- Definition:- Industrial sickness is defined in India as “an industrial company (being a company registered for not less than five years) 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”.
Causes of Industrial sickness:-
- Power cuts:- A large number of industrial units face power cuts from time to time. These power cuts are imposed by the state governments as the generation of power is considerably below its actual requirements. Drought situation during some years in a number of States further aggravated the problem and acute power shortage resulted in frequent power cuts.
- Erratic supply of Inputs:Erratic and insufficient supply of inputs like raw-materials, power, skilled manpower, finance, credit and transport at reasonable prices could cause disturbance in the production schedule and ultimately result in sickness of the firm.
- Government Policy:Excessive govt., control and restrictions on capacity utilisation, location, product mix, product quality, prices, distribution etc. come in the way of smooth functioning of the firms and often result in sickness of the firm. Further, frequent changes in government policy relating to industrial licensing, import, exports, taxation, credit can make healthy units sick overnight.
- Erratic supply of inputs:- Some units depend on scarce raw material whose supply is erratic. This results in distributing the production schedule causing losses to the unit. This often happens in the case of units depending upon the supply of imported inputs. Insufficient availability of transport facilities can also upset the supply schedule of inputs.
- Faulty planning:At the planning stage itself, weak foundations may be laid, which may ultimately result in downfall of the unit.
- Incompetent Entrepreneurs:Many persons starting new business lack technical knowledge of the product they want to manufacture. It is the normal case with small scale entrepreneurs. They sometimes plough into production activity, without bothering to find out the marketing potential of their product or sometimes they start production without properly calculating the ultimate cost. Poor maintenance of plant and machinery, constant technical problems with maintenance of production volume, quality, time schedule and cost limits may ultimately spell doom for the firm.
- Problems relating to Management:Since Production, marketing, finance, etc. are in the hands of management, any wrong decision by them in regard to these fields may ultimately ruin a firm. The management may lack business acumen to make demand projections, to push the product in the market, to build up market image and customer loyalty, to face competition and so on.
- Improper level and use of working capital can also ruin the firm. Similarly, poor industrial relations, lack of human resources planning, faulty wage and promotional policies can cause problems for the existence of the firm. So, incompetent management is the most important reason behind industrial sickness.
- Financial problems:These problems are generally faced by small units. Often the financial base of the small units is very weak. They generally borrow from their own known sources or banks, rather than approaching market. Generally, they are unable to meet their debt obligations in time and these debts accumulate. Banks normally do not help at this stage when symptoms begin to show the problem and sickness becomes chronic.
- Labour unrest:Labour unrest for a long period may ultimately spell doom for the firm.
Consequences of Industrial sickness:-
- Loss to Employment Opportunities: One of the serious consequences of industrial sickness has been loss to employment and, thereby, aggravating the most dangerous socio-economic problem of unemployment in a labour surplus economy likes ours.
- Fear of Industrial Unrest: The closure of sick units causes not only unemployment, but leads to industrial unrest also. Whenever the workers are retrenched and rendered out of jobs, the trade unions oppose it and resort to industrial strikes. Such disturbances threaten the peace and tranquillity of the industrial environment. This results in setback to industrial production.
- Wastages of Scarce Resources: In an under-developed economy like ours, the resources are already scarce. If these scarce resources are locked up in sick units, it becomes the wastage of scarce resources which otherwise invested would have yielded substantial returns to the economy.
- Adverse impact on related units: Frequently, an individual in it is linked up with a number of other industrial units through backward and forward linkages. Therefore, sickness is one unit likely to affect adversely a number of other units. For instances, iron and steel industry is linked up with a number of other industries via backward and forward linkages. Accordingly, sickness in a large unit manufacturing iron and steel is likely to have adverse repercussions on a number of other units.
- Loss of Revenue to the Government: The government raises a substantial portion of its revenue from industrial units by way of various taxes and duties levied on them. But, when a large number of industrial units become sick, the possibilities for raising substantial revenue from the sick units by way of various levies are greatly reduced. Thus, industrial sickness results in loss of revenue to the Government also. The shortage of revenue ultimately affects the functioning of the economy as a whole.
- Adverse effect on investors and entrepreneurs: Closure or liquidation of a large sick unit creates a psychology of despair amongst investors. The share price of that unit will tumble down and prevalence of gloomy market conditions can adversely affect the entire stock market.
- Huge Financial Losses to the Banks and the Financial Institutions: The banks and the financial institutions provide substantial funds to start an industry. Obviously, the locking up of substantial funds in the sick industrial units impinges on the future lending capacity of the banks and the financial institutions.