Industrial Sickness – Sick Small Scale Units – Entrepreneurship

In order to clearly understand the concept of industrial sickness we must first understands the difference between a sick unit and a healthy unit.

  • A healthy unit or healthy industry is one which earns an adequate return on capital invested and is capable of earning profits.  
  • A sick unit or sick industry is an Industry which has become inoperative or an industry which is working at very low capacity.

 

According to Reserve bank of India, “A sick small scale unit is one which fails to generate internal surplus on continual basis and depends for its survival on frequent infusion of external funds”

According to the Sick Industrial Companies Act,  a sick industry is 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 proceeding such financial year”

Simply defining, a sick unit is one which incurs heavy cash losses in a particular year and in the opinion of the financial institutions, it is likely to continue incurring losses in the following years.   

 

Symptoms of industrial sickness  

  • Frequent closure of units due to problems of work load, power supply or natural causes.
  • Frequent break down of machinery and facilities and inability to repair them at reasonable cost and time.
  • Heavy rejection of goods due to quality problems, blockage of funds for inputs, Work in progress
  • Increasing cost of production and continuous decline of capacity utilization
  • Funding problems and inability to pay statutory obligations of various taxes, rent, electricity bills etc.
  • Frequent turnover of employees
  • Deteriorating financial ratios
  • Use of very old machinery and low employee morale

 

Causes of Industrial sickness

(i) Internal causes of industrial sickness →

Lack of finance

  • Weak equity base and poor utilization of assets
  • Inefficient working capital management
  • Absence of costing & pricing and budgeting
  • Inappropriate utilization of funds

Lack of Marketing

  • Faulty Demand Forecasting & Market analysis
  • Inappropriate marketing mix
  • Absence of product planning
  • Wrong Marketing Research
  • Poor sales promotion and selling efforts

Bad Production Policies

  • Wrong selection of site, layout, processing
  • Lack of Plant & machinery
  • Lack of quality control
  • Lack of research and development
  • Under-utilization of capacity

Entrepreneurial incompetence

  • Lack of knowledge
  • Lack of innovation
  • Lack of motivation
  • Lack of skill

Inappropriate personnel management

  • Poor wages and salary administration
  • Bad labour relations
  • Lack of behavioral approach
  • Low employee morale

Ineffective Corporate Management

  • Improper corporate planning
  • Lack of integrity in top management
  • Lack of coordination and control

(ii) External causes of Industrial sickness →

Personnel constraints

  • Lack of skilled labour
  • Disparity in wages
  • High employee turnover
  • Lack of technical or professional skill

Marketing constraints

  • Liberal licensing policies
  • Restraint on bulk purchases
  • Changes in global market scenario
  • Excessive tax policies
  • Market recession

Production constraints

  • Power cuts
  • Shortage of raw materials
  • Shortage of power
  • Shortage of fuel
  • High prices of inputs
  • Import export restrictions

Financial limitations

  • Credit restrains policy
  • Delay in disbursement of loans by government
  • Unfavourable investments
  • Lack of credit facilities
  • High interest rates on loan

Government policies

  • Unfavourable government policies
  • Lack of support from government
  • Taxation, licensing

Competition

Small scale industries face competition from big industries associated with the trade. Sickness is caused by:

  • Inability of large industries to give work load to small industries
  • Inability of large Industries to encourage entrepreneurial
  • Lack of interest of large industries to uplift or develop sick units

 

Consequences of Industrial Sickness

  • Loss of GDP of the country
  • Decline in production and wastage of scarce resources
  • The industrial climate becomes non-conducive to industrial development
  • Prospective investors and entrepreneurs get discouraged
  • Industrial unrest like strikes, lockouts, unemployment, social unrest etc.
  • Loss of interest on borrowings by Financial institutions
  • Loss in Tax revenue of Government

 

Remedial Measures to Overcome Industrial Sickness

  • Identifying the sick units at initial stages and avoiding sickness
  • Merging sick units together
  • Rehabilitating sick units by solving personnel problems, marketing problems, quality problems etc. 
  •  Debt restructuring and infusion of external funds for sick units
  • Increasing Workers participation in management of sick units
  • Having a strict control over costs 

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