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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 and external causes

    • 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 unitsand 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.