Industrial Sickness in India Assignment Help
Background
The issues of business closure, liquidation and bankruptcies has become normal aspects of competitive market economies all over the world. The competition is intense within all industries and marketing environment is changing rapidly and abruptly, which has led to increasing incidences of corporate failure at global level. It has been found by Taylor & Bain (2005) that although resilience is witnessed in current competitive market economies, to absorb the effect of economic disturbance brought the corporate failures. Yet, the notion of industrial sickness has grabbed the attention of both researchers as well as practitioners to recognize the adverse consequences of this phenomenon on long run health of market economies. The sickness is considered as a phenomenon, whereby financial position of specific business unit is deteriorated year by year and it experiences losses in its business operations. The effect of sickness is not confined to single business unit and it prevails to whole industry, as well as to different related units and industry sectors (Ojha, 2018). Although, notion of business unit or industrial sickness is relevant to all small as well as large businesses, yet it is found to be more relevant to small scale businesses, which have limited amount of finance available to run its operations (Pal, 2019). The limited access to resources, limited scope of business operations and focus on relatively narrow segment of market; are same main aspects which restrict the ability of small businesses to cope with the market challenges, thus leading to their sickness, which might cause death of these businesses in worse case (Tabassum & Fasi, 2017).
The problem of sickness in Indian industry has widely been witnessed over the years and the issue has found to be extending in seriousness over time. For instance, it was found that in 1976, there were about 300 small and medium sized business units which were closed based on the issue of sickness or were at the verge of getting closed (Roy & Basu, 2015). The situation has continued to persist for the next decades, as the economic survey of 1989-1990 has mentioned that among the issues experiences by Indian industry, the problem of sickness is the most prevalent as well as persisting (Reddy & Reddy, 2020). The data of Reserve Bank of India has shown that during 1989-1990, the sickness was prevailing in small scale sector to the extent that every seventh unit was found to be sick. The background information also shows that mainly the sick industrial business units are Jute, engineering and textile industry (Singh, 2011). Likewise, the cotton, sugar and small steel industries have also witnessed the issue of sickness over time. It is addressable that Government of India has made substantial effort to help revive the sick industrial units, based on provision of Sick Industrial Companies Act of 1985, which has officially came into force since 1987 (Shetty & Shetty, 2020; Mehta & Harode, 1998). The efforts were made to arrest the sick industrial units at their initiation stages, such that any early treatment might encourage early recovery of the business units.
Followed by the implication of Sick Industrial Companies Act, there were still evidences of sickness in different industrial units. For instance, the research has indicated that by the end of 2003 there were around 1.71 lakhs of sick business units, of which about 1.67 lakhs business units were small scale units. It indicates that 98% of total sick units were from small scale businesses (Reddy & Reddy, 2020). The number of sick units has increased gradually over the years, such that there were 271,206 sick business units in 1995 and 307,399 sick business units in 2000. However, the number declined in the next five years period, such that in 2005, there were 143,293 units (Navulla, Guniganti & Boda, 2016). In spite of this decline in sick business units, it is still evident that major threat of economic slowdown in India, is caused by sick industries and thus exploration is needed on investigating the causes of sickness, such that any measures can be taken to deal with it.
Problem Statement and Research Significance
The growth of Indian economy is mainly dependent on the development of industries and business units, which not only offer contribution in economic expansion of the country but also play vital role in enhancing employment prospects. The burden from economy is shared by businesses at large, and among large scale industries, the small and medium businesses are also said to play substantial role in economic growth (Navulla, Golla & Sunitha, 2016). The effective distribution of wealth is assisted by growth of businesses and mainly the growth of economy is the outcome of growth of industries. However, it is witnessed that in India, industrial sickness has remained one of the key issue, which has not only affected the growth rate of industries but has also influenced the economic growth of India as a whole. Of the small and medium sized businesses, the substantial proportion of business units have closed, which have laid numerous direct as well as indirect burden on the economy (Mondal & Roy, 2013). Based on this notion, there is greater need to conduct a study through which causes of industrial sickness can be identified, as well as remedial measures can be explored through which issue of sickness can be addressed.
There will be both practical as well as theoretical significance of the research, given that practically it will enable small scale business units to recognize the causes of sickness. Based on the identification of causes, the steps can be taken by them to address those causes, such that sickness of business units can be handled and their long run health and wellness can be assured. On the other hand, the business units will also be able to identify the impact of their sickness on economy and society and thus they might understand the wider impact of their actions on overall industry and economy. It can direct their attention towards actions which can help them to address the issue of sickness. Further, the study will also highlight impact of different remedial measures on treating the sickness of business units. This evidence will serve as guiding principle for suffering business units to deal with the symptoms of sickness and thus it is expected that results of study will help the sick business units to seek remedy of their ailment. On the other hand, with respect to theoretical contributions, the results of the study will add significantly in sickness related literature in the context of Indian industry. The results of the research will provide inclusive insight to researchers about the causes, effects and remedial measures of the industry sickness.
Research objectives
The underlying research study is guided by two kinds of research objective, including primary and secondary research objectives, given below.
Primary objectives
- To examine the causes of industrial sickness in the context of Indian industry
- To evaluate the effect of remedial measures, which are adopted for industrial development by governments, financial institutions and entrepreneurs
Secondary objective
- To study the effect of industrial sickness on industrial growth and society, with specific emphasis on industrial sickness in small scale sector
- To study and analyze the problems faced by sick entrepreneurs with respect to causes of sickness and it revival.
Research Questions
The study will focus on answering the following research questions;
- What are the causes of industrial sickness with respect to Indian industry?
- What are effects of remedial measures which are being adopted by governments, financial institutions and entrepreneurs?
- What are the effects of industrial sickness (specifically sickness of small sector) on industrial growth and society?
- Which problems are faced by sick entrepreneurs with respect to revival of sick business units?
Literature Review
The phenomenon of industrial sickness has largely been studied in the context of international industry and sine qua non of sickness is linked with the notion that cost effectiveness is not achieved during the production process (Pathak, 2016). It is addressable that firms which fail to maintain competitive efficiency are likely to get sick, whereby sickness of company is defined as an industrial organization that has been registered as company for five years or more and for any given financial year, accumulates financial losses equal to or exceeding net worth of the company. Additionally, the industrial unit is also likely to experience shortage of cash in the preceding financial years, which might be considered as a signal that there exists threat to long run survival of the business (Prasain & Singh, 2012). The sick business unit has also been defined by the Reserve Bank of India, as the one that has faces loss of cash in existing year and faces same for the coming year, along with experiencing imbalance in financial structure of the business unit. The level of current ratio is less than 1:1 in case of sick business unit and there is deteriorating condition of debt to equity ratio (Manimala & Panicker, 2011). On the other hand, the sick business has also been defined by state Bank of India, as the one that is not able to generate surplus for any financial year and continually makes reliance on injection of funds for assuring its survival (Ranjithkumar, 2017). Based on this definition, a sick business unit becomes unable to operate below the breakeven point and in order to assure its survival, it needs to maintain reliance on external sources of funds.
Specifically, for small scale businesses, the sickness is witnessed when capacity utilization of small businesses is 50% less than the highest capacity utilization achieved by the specific business unit in five preceding financial years (Prasain & Singh, 2012). Additionally, the small scale business unit is considered sick when its net worth decreased by 50% given a specific financial year. Finally, when a specific small scale business unit remains close or discontinue its operations for period of six months or more, then it is regarded as a sick business unit (Kumar & Sardar, 2011). Therefore, based on these insights, it has been mentioned by Kohli (2006) that signs and symptoms can be detected by small scale business owners on early basis through identification of unbalanced financial structure. Thus based on early identification of symptoms of sickness, actions might be taken by small scale businesses to address the sickness through modification of internal factors. For instance, the actions could be linked with enhancing the range of product offerings, extension of target markets, recruitment of effective human resources or any other relevant actions. Mannar (2019) highlighted that if identified and approached in effective and appropriate manner, then any sick business unit can treated at right time, assuring its good health in long run.
While exploring the types of sick industries and companies, the researchers have highlighted three main types of sick companies. These three sick businesses include; born sick, become sick and made sick. Firstly, with respect to born sick businesses, it has been stated by Golla & Rao (2019) that sickness does not only have post implementation features but some businesses could be born sick based on ineffective planning, poor selection of products and projects, bad investment decisions, inappropriate survey of market condition and entering into the wrong target market. For instance, it has been mentioned by Hill (2009) that some entrepreneurs are unaware of the specifications and requirements of feasible planning for a new venture and they start a business that is sick by birth. Secondly, the businesses become sick when they are subject to poor internal circumstances, such as ineffective management, ineffective manufacturing and marketing, poor recruitment and other inappropriate decisions. Based on evidences mentioned by Kohli (2006) it is noted that mainly medium and large scale businesses fall sick because of internal factors. This might be based on the notion that mainly large businesses have separation of ownership and control, which might give rise to management related issues. Finally, the business units can be made sick based on the involvement of external forces, which might be beyond the control of management. For instance, the made sick business could be the result of abruptly changing political situation, changing policies of Government, breakthrough advancements in technology as well as changes in social trends. It is mentioned by Goyal, Gupta & Gupta (2012) that sickness of small business units is mainly subject to external factors, as small businesses have limited capacity to deal with abrupt changes in external environment.
It has been highlighted by Ali & Fazili (2017) that there are both internal as well as external causes of industrial sickness, which are needed to be identified, prior to exploration of any remedial measures of sickness. Firstly, the internal causes could arise due to inefficiency or incompetence of management, which could hinder the ability of business unit to manage its operations in effective way and thus leads to worsening financial position of the business (Allen et al., 2006). Among these internal causes the following are noteworthy, encompassing; entrepreneurial incompetency, financial problems, management problems, issues with demand forecasting, reliance on defective machinery and equipment, ineffective recruitment of human resources, ineffective marketing and many others (Goswami, Hazarika & Sarma, 2012). The list of internal causes of sickness can become highly exhausted if each cause of sickness is addressed. The key issue stands in the notion that when organization does not highlights its internal weaknesses at appropriate time, then it could become unable to deal with the issues arising as the result of the organizational weaknesses, leading to sickness of business unit (Manimala & Panicker, 2011). The assistance is provided to business units through Sick Industrial Companies Act, such that any early symptom of sickness might be identified and further ailment of the business units can be controlled.
On the other hand, the external causes are mainly linked with demand and credit restrain, ineffective and inefficient supply of inputs needed to continue organization’s operations and changes in any of the macro environmental factors (for example; political, economic, legal, social, technological and environmental) among other factors (Navulla, Guniganti & Boda, 2016). It has been highlighted by Manimala & Panicker (2011) that although external environmental factors are mainly beyond the control of business unit, yet an early anticipation and strong internal resource base of company can enable it to deal with external pressures with relative ease. These evidences, clearly highlight that sickness is an issue which could be controlled at early stages based on appropriate planning of the business units (Misra & Puri, 2011). On the other hand, the role of Government is highly important to support any sick business unit at early stages, such that any prolonged sickness as well as death of the business unit can be controlled.
A sick business unit is said to cause numerous socio-economic challenges. It can be justified by the notion that there are many actors which depend upon a specific business unit and sickness of unit can cause many challenges for them (Chakrabarty, Norbu & Mall, 2020). For instance, loss of employment is one significant aspect of socio-economic challenge which is worsened by the prevalence of sick business units (Datta, 2013). On the other hand, if loss of employment is not witnessed, even then there is huge uncertainty regarding the receipt of wages and compensation. It can lead to decline in income as well as purchasing power of many individuals, which has direct impact of social lives of people as well as on wider economic development (Bhattacharya, 2018). Additionally, the loss of employment in one industry could also affect the growth rate of other industry, as mainly economic industries are dependent on each other for their growth.
On the other hand, it is considerable that substantial amount of loanable funds are mainly stuck in the sick industrial units, which leads to loss of financial resources, which could have been invested in any other business to support thee economic growth of the country. It is noted by Goyal, Gupta & Gupta (2012) that blocking funds as result of industrial sickness can affect the lending capacity of financial institutions and thus it affects the health of financial organizations as a whole. Likewise, being an economically developing nation, India is exposed to scarcity of resources and the frozen and non performing resources in sick industrial units are considered as one substantial cause of slowing down the development of economy (Goswami, Hazarika & Sarma, 2012). While investigating the effect of industrial sickness on the prospective investment market, it is noted that closure or liquidation of any sick unit gives rise to gloomy market condition and overall adverse effect is witnessed on whole stock market (Dongre, 2012). The feeling of despair is likely to emerge among other entrepreneurs who might have planned to invest in same industry, which has recently shown evidence of sickness. Thus, the growth rate of industry is mainly influenced. Along with unrest in industries, the sickness also leads to loss of revenue of state, as industries contribute largely in revenue of Government through taxes.
Hypotheses Formation
The following hypotheses are proposed to be tested in underlying study;
- Industrial sickness has been caused by economic slowdown, price pressure and a changing business environment;
- Sick industrial units are suffering from tough competition from large industries in terms of marketing and raw material procurement;
- Sick industrial units face financial pressure for technical upgrade and utilization of installed capacity;
- Sick units face challenges from financial delay and government sector financial support;
- Sick units face problems due to the loss of funding from government organizations for the purchase of goods and products, the expansion of technological and marketing support and financial support.
Methodology
From the available research methodologies, the following research will make reliance on qualitative research methodology, which will allow an in-depth exploration of the research issue. The exploration of industrial sickness, its causes, effects and remedial measures is highly diverse phenomenon and qualitative data can help to deeply analyze these aspects with relative ease. There is greater need of in-depth evaluation, interpretation as well as explanation to clearly address the industrial sickness in the context of Indian industries and thus qualitative method will serve the purpose in effective manner. It is notable that industrial sickness is not the result of any objective phenomenon and there could be multiple explanations (Fletcher, 2017). The organizations are social entities and their sickness can be well studied through social constructivism and phenomenology, thus encouraging the adoption of qualitative research methodology for the underlying research study.
The qualitative data will be obtained through secondary means of data collection, which will allow to make reliance on pre-published data in the context of Indian industry. The adoption of secondary data collection is based on time and resource sensitive nature of the study, as well as the difficulty to gain access to the management of sick industrial units. Based on historical nature of Indian industrial sickness, there is lot of literature available on it and review of existing material is suitable for understanding of sickness issue.
The inclusion criteria for the secondary data will be that it has addressed the industrial sickness in the context of Indian industries and its causes, effects, remedial measures and policies of Government regarding combating the industrial sickness are mentioned. Inclusion of any of these aspects, will lead to qualification of data for this research. On the other hand, any studies on industrial sickness which are not in the context of Indian industries will not be included for analysis in the underlying research project. The existing research articles will mainly be the data source for this study, which will be supplemented by the published reports of Government of India, Reserve Bank of India, Economists of India or in general by industry analysts. The time span for sick industrial unit has been chosen from 2006 to present. The selection of this time span is based on the notion that Sick Industrial Companies Act was amended and brought in force by 1991 and thus condition of sick industrial units post the implementation of act will be considered in the review of secondary information. On the other hand, the practical instances of businesses which have failed in India has also been considered as the part of secondary analysis, such that more clear insight can be obtained regarding the causes of sickness within Indian industry.
Constraints
During the research, the data regarding total number of sick units in India was only accessed till 2015 and thus most recent insight about number of sick units is missing in the study. On the other hand, the second constraint is linked with adoption of only qualitative methods of study, as it might not serve the purpose of providing valid findings. Likewise, reliance was only maintained on secondary data and thus recent research insight is missing, however, given the scope and time sensitive nature of study, the secondary data was both valid and suitable for this study.
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