Meaning & Causes of Industrial sickness - Problems of growth, Business Environment | Business Environment - B Com PDF Download

Meaning:

One of the adverse trends observable in the corporate private sector of India is the growing incidence of sickness. It is causing considerable concern to planners and policymakers. It is also putting a severe strain on the economic system, particularly on the banks.

There are various crite­ria of sickness. According to the criteria accepted by the Reserve Bank of India “a sick unit is one which has reported cash loss for the year of its operation and in the judgment of the financing bank is likely to incur cash loss for the current year as also in the following year.”

A major symp­tom of sickness is a steady fall in debt-equity ratio and an imbalance in the financial position of the unit. Simply put, a sick unit is one which is unable to support itself through the operation of internal resources (that is, earnings plough-back). As a gen­eral rule, the sick units continue to operate below the break-even point (at which total revenue = total cost) and are, thus, forced to depend on exter­nal sources for funds of their long-term survival.

Industrial sickness creates various socio-eco­nomic problems. When an industrial unit falls sick those who depend on it have to face an uncertain future. They fear loss of jobs. Even if they do not lose jobs they do not get their wages and compen­sation in time and are, thus, forced to live in ex­treme hardship.

Of course, sickness is not a special problem of India. It is, undoubtedly, a global phenomenon. Even in industrially advanced countries there are numerous cases of bankruptcy or liquidation. These sick units are nursed back to health through merg­ers, amalgamations, takeovers, purchase of assets, or outright nationalisation. When the-problem becomes really alarming or unmanageable, the unit is permitted to die its natural death.

Causes:

Industrial sickness has become a major problem of the India’s corporate private sec­tor. Of late, it has assumed serious proportions. A close look reveals that there are, at least, five ma­jor causes of industrial sickness, viz., promotional, managerial, technical, financial and political.

An industrial unit may become sick at its nascent stage or after working for quite some time. For instance, two major traditional industries of India, viz., cot­ton textiles and sugar, have fallen sick largely due to short-sighted financial and depreciation poli­cies. Heavy capital cost escalation arising out of price inflation accentuates the problem. The his­torical method of cost depreciation is highly inad­equate when assets are to be replaced at current cost during inflation.

Moreover, since the depre­ciation funds are often used to meet working capi­tal needs, it does not become readily available for replacement of worn-out plant and equipment. The end result is that the industrial unit is constrained to operate with old and obsolete equipment, its profitability is eroded and, sooner or later, the unit is driven out of the market by the forces of compe­tition.

External vs. Internal Causes:

The factors leading to sickness can be due to reasons of finance, technical issues, mismanage­ment, non-availability of raw materials, power or natural calamities or disasters such, as fire or earth­quake or a combination of such factors.

The causes of industrial sickness may be divided into two broad categories:

(i) external and
(ii) internal.

External causes are those which are beyond the control of its management and seen to be rela­tively more important than internal causes.

The causes which have been identified so far include:

(a) Delay in land acquisition and building construction
(b) Delay in obtaining financial as­sistance from public financial institutions
(c) De­layed supply of machinery by the manufacturers
(d) Problems related to recruitment of technical and managerial staff
(e) Delay on the part of the Government in sanctioning licences, permits, etc.
(f) Shortages of basic inputs like power and coal. Other causes include
(g) Cost over-runs due to factors beyond the control of management
(h) Lack of demand for products or shift of demand to products of rival firms due to delays in project implementation

(i) Unsatisfactory performance by collaborators—financial and technical
(j) Large changes in the scale of operation and optimum product mix in the long run and, last but not the least
(k) Changes in the policy of the Government relating to movement of goods from one place to another within the country

The primary cause seems to be:

(i) “Lack of experience of the promoters in a specific line of activity”.

The other causes are:

(ii) Differences among various persons associated with the pro­motion and management of the enterprise
(iii) Mechanical defects and breakdown
(iv) Inability to purchase raw materials at an economic price and at the right time
(v) Failure to make controls effective in time, in case of deficiencies in work­ings
(vi) Deteriorating labour-management rela­tions and the consequent fall in capacity utilisa­tion
(vii) Faulty financial planning and lack of balance in the financial (capital) struc­ture.

It is often observed that many projects are started without proper feasibility study. Hardly any long-term view of the future is taken. Instead, a project is sought to be managed on the basis of myopic vision, inadequate analysis and improper approach. Often industrial projects are started on an ad hoc basis without gathering much informa­tion about the expertise and competence needed for the purpose.

Moreover, once the construction work is started on the basis of a project report, there is no periodic assessment (or review) of the economic viability of the project. Often major changes in the political and economic environ­ment (such as change in the party in power or change in Government) make the basic assump­tions underlying the project unrealistic or inap­propriate. Yet the project is made to remain opera­tional without considering the after-effects.

So, there are various reasons that make in­dustries sick. The prime among this is market-related. Market obsolescence is one of the prime reasons for units turning sick. A striking example is that of the jute industry, where “the non-avail- ability of raw materials and constant power short­ages have made many units sick. And bankers are not normally very responsive in helping a com­pany that has gone sick.