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Indian Economy / Industry Sector

Industrial Sickness in India


    An industry is considered to be a Sick Industry if the accumulated loss of the industry in any financial year is more than or equal to 50% of its average Networth ( Assets - Liabilities ) during 5 years immediately preceding such financial year ( or ) if it fails to repay its debts within any four consecutive quarters on a demand that is made in writing by a creditor or creditors of such company for its repayment.

    Causes of Sickness in Industries

    The causes for sickness can be broadly classified to two categories

    • Internal Causes - If the factors which cause sickness are within the control of management, we call them internal causes. These are
      • The location of industry is not at right place
      • Use of obsolete technology
      • Producing goods without proper market analysis
      • Lack of proper financial measures, which include inadequate support from banks, managing working capital inefficiently, improper utilization of assets, etc.
      • Inefficient entrepreneurs having no domain expertise and non-cooperation of management across different verticals.
      • Unavailability of labour and problems arising due to labour unions like strikes and locking out of the units due salaries, bonus, health related issues.
    • External Causes - These factors are external to the the industry itself and it cannot control on its own. These are
      • Supply of raw materials and other required inputs in an untimely manner
      • Frequent Power cuts imposed by different power distribution entities
      • Effect of business cycles in the market, resulting in lack of demand for industrial products and hence accumulation of inventory
      • Change in Government policies with respect to power tariff, taxation, subsidies, imports, exports, etc.
      • RBI monetary policy which squeezes the credit if interest rates are hiked

    Goswami Committee on Industrial Sickness

    It made the following recommendations

    • Responsibility should be fixed on promoters for whatever may be the reasons of sickness.
    • Identification of sickness in the industry at early stages.
    • Closure of sick units and disposal of the assets for repayment of the debts.

    Classification of Industries in India

    • According to Micro, Small and Medium Enterprises Development Act, 2006, enterprises are being categorized broadly into those that are engaged in manufacturing and those that are engaged in providing / rendering service.
    • Both categories are further being classified into micro, small and medium enterprises, depending on their capital investment in plant and machinery ( relevant for the Manufacturing enterprises ) or capital investment in equipment ( enterprises that are providing or rendering service )
    • In Manufacturing sector, if investment is upto Rs. 25 Lakh, it is termed as Micro enterprise. If investment is more than Rs. 25 Lakh but less than Rs. 5 Crore, it is termed as Small enterprise. If investment is Rs 5. Crore but less than Rs. 10 Crore, it is termed as Medium enterprise.
    • In Services sector, if investment is upto Rs. 10 Lakh, it is termed as Micro enterprise. If investment is more than Rs. 10 Lakh but less than Rs. 2 Crore, it is termed as Small enterprise. If investment is Rs 2. Crore but less than Rs. 5 Crore, it is termed as Medium enterprise.
    • If the investment is more than the upper limit of the Medium enterprise, it is termed as Large enterprise.