Sickness of Indian Industry: Causes

Sickness of Indian Industry

Sickness is defined in India as “an industrial company which has, at the end of any financial year, accumulated losses equal to, or exceeding its entire net worth and has also suffered cash losses in such financial year and the financial year immediately preceding such financial year”.
Industrial sickness is an umbrella term applied to various things associated with an industry that makes people ill and cause them to miss work. The solution will have to be tailored to the specific industry, and only in that way can any real effect be made on improving the health and productivity of the industrial workforce.

Meaning and Definition of Sickness

According to State Bank of India___ ” A sick unit is that unit which fails to generate an internal surplus on a continuous basis and depends for its survival upon frequent infusion of external funds”.
According to Reserve Bank of India(RBI)___ “A small-scale unit should be considered as sick if it has at the end of any accounting year, accumulated losses equal to or exceeding 50% of its peak net worth in the immediately preceding 5 accounting year”.
According to Companies Act, 2002___” Sick Industrial Company’’ means an unit which has accumulated losses in any financial year which are equal to 50% or more of its average net worth during 4 years immediately preceding such financial years; or Failed to repay its debts within any 3 consecutive quarters on demand made in writing for its repayment by a creditor or creditor of such company.

Industrial sickness in India is growing at an annual rate of about 28% and 13% respectively in terms of-of a number of units and an outstanding number of bank credit. It is estimated that as of today there are more than 2 lacks sick units with an outstanding bank credit of over 7,000 crores, nearly 29000 units are added to the sick list every year in India.

Causes for Industrial Sickness

The causes of sickness may vary from one unit to another. But the most common causes of sickness can be grouped under two under two heads internal and external.

1). Internal Causes for Sickness

It consists of those factors which are within the control of management. This sickness arises due to internal disorder in the areas justified as following:

  1. Lack of Finance: This including weak equity base, poor utilization of assets, inefficient working capital management, the absence of costing and pricing absence of planning and budgeting and inappropriate utilization or diversion of funds.
  2. Bad Production Policies: The another very important reason for sickness is a wrong selection of site which is related to production, inappropriate plant and machinery, bad maintenance of plant and machinery, lack of quality control, lack of standard research and development, and so on.
  3. Marketing and Sickness: This is another part which always affects the health of any sector as well as SSI. This including wrong demand forecasting, selection of inappropriate product mix, the absence of product planning, wrong market research methods, and bad sales promotions.
  4. Inappropriate Personnel Management: The another internal reason for the sickness SSIs is inappropriate personnel management policies which includes bad wages and salary administration, bad labor relations, lack of behavioral approach causes dissatisfaction among the employees and workers.
  5. Ineffective Corporate Management: Another reason for the sickness of SSIs is ineffective or bad corporate management which includes improper corporate planning, lack of integrity in top management, lack of coordination and control, etc.

2). External Causes of Sickness

It consists of those factors which are outside the organization, management has no or little control over it. It consists following:

  1. Personnel Constraint: The first most important reason for the sickness of small-scale industries is non-availability of skilled labor or manpower wages disparity in a similar industry and general labor invested in the area.
  2. Marketing Constraints: The second cause for the sickness is related to marketing. The sickness arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes in global marketing scenario, excessive tax policies, is by the government, and market recession.
  3. Production Constraints: This is another reason for the sickness which comes under external cause of sickness. This arises due to a shortage of raw materials, shortage of power, fuel high prices,import-export restrictions.
  4. Finance Constraints: Another external cause for the sickness of SSIs is lack of finance. This arises due to credit restraint policy, delay in disbursement of the loan by the government, unfavorable investment, fear of nationalization.

Symptoms of Industrial Sickness

The Tiwari Committee identified certain symptoms which would be quite helpful in the detection of industrial sickness at the beginning or ‘’incipient stage’ These symptoms are :

  1. Continuous irregularity in cash credit accounts:
  2. Low capacity utilization;
  3. Profit fluctuation, downward trends in sales stagnation, or fall in profits followed by a contraction in the share of the market.
  4. The higher rate of rejection of goods manufactured;
  5. Reduction in credit summations whenever the companies are in financial difficulty, they open a separate account with another bank and deposit all collections therein;
  6. Failure to pay liabilities;
  7. Large and longer outstanding in the bill accounts;
  8. A longer period of credit allowed on sale documents negotiated through the bank frequent returns by customers of the same;
  9. Constant utilization of cash credit facilities to the maximum and failure to pay a timely installment of principal and interest on term loans and installment credits;
  10. Non-submission of periodical financial data/stock statement, etc., in time;
  11. Financing capital expenditure out of funds provided for working capital purposes;
  12. A general decline in that particular industry combined with may failures;
  13. Rapid turnover of key personnel;
  14. The existence of a large number of lawsuits against the company;
  15. Rapid expansion and too much diversification within a short time;
  16. Sudden/frequent changes in management- whether professional or otherwise and /or dominated by one man/few individuals;
  17. Diversion of funds for a purpose other than running the unit.