Industrial Sickness: Meaning, Causes, Symptoms, Impact & Remedies for UPSC

Industrial Sickness is a term used to describe an industrial unit's poor health or financial condition, which makes it unable to operate effectively or sustainably. This happens when a business is in poor financial health and can't keep itself going. It's when the company doesn't make enough money to cover its costs. This can lead to lower production, jobs being lost, and potentially the closure of the business. A sick unit is unable to function properly with its internal resources. Industries are forced to rely on external funding sources after the sick units function below the break-even point (at which total revenue equals total cost).

The topic Industrial Sickness is important for the UPSC exams. It covers a major part of the Economy subject in the General Studies Paper-3 syllabus.

In this article, we shall study in detail the meaning, causes and impact of industrial sickness on the economy.

Download the UPSC Practice Questions on Industrial Sickness for Prelims & Mains!

"Industrial sickness" refers to industrial weakness when the business fails to profit reasonably. It is the persistent debt-to-equity ratio imbalance and the inaccurate representation of the financial situation of the industrial unit. Industrial Sickness is a stage where a company cannot consistently generate a surplus and must rely on outside financing to survive in the market. A unit cannot support itself while it is ill through normal functions.

Also, read about the Index of Industrial Production for the UPSC exam here.

Examples of Industrial Sickness in India

Here are some examples of industrial sickness in India:

1. Hindustan Cables Limited (HCL)

A public sector company that made telecom cables. It became sick due to outdated technology, high costs, and low demand. The government eventually closed it down in 2016 under a revival scheme.

2. HMT Ltd (Hindustan Machine Tools)

Once famous for its watches and machine tools, HMT faced losses due to outdated products and tough competition from private companies. Some units were shut down, and others are still struggling.

3. Scooters India Ltd (SIL)

It produced scooters like Vikram. Due to poor management, low demand, and financial losses, the company became sick and was recommended for closure by the government in recent years.

4. Kingfisher Airlines

Though not a manufacturing company, Kingfisher is an example from the services sector. It suffered huge losses due to high debt, poor financial planning, and rising fuel costs. It stopped operations in 2012 and was declared a sick company later.

5. National Textile Corporation (NTC)

Many textile mills under NTC became sick due to rising costs, old machines, and competition. Several of them were shut down or taken over by the government for revival.

Causes of Industrial Sickness in India

Industrial sickness is not produced by a single element but rather by the cumulative influence of several causes. The variables that cause industrial disease are divided into two categories: internal causes and external causes, which are addressed further below:

Internal Causes of Industrial Sickness

• Poor management decisions, lack of effective leadership, and inadequate planning can lead to a company's downfall.
• Insufficient working capital, poor financial planning, and inability to secure loans or investments can lead to financial distress.
• Failure to adopt modern technology or upgrade existing systems can reduce efficiency and competitiveness.
• Strikes, disputes, or high employee turnover can negatively impact productivity and morale.
• The inability to control costs or maintain quality standards can hamper a company's profitability.

External Causes of Industrial Sickness

• Economic downturns or recessions can lead to reduced demand and increased competition, making it difficult for businesses to survive.
• Changes in regulations, taxes, or import-export policies can adversely affect certain industries or sectors.
• Intense competition from domestic or international players can lead to market saturation and reduced profitability.
• Floods, earthquakes, or pandemics can disrupt supply chains and cause significant damage to industrial units.

Other Causes of Industrial Sickness

• Finance, technical difficulties, poor management, a lack of raw materials, electricity, natural disasters like fire or earthquake, or a combination of these can all contribute to illness.
• External reasons are those that are beyond the management’s control and are deemed to be more important than internal causes.
• The following are the additional causes:
  • Disagreements among various individuals involved in the enterprise’s promotion and administration.
  • Mechanical flaws and failure.
  • Inability to obtain raw materials at a reasonable cost and appropriate time.
  • Failure to implement controls promptly where there are shortcomings in work­ings.
  • Deteriorating labour-management relations, resulting in a drop in capacity utilisation.

Also, read SARFAESI ACT, 2002 for UPSC here.

Major Symptoms of Industrial Sickness

The following are the primary indications or symptoms of industrial sickness in India that can help determine whether a company is a sick unit, according to the Sick Industrial Companies Act (SICA).

• The government first set a minimum registration requirement of 7 years, eventually lowered to 5 years.
• The business should have lost money over the previous and current years.
• The reserves and paid-up capital must have been lost together with the company's net worth.
• The Second Amendment to the Companies Act of 2002, which defines industrial sickness, has done so again.

Impact of Industrial Sickness in India

• The Indian market has been opened to foreign investors, and their shares in Indian companies are increasing.
• After the introduction of the policy of disinvestment, many Central and State Public Sector Undertakings (CPSUs and SPSUs) have been transformed into private units for smooth running.
• A formidable decision has also been taken. To overcome this bottleneck situation, the West Bengal Government adopted a separate Industrial Policy in 1994. The major objectives of this policy were –
  • Decentralization of units,
  • Establishment of a strong relationship between rural agrarian and urban industrial economy through food processing units,
  • Emphasis on the expansion of micro and small-scale units and
  • Establishment of different industrial parks in different locations to create an advantage of industrial agglomeration.

Also, read about the Public Sector Undertakings (PSU) here.

Sick Industrial Companies Act (SICA), 1985

The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) was introduced to identify and revive large industrial companies that were making heavy losses and on the verge of closing down.

It created a body called the Board for Industrial and Financial Reconstruction (BIFR) to:

• Check if a company was "sick" (i.e., financially failing),
• Help revive it if possible, or
• Close it down in an orderly manner if it couldn’t be saved.

Over time, the process became slow and ineffective. So, the government repealed SICA in 2016 and replaced it with the faster and more modern Insolvency and Bankruptcy Code (IBC).

Also, read the Strategic Debt Restructuring (SDR) for the UPSC exam here.

Remedies of Industrial Sickness in India

Industrial sickness means a company is not doing well and is facing financial problems. If not fixed in time, it can lead to job losses and harm the economy. Here are some simple steps that can help solve this issue:

• Companies should be checked regularly. If signs of trouble are found early, it becomes easier to fix them.
• Many sick industries suffer due to poor planning and weak leadership. Having trained and professional managers can improve decision-making.
• Banks can help by giving loans or changing loan terms for companies that can still be saved. This support gives them time to recover.
• Old machines and outdated methods make companies weak. Giving support to buy new technology can help improve performance.
• Good roads, electricity, and better market access can reduce costs and help industries grow.
• If a company cannot be saved, it’s better to close it quickly using laws like the Insolvency and Bankruptcy Code (IBC), so losses don’t grow bigger.
• The government runs many programs to help small industries, like giving guarantees for loans or support for upgrading machines.
• Owners, workers, banks, and the government should work together to bring a sick unit back to health.

Also, read Insolvency and Bankruptcy Code (IBC) for UPSC here.

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