Industrial Sickness

What is Industrial Sickness ?

Industrial sickness refers to the uneconomical performance of industrial entities. It reflects poor functioning of business operations and suggests that something has seriously gone wrong with the usual business running. As the term indicates, industrial sickness is related with industrial/ production/ manufacturing units of large, medium and small scale businesses. Similar to the sickness of human body, industrial sickness also has its own causes, symptoms, consequences as well as remedies.

An industrial unit suffering from industrial sickness can be defined as any such entity which has been incurring continuous losses for more than five years, and such losses amount to more than the total net worth of this entity. Such entity may have also suffered losses in the current and previous financial year. A sick unit may not work to its full capacity, may not earn reasonable profit, may not pay fair wages and dividends and may face financial, marketing and other problems in a continuous manner.

The perception regarding the characteristics and symptoms of the sick industries may vary significantly as the concept of industrial sickness is relative in nature and differs from person to person. In a layman's language, industrial sickness is related to an unhealthy or sick unit, in terms of an entrepreneur, it is a unit which incurs continuous losses; for an 18 investor, sickness means an entity which is unable to pay to the investors; and for a banker, it is dividends to an entity unable to repay its loans borrowed from the bank on time. Industrial sickness in India is increasing at an annual rate of 28% in terms of number of units and 13% in terms of outstanding number of bank credit. At present, there are more than 2 lac sick units having an outstanding bank credit of over 7000 crores. Every year, approximately, 29,000 units are added to sick list in India.

Definition of Industrial Sickness

According to Companies (2nd Amendment) 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 creditors of such company.

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 Reserve Bank of India (RBI) :
"A small scale unit should be considered as sick 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 years".

Symptoms of Industrial Sickness 

Specific symptoms which are quite beneficial in the identification of industrial sickness are as follows :

1) Inappropriate utilization of resources. 

2) Rejection rate of goods manufactured is very high. 

3) Overuse of cash credit facilities on a regular basis and failing to pay installment on credits and interest on loans taken from banks and other financial institutions

4) Constant inconsistency prevailing in cash, credit accounts.

5) Failure to pay statutory liabilities.

6) Employing working capital fund.s for financing capital expenditure

7) Continuous loss of profits, fluctuations or downward trends in sales and stagnation followed by downfall in the market share.

8) Longer and larger outstanding bills. 

9) Diverging industrial funds and employing it to other purposes which may not relate to industry.

10) A major decline in the market causing failure of all the units engaged in this industry.

11) Conducting quick expansion activities and too much diversification with a short interval of time.

12) Several law suits pending against the firm. 

13) Frequent changes made in the management of the industry including professional or an individual authority.

14) Failure to submit periodical financial data, stock statement, etc.

15) Constant decrease in the working capital of industry majorly caused due to :
  • Increase in inventories involving substantial amount of slow and non-moving items.
  • Increasing number of creditors.
  • Increasing number of debtors (non-payment of sales proceeds from the side of selling agents).

Causes of Industrial Sickness 

There are various causes of industrial sickness, i.e., some business units are born sick, in some sickness may have been thrust upon, and others may have turned towards sickness due to other reasons. The dynamic economic factors and the external influence greatly affect the economic sustainability of the industry, and hence, they are responsible for sickness in an industry. Every commonly held business unit may have different reasons for sickness. However, the most prevalent causes of sickness can be categorized into two groups namely, internal and external causes. Internal and external causes of industrial sickness are as follows :

Causes of Industrial Sickness

Internal Causes for Industrial Sickness 

Factors which are within the control of management are categorized under internal causes. Some disorder arising in these internal factors becomes the cause for sickness of an industry. Some of the internal causes are e given below :

1) Lack of Finance : 
Lack of finance is one of the internal disorders which may lead to industrial sickness. It may be caused due to insufficient funds involving uneconomical and unproductive working capital management, improper utilization or diversion of funds, weak equity base, exclusion of planning and budgeting, deficient use of assets and use of inappropriate costing and pricing methods. 
For example, some of the jute industries in West Bengal.

2) Bad Production Policies : 
The next reason for sickness can be related to the production decisions viz. choosing inefficient site for conducting production activities, poor maintenance of plants and machineries, absence of quality control measures, absence of standard research and development techniques, etc. 
For example, lamp making industries are suffering from this type of sickness in India.

3) Marketing and Sickness : 
The health and vigor of an industry is invariably influenced by its marketing activities. An inappropriate marketing strategy may cause poor performance of its products and services in market, and ultimately lead towards industrial sickness. Some of these inefficient marketing strategies can be incorrect demand forecasting, selection of inappropriate product mix, absence of product planning, inappropriate market research methods, poor sales promotion techniques, etc.

4) Inappropriate Personnel Management : 
Improper personnel management yet another cause for sickness of an industry. Lack of efficient personnel management policies can be observed in the form of mismanagement of wages and salaries of employees, absence of behavioral approach causing discontentment and resentment among workers and employees, inefficient labour relations, etc.

5) Ineffective Corporate Management : 
Another important internal cause for industrial sickness is ineffective corporate management. If the corporate policies are inappropriate, its top management lacks integrity and the control lacks among corporate managers and authorities, then such reasons become the major cause for industrial sickness.

External Causes for Industrial Sickness 

These are the external factors which are beyond the control of management of an industry. Some of these external factors are as follows :

1) Personnel Constraints : 
Personnel constraints such as lack of availability of skilled manpower or labour, disparity in wages of employees and labours as compared to other industries, and the type of labour employed/available in a region. For example, leather industry is suffering problem of availability of skilled labours.

2) Marketing Constraints : 
Marketing constraints include recession in market, liberal licensing and tax policies imposed by the government and regulation on making bulk purchases, dynamic international market environment which may undergo sudden changes, etc. For example, crackers and firework industries which has been facing huge downfall in its its market demand since last year and lot of stock has been summed up in the factory. More than 100 units India are up for sale now, which is alarming.

3) Production Constraints : 
Sickness of small scale industries also arises due to the lack of power supply, fuel and high prices, dearth of raw material, import/export restrictions, etc. These factors are categorized as product constraints causing industrial sickness. For example, tariff on production material of steel, Cement, Chemical, plastic, paper, etc. remains high. This is the reason why some of these industries fail to earn profits and bears these huge expenses leading to industrial sickness.

4) Financial Constraints : 
The last most common external cause of sickness in an industry is financial constraints. Such constraints may arise due to any delay in disbursement of loan by government, unfavorable investments. credit restraints policy, etc.

Consequences of Industrial Sickness

Industrial sickness is assumed as a problem which has serious consequences. According to the opinion of the Planning Commission, industrial sickness will result in increasing problem of unemployment along with wastage of capital resources. An unfavorable climate will be developed for further industrial growth due to industrial sickness. The major sufferers of industrial sickness are workers working in sick units. Some of the major consequences associated with industrial sickness ace enlisted herein :

1) Large-Scale Unemployment : 
When a sick unit fails to take forward its operational activities and consequently shuts down, then the number of workers and labour engaged in such industries become unemployed. Such consequence is severe if the industrial unit is employing large scale workforce. For example, if a large-scale cotton textile mill becomes sick, it will greatly affect the substantial amount of workers.

2) Wastage of Resources : 
India being a capital deficient economy can encounter adverse effects, if an industrial unit is shut down due to sickness as all the resources invested in that unit will be wanted. This issue is especially critical for large scale sick units where considerable investments are employed in setting up of plants and machinery.

3) Adverse Effects on Related Units : 
Forward and backward connections create a linkage between different industries. Due to this reason, failure of one industry is expected to affect the other related industries as well. For example, a textile unit which purchases its raw materials and other inputs from other industrial unit and sells the manufactured products to other. Therefore, if the textile unit becomes sick, it will possibly. influence the business operations of these associated industrial units.

4) Industrial Unrest : 
The closure of a large-scale industrial unit may lead to the rising unrest among the workforce engaged in such unit. Such unrest may cause situations of strike which will affect the overall industrial environment affecting the production of several other associated units.

5) Adverse Effects Investors and Entrepreneurs : 
The investors who have invested their capital in an industrial unit may be largely discontented if such unit becomes sick and closes down. Such discontentment among the existing investors may also discourage the prospective investors willing to invest in these industrial units. Farther, failure of a unit acts as a deterrent to other entrepreneurs who may be planning to establish new industrial units.

6) Losses to Banks and Financial Institutions : 
Banks and other financial institutions which have provided credit to sick industrial units suffer considerable financial losses on account of closure of such units. For example, ICICI, IDBI and IFCI are some of the prominent institutions that have witnessed such losses due to the non-recovery of loans provided to the industrial units that are now categorized as sick units. Such large-scale losses may cause inadequacy of funds among banks and financial institutions arising due to blocked funds. This will further affect the future lending programmes of these institutions.

7) Decline in the Revenue of Government : 
A huge amount of revenue is generated by the central, state and local governments from industrial units in the form of taxes and duties imposed on these units. Moreover, industrial sickness causes decrease in the amount of revenue generated by the government from these units.

Remedial Measures for Industrial Sickness 

The measures to overcome industrial sickness or remedies of industrial sickness are enlisted below :

1) Effective Planning : 
It is essential for every small and medium sized enterprise to conduct in-depth survey of prevailing circumstances in small scale sector and productive programmes. Only a small number of entrepreneurs initiate their operations based on an accurate and diligent plan. Thus, effective planning is essential as all small entrepreneurs require a detailed project report or an all-inclusive feasibility study to start their units. Absence of such a planning can affect entrepreneurs with issues like inappropriate technology, under-estimation of costs, unsuitable location, unqualified or inexpert consultancy service, etc. Hence, it is indispensable for SMEs to launch effective action plans for their sustenance.

2) Improvement in Techniques of Production and Proper Technology : 
With the advent of technological advancements, firms must attempt. to upgrade their process of production. They must adopt the latest technology for producing goods/ services. Under the following circumstances, government consultancy organisations and laboratories play a crucial role. As small firms are incompetent to spend money on the latest technologies, government should arrange practical and modern methods of production for them. If financially possible, firms should also invest in their research and development activities. They should always strive for constant innovation for leading the market and sustaining in globalized business environment.

3) Training and Development : 
Industries must make coordinated efforts in bestowing formal training and education to workers involved in this sector as they are the real profitable asset of the industry. Firms should consider the expenses incurred on training and educational activities as investments for ensuring long-term of the growth business. Expertise and skills essential in the dynamic business environment should be provided by the Small Industries Association. Further, in order to compete with medium and large-scale competitors, small firms should motivate their workers by providing motivation and offering rewards.

4) Provision of Infrastructural Facilities : 
Firms require many important facilities to ensure smooth. functioning of its operations such as finance,, water supply, power arrangement, etc. These facilities are extended by small industries corporation. State technical consultancy organisations and State Development Corporation. However, their support system requires more improvement. Evolution of industrial estates has resolved this problem partly, yet more efforts are necessary to establish more industrial estates to accommodate more small units.

5) Regular Supply of Raw Materials : 
Small-scale sectors get regular supply of raw materials by Small Industries Development Corporations and other canalizing agencies. These agencies should undertake requisite actions for maintaining a steady, but proper supply of raw materials to small and medium sized enterprises. Government should also take a hand on a regular basis in arranging economical and affordable imports of raw materials. Firms on the other hand, should maintain regular procurement of raw materials for avoiding industrial sickness.

6) Adequate Credit Arrangement : 
For avoiding industrial sickness, firms and industries should arrange adequate credit for running their business efficiently. There are many small and medium sized firms which are incompetent to obtain proper financial support from banks and other funding agencies, they primarily depend more on owned funds and funds borrowed from non banking sector. However, SEBI has devised guidelines and directives for venture capital and better finance facility is expected for this sector. Moreover, lending schemes offered by priority sector should be made more wide-ranging and general credit with improved limit.

7) Effective Marketing Arrangements : 
Every firm must emphasize on their market, brand and product development. They must strive to persist in the market by paying exceptional significance on quality enhancement programme. Offering products at cheaper rates and transmitting the benefits to consumers would be advantageous in the long-run to raise their marketing performance. Marketing the products of small units by charging a very high price from the customers enables large companies to earn substantial profits. Thus, firms should adopt effective marketing strategies to overcome industrial sickness.