B.A L.L.B. 2nd Year ECONOMICS – II Unit – 3 (Economics Notes)

B.A L.L.B. 2nd Year ECONOMICS – II Unit – 3 (Economic Problems and Polities in India)

Unit -3

Meaning of Industrial Sickness:

The strength of the industrial sector, by and large, determines the soundness of the economy.  A developing economy like India cannot afford the growing sickness in industries as it results in a colossal wastage of physical, financial and human resources. In the presence of the resource crunch, the industrial sickness becomes all the more an alarming problem. Industrial sickness usually refers to a situation when an industrial firm performs poorly, incurs losses for several years and often defaults in its debt repayment obligations.

The Reserve Bank of India has defined a sick unit as one “which has incurred a cash loss for one year and is likely to continue incurring losses for the current year as well as in the following year and the unit has an imbalance in its financial structure, such as, current ratio is less than 1: 1 and there is worsening trend in debt-equity ratio.” The State Bank of India has defined a sick unit as one “which fails to generate an internal surplus on a continuous basis and depends for its survival upon frequent infusion of funds.”

Nature and Causes of Industrial Sickness:

Competition breeds efficiency but adversely affects weak industrial units and makes them sick. The clear directional changes since 1982-83 towards liberalization of industrial licensing policies, foreign collaboration approvals, the concept of minimum-size plants are welcome from consumers’ point of view. But the weaker units have to pay the price. The inevitable cost of achieving competitive efficiency is that the weak must be allowed to fade. But the country cannot allow this to happen.

The Sick Industrial Companies (Special Provisions) Act, 1985, was enacted to help and revive the sick units. The substantive portions of the Act came into force from May 15, 1987. The Act provided for setting up of a quasi-judicial body designated as the Board for Industrial and Financial Reconstruction (BIFR) to deal effectively with the problem of sick industrial companies. The Reserve Bank of India has issued guidelines to banks to strengthen the monitoring system and to arrest industrial sickness at the incipient stage

Nature of Sickness:

Sickness in industry can be classified into:

(a)     Genuine sickness which is beyond the control of the promoters of the concern despite the sincere efforts by them,

(b)     Incipient sickness due to basic non-viability of the project, and

(c)      Induced sickness which is due to the managerial incompetence and wrong policies pursued deliberately for want of genuine stake.

This is a man-made sickness in which some unscrupulous promoters adopt fraudulent practices to start a concern and to get away with the money obtained by fraud and deceit.

The FICCI study entitled ‘Industrial Sickness — Dimensions and Perspectives’ says that the causes of sickness are both internal and external, often operating in combination. External factors are government policies on pricing, duties, taxes, high interest rates, taxes on profit, slackness in demand, sluggishness in export markets, high labour cost, inadequate availability of inputs, lack of infrastructure and the like.

The internal factors which contribute to sickness are wrong planning in relation to location, technology, capital cost, technological obsolescence, management deficiencies and industrial unrest. We explain below these external and internal factors in some detail.

External Factors:

(i) General Recessionary Trend:

Sometimes a general depression hits industrial units. This is reflected in lack of demand for industrial products in general. An overall slowdown in economic activities affects the performance of individual projects. Improper demand estimation for the products to project lands the industrial units in difficulties.

(ii) High Prices of Inputs:

When the costs of manufacture are high and sales realisation low, the industrial unit cannot stand in the market. This happens when the prices of inputs such as price of fuel such as petroleum during energy crisis goes up whereas the competitive forces keep down the prices of the products.

(iii) Non-Availability of Raw Materials:

When the supplies of raw materials are not available regularly or in good quality, the industrial units are bound to be in trouble. This often occurs in case of supply of imported raw materials.

(iv) Changes in Government Policies:

The industrial sickness is also caused by certain changes in policy designs of the government. These frequent changes affect the long-term production, financial and marketing planning of an industrial unit. Changes in Government policies regarding imports, industrial licensing, and taxation can make viable units sick. For example, liberal import policy since 1991 has rendered many small-scale industrial units sick.

(v) Infrastructure Bottlenecks

Often the infrastructure difficulty is responsible for industrial sickness. No industrial unit can survive prolonged transport and power bottlenecks.

Internal Factors:

 (i) Project Appraisal Deficiencies:

The industrial unit becomes sick when the unit has been launched without a comprehensive appraisal of economic, financial and technical viabilities of the project.

(ii) Industrial Unrest and Lack of Employee Motivation:

When there is labour discontent, no industrial unit can function smoothly and efficiently. When labour lacks motivation no good results can be expected and this results in sickness and non-viability of several industrial units.

(iii) Wrong Choice of Technology:

If the promoters use wrong technology, results are bound to be unsatisfactory. Many industrial units, especially in the small-scale sector, do not seek professional guidance in installing the correct machinery and plant. If the machinery and plant installed turn out to be defective and unsuitable, they are bound to suffer losses and become sick and non-viable.

(iv) Marketing Problems:

The industrial unit becomes sick due to product obsolescence and market saturation. The industrial unit becomes sick when its product-mix is not attuned to the consumers’ demand.

(v) Wrong Location:

If the location of an industrial unit happens to be defective either from the point of the market or the supply of inputs, it is bound to experience insurmountable difficulties.

(vi) Lack of Finance:

Inadequate financial arrangements or in the absence of timely financial aid an industrial unit is bound to come to grief. It will not be able to withstand operational losses.

(vii) Improper Capital Structure:

If capital structure proves to be unsound or unsuitable especially on account of delayed construction or operation, it will result in cost overruns or unduly large borrowing and create financial trouble for the unit concerned.

(viii) Management Deficiencies:

The biggest cause of industrial sickness is the managerial inefficiency. Lack of professional management or experienced management and the existence of hereditary management is an important cause of industrial sickness. Inefficient management results in inability to perceive things in proper perspective devoid of routine considerations. Inefficient management is also unable to build up good team and inspire confidence for an organized collective effort and takes autocratic and high-handed decisions.

(ix) Voluntary Sickness:

There is some sickness which is voluntarily invited by the entrepreneurs for various motives like getting government concession or aid from financial institutions. Thus industrial sickness cannot be attributed to any single or simple cause but may be the result of a combination of number of allied causes.

An analysis of 637 large-scale units identified that deficiency in management was responsible for 52 per cent cases of sickness. While labour troubles caused sickness only in 2 per cent of the industries, market recession and environmental factors came second with 23 per cent.

The other causes were technical factors and faulty initial planning (14 per cent) and infrastructural factors such as power cuts and shortage of critical inputs (9 per cent). Of the 637 large units, 350 could be put back on the track. Of these, 221 units, with the outstanding credit of Rs. 1,125.06 crores were put under the nursing programme.

Suggestions for Rehabilitation of Sick Units:

The rehabilitation of sick units or restoring them to normal health is a matter of great urgency in view of the serious social, economic and political consequences of industrial illness.

The following measures may be suggested:

(i) Cooperation between Term-Lending Institutions and Commercial Banks:

Since commercial banks provide working capital, they are in a position to know about the working of industrial concern. But assistance from term-lending institutions is also essential for rescue operations.

(ii) Coordination between Various Government Agencies:

All government agencies, both regulatory and promotional, must join hands to restore sick units to health.

(iii) Full cooperation from various suppliers,’ unsecured creditors and other stakeholders, particularly from the employees, is also essential to take the concern out of the difficulties in which it is involved.

(iv) Willing Cooperation and Clear Understanding with the Project Promoters:

Generally there is a lack of trust and confidence among the various interests concerned. It is found that government agencies and dealing institutions are more worried about their money and are anxious to recover them instead of curing of the health of the sick units.

(v) Checking Over-Valuationof Inventories:

The banks should verify on a regular basis the valuation of inventories both in terms of quantity and price. This would prevent over-borrowing on the hypothecation of inventories.

(vi) Marketing:

There should be well organized and scientific marketing by the project promoters otherwise launching of a project will be a leap in the dark. Good marketing arrangements will prevent industrial sickness.

(vii) Recovery of Outstanding:

Every effort should be made to realize outstanding advances so that the concern is able to gather funds to avoid sickness.

(viii) Modernisation of Machinery:

If the sick unit is to be restored to health, old and obsolete machinery and outdated technology should be discarded at the earliest.

(ix) Improving Labour Relations:

Restrictive labour and unreasonable trade unions are great obstacles. Improving labour relations will go a long way in curing industrial sickness.

(x) Efficient Management:

If necessary inefficient management should be replaced. The key to industrial health lies in alert and efficient management. The management should show a calm approach, patience and perseverance, courage and ability to steer in bad weather.

(xi) Performance Incentives:

It is necessary to offer performance incentives to the executives and the workers to induce them to put in their best efforts. This will be quite helpful in curing industrial sickness.

(xii) Sympathetic Government Attitude:

During periods of industrial illness the government agencies should adopt a sympathetic and understanding attitude so that the problem is not aggravated but moves towards a solution instead.

(xiii) Austerity and Economy:

Austerity and disciplines should be enforced at all levels. Every effort should be made in raising funds internally through the sale of excess assets, surplus machinery, etc. Uncalled for tours, lavish entertainments, unnecessary personal expenses should be ruthlessly cut down.


In view of the large-scale industrial sickness it would be necessary to organize a task force consisting of competent and experienced executives in various branches of business to go into the case and monitor recovery. Rehabilitation of sick units is not an easy and simple affair. An all-round effort is necessary to root out the disease, first necessary step is the identification of sick units which can be made viable through renovation, expansion, and diversification. Units beyond recovery should be wound up.

The second step is the reconstitution of management. Where the management is unwilling or unable to play its proper role, the financial institutions and the government agencies should intervene to fulfill their large social responsibility of ensuring efficient use of national resources. Since industrial sickness is due both to external causes, e.g., general recession, and internal causes like dishonest and inefficient management, the remedy must also lie in both directions.

With a view to meeting the situation, the early warning system is strengthened. Viability studies should be undertaken to identify the sick units including creeping sickness which could be eventually restored to health with additional financial aid on liberal and easy terms. To an extent increase in industrial sickness is inevitable result of the very process of modernisation or technological development industry. It is natural that the units which cannot keep pace with the ongoing technological change will become sick, they should be allowed to wind up.

support aid and lift sick in­dustrial units from the situations that befall them. It is also the level of service and support in terms of financial advice, assistance in related matters of insurance, release of hypothecated assets and timely finance.

The Sick Industrial Companies (Special Pro­visions) Bill, 1997, passed by LokSabha, intro­duced encouraging changes. It suggested that a time-bound procedure was to be adopted within which the scheme has to be sanctioned and BIFR would play the role of a mediator and not a court.

Technical obsolescence and financial mis­management are also important factors that lead to industrial sickness. As per the new provisions, an opportunity will be given to get an unanimous consent to a scheme from all concerned, failing which secured creditors will attempt to form a scheme and, if all this fails, the undertaking would be sold off. Only if it is not possible to do that, the BIFR may order winding up of the company.

Meaning and Definition of Industrial Relation

The relationship between Employer and employee or trade unions is called Industrial Relation. Harmonious relationship is necessary for both employers and employees to safeguard the interests of the both the parties of the production. In order to maintain good relationship with the employees, the main functions of every organization should avoid any dispute with them or settle it as early as possible so as to ensure industrial peace and higher productivity. Personnel management is mainly concerned with the human relation in industry because the main theme of personnel management is to get the work done by the human power and it fails in its objectives if good industrial relation is maintained. In other words good Industrial Relation means industrial peace which is necessary for better and higher productions.

Definition:-i. Industrial Relation is that part of management which is concerned with the manpower of the enterprise – whether machine operator, skilled worker or manager-(Bethel, Smith & Group)

  1. Industrial Relation is a relation between employer and employees, employees and employees and employees and trade unions. – (Industrial dispute Act 1947)

iii. While moving from jungle of the definitions, here, Industrial Relation is viewed as the “Process by which people and their organizations interact at the place of work to establish the terms and conditions of employment.” The Industrial relations are also called as labour – management, employee-employers relations.

Features of Industrial Relations

  1. Industrial Relation do not emerge in vacuum they are born of employment relationship in an industrial setting. Without the existence of the two parties, i.e. labour and management, this relationship cannot exist. It is the industry, which provides the environment for industrial relations.
  2. Industrial Relation are characterised by both conflict and co-operations. This is the basis of adverse relationship. So the focus of Industrial Relation is on the study of the attitudes, relationships, practices and procedure developed by the contending parties to resolve or at least minimize conflicts.
  3. As the labour and management do not operate in isolations but are parts of large system, so the study of Industrial Relation also includes vital environment issues like technology of the workplace, country’s socio-economic and political environment, nation’s labour policy, attitude of trade unions workers and employers.
  4. Industrial Relation also involve the study of conditions conductive to the labour, managements co-operations as well as the practices and procedures required to elicit the desired co-operation from both the parties.
  5. Industrial Relations also study the laws, rules regulations agreements, awards of courts, customs and traditions, as well as policy framework laid down by the governments for eliciting co-operations between labour and management. Besides this, it makes an in- depth analysis of the interference patterns of the executive and judiciary in the regulations of labour–managements relations. In fact the concepts of Industrial Relations are very broad-based, drawing heavily from a variety of discipline like social sciences, humanities, behavioral sciences, laws etc.

Objectives of Industrial Relation

Following are the important objectives of industrial relation

1)      To safeguard the interest of labour and management by securing the highest level of mutual understanding and good-will among all those sections in the industry which participate in the process of production.

2)     To avoid industrial conflict or strife and develop harmonious relations, which are an essential factor in the productivity of workers and the industrial progress of a country.

3)      To enhance productivity to a higher level in an era of full employment by lessening the tendency to high turnover and frequency absenteeism.

4)      To establish and nurse the growth of an Industrial Democracy based on labour partnership in the sharing of profits and of managerial decisions, so that ban individuals personality may grow its full stature for the benefit of the industry and of the country as well.

5)      To eliminate, as far as is possible and practicable, strikes, lockouts and gheraos by providing reasonable wages, improved living and working conditions, said fringe benefits.

6)      To establish government control of such plants and units as are running at a loss or in which productions has to be regulated in the public interest.

7)      Improvements in the economic conditions of workers in the existing state of industrial managements and political government.

8)     Control exercised by the state over industrial undertaking with a view to regulating production and promoting harmonious industrial relations.

9)      Socialisations or rationalization of industries by making the state itself a major employer.

10)   Vesting of a proprietary interest of the workers in the industries in which they are employed. The main aspect of Industrial Relations










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