot of rapid industrialisation and goes hand in

hand with industrial development. In India, this problem started rising with
the rising pace of industrialisation. In common parlance, industrial sickness
means business failure. Like humansickness industrial sickness is a painfull
reality affecting the society.
Sick industrial units are those which fail to fulfill their financial obligations.
These units suffer from falling production/productivity; employment leading
to retrenchment of labour, operating at much less than full installed capacity.
These units are not able to achieve breakeven, so incur huge losses. Neither
they are able to pay salaries to the minimum staff nor they can liquidate the
interest on capital borrowed. Closure of industrial units in developing
economies lead to serious consequences. Their limited investible resources
and relatively limited alternative employment opportunities cannot easily
absorb resultant loss of jobs, production and revenue.
After the passage of Sick Industrial Companies Act, the sick industrial unit is
defined as the one wherein total losses (accumulated) at the end of a financial
year, i.e. on 31st March, show the depreciation of50percent or more ofits highest
net worth during the preceeding five years. The word 'net worth' in the
definition is equal to the sum of paid up capital and some portions credited as
reserves out of profits. According to RBI, "a unit is considered sick if it has
ncurred cash losses for one year, and in the judgment of the financing bank,
is likely to incur cash losses for the current as well as following year. When the
ratio of current assets to current liabilities is less than 1:1 and total debt
equity
ratio (total liabilities as a ratio of net worth) is
worsening."
Sick units are found both in private sector and public sector. In private sector,
these sick units are classified as:
(a) Small Scale Industrial-sick units (SSI - sick units) and
(b) Non SSI - sick and weak units (Non-SSI units comprise of large and

medium sized industrial units). At the end of March 1994, there was total
of 2,58,352 sick units out of which share
of SSI
sick units was 99
percent,
as number of SSI sick unit was 2,56,452. These SSI sick units had a locked
up bank credit of T 3,680 crore (26.9 percent) out of the total locked up
bank credit of 7 13,695 crore in all the sick and weak units. The number
of non-SSI sick units increased from 1,401 in 1980 to 2,500 in 1994
(an increase of 78 percent) and that of SSI sick units increased from
23,149 in 1980 to 2,56,452 in 1994 (an increase of more than 1l times).
By the end of March 2002, the number of sick industrial units had become
1,80,597 units and the amount of outstanding bank credit against them
stood at 26,065 crores. Nimber of sick public sector enterprises has
also increased over the years. At the end of Tenth E.Y.P.
(2006-07) there
were 250 sick PSEs.
Industrial Sickness 11.3

Industrial sickness is caused by two sets of factors external factors

lexogenous) and internal (endogenous). External factors comprise government
policies relating to production, distribution and prices, change in investment
pattern (due to changing priorities in the plans), shortage or inconsistent power
supply: inadequate and irregular supply of raw materials and worsening
industrial relations. These factors affect all the units in a particular industry
and can be solved by government intervention.
Endogenous or internal factors consist of mismanagement, diversion of funds,
too much burden of overheads, inadequate provision for depreciation of fixed
capital, wrong declaration of dividend and over estimation of demand
After a carefull study of all the factors, the Sixth E.Y.P. observed
projections.
that the most important cause was the incompetence of management in sick units.
On scrutiny it was found that both the government policies and
mismanagement/misconduct were responsible for industrial sickness. Out of
in the majority of cases endogenous factors were responsible for this
problem. Prem Shankar Jha and George Fernandes remarked that the misdeeds
of entrepreneurs/mismanagement could be held responsible for the sorry plight
of sick industrial units.
In the event of take over of sick units by State, it has to shoulder the huge burden
of liabilities which the extravagant management has incurred. Worst sutteres
are the workers and the small shareholders.
A debate has been going on whether the sick units be taken over by State or the
State should start new public undertakings instead of buying old and outdated
capacity. In large number of cases it was found that the sickness was contrived,
the private business houses were successful in abandoning the sick units, which
had been deliberately pushed to such a plight to be taken over by the State. Raj
Krishna suggested, public investment should be channelised for creating new
capacity in crucial sectors rather than buying old sick units. George Fernandes
felt that "management of sick units should be handed over to workers and /or
professional managers under the government ownership, with all the assistance
which had been given to the owners of sick industrial units earlier." Another
option to revive sick units can be to merge them with a healthy public sector
unit or private sector units.

11.2 SICKNESS AMONG SMALL SCALE INDUSTRIES (SSis)

Studies were conducted in several parts of the country to find out reasons for
the rampant sickness in SSIs. The most important factor responsible for
extensive sickness in general was lack of management and lack of adoption of
sOund business principles in running the business enterprises.
After surveying 248 units in Gujarat it was found that the entrepreneurs were
too young to perform properly. Their performance improved with their age.
Labour problems were the least important. In southern States, most of the
 Business Environment
11.4

units failed in their infancy. These were

not able withstand th.
to
the
surveyed of the lack of finance to me.
problems (in their infancy) like the problem meet
of adequate raw materials.
working capital needs and non availability
most of the principals' (buyers)
do not pay tha
Experience of Haryana was that
ancillaries for six months or more after
the purchase of goods.

FOR SICKNESS OF SMALL SCALE

11.3 FACTORS RESPONSIBLE
INDUSTRIES (SSIS)
sickness of small scale industrial
Following reasons are responsible for
(SSI) units.
Enthusiastic young entrepreneurs important
lack managerial qualities
(i)
about minimising overhead costs
and interest paid-on borrowed capital
a times.
are not adhered to many They
(ii) Basic principles of management
financial
corpus.
develop good internal
fail to
demand for the product and raw materials,
(ii) Due to shortage of capital,
units fail to utilise the installed capacity.
new industrial units got
(iv) In applications for setting up
most cases,
of proposals.
clearance from state without proper scrutiny
resources only.
on using their own
(v) Some of sick units, insisted
wanted to take loans from
Percentageof such units was 89. These units
nationalised banks or cooperative credit societies only.
to the ancillaries was also
(vi) Unduly long delayed payment by principals
found as important cause.

EFFORTS TO DEAL WITH INDUSTRIAL

11.4 GOVERNMENTAL
SICKNESS
of industrial sickness as a persisting problem
Having taken cognizance initiated
of the country. The GOI and RBI
affecting the industrial development assets
to
of sick units
various remedial measures to put the unproductive
the units closed. As the
GOI started the policy of taking over of
productive use.
wel.
number of such units was relatively small at
that time, this policy worked
of India (IRCI) was set
In 1971, the Industrial Reconstruction Corporation the
of sick units continued to grow. This compelled
up, but the number Various
drastic changes in its rehabilitation policy.
government to introduce
in 1977, Policy
policy measures like Soft loan Scheme and Merger Policy
Guidelines on Sick Industrial Units in 1978; Policy Statement in 1980 and
establishment of Industria
New in 1981 etc. were initiated. The
Strategy IRCI also failed
Reconstruction Bank of India (IRBI) in 1985 by reorganising

to make any impact.

Evaluation of Efforts During Last 15 Years
As per the information from Ministry
of Micro, Small and Medium enterprise
in 1998. This number has increased
there were 89.91 lakh total MSMEs units
Industrial Sickness
11.5

to 311.52 lakh units in 2011 (3.47 times). The percentage of sick units among
the MSMEs was 2.46 percent (approximately 2.74 lakh units) in 1998, which
declined to a level ot 0.29 percent (approximately 9,300 units) in 2011.
The total investment in MSMEs units was reported at 1,33,242 crore in 1998
of which investment incurred on sick units has been worked out to 2.89 pecent.
This percentage has been revolving in the range of3.52 percent to 2.48 percent
during the next 13 years.

As per the report of Board for Industrial Financial Reconstruction (BIFR) as

on 31-12-2004, there were total 88 sick central PSUs out of which 9 units had
evived, another 9 were found to be not maintainable and winding
31 units had been recommended. This proves that the number of sick central
up
PSUs has also been declining during the two decades.

11.5 CONCULSION

It can therefore be summed up that industrial development in India is haunted

by a variety of factors like lack of investment, inadequate infrastructural
facilities, insufficient availability of raw materials, inadequate supply ofpower,
high input costs and rising regional imbalances. Frequent labour disputes result
in loss of output due to day to day strikes and lockouts. Economists feel that
interest rates need to be moderated without any delay to stimulate investment
activity in the country.

Check Your Progress=

1. Explain the status of industries at the time of independence.

2. Discuss the factors responsible for sickness of Small Scale Industries (SSIs)
3. Explain Governmental efforts to deal with the problem of industrial sickness.