Employment and Unemployment

Full employment: It refers to the situation under which all those who are willing and able to work at the
prevailing wage rates are employed according to their skills.
Underemployment: It refers to the situation under which persons are working less than they are willing to
work.
Unemployment: It refers to a situation when a part of population is unable to get employed due to lack of work
but is seeking job through different means.
Types of unemployment
1. Functional or Frictional: It refers to temporary unemployment during the interval period when people
change from one job to another.
2. Structural: It refers to the mismatch between the skill set available with the unemployed and that
required by the industries. It occurs mainly due to technological change in economy.
Frictional & Structural unemployment is unavoidable in any economy undergoing a growth process. These 2
types together are called natural rate of unemployment or the minimum unemployment rate acceptable even
under full employment situation.
3. Cyclical: It occurs due to cyclical nature of the economy. An economic boom is followed by a
depression or recession, when aggregate demand in the economy is not enough to absorb entire
production. The production decreases thereby making people unemployed.
4. Seasonal: It refers to the unemployment occurring due to seasonal nature of agricultural production. It
becomes serious for India due to lack of irrigation facilities and advanced agricultural practices like
multiple cropping.
5. Disguised: It is also prevalent in agricultural sector. It refers to the situation of employing surplus
labourer whose marginal product is zero. It means that, even if they are removed from agricultural
activity there will be no decline in production.
Measurement of Unemployment
National Sample Survey Office (NSSO) conducts detailed sample survey every 5 years to estimate magnitude of
employment and unemployment in 3 ways.
1. Usual Status: It measures unemployment over longer reference period of 1 year. It classifies a person as
unemployed if he was not working but was available for work for most or all of the period of 1 year.
2. Current Weekly Status: It classifies a person as unemployed if he did not work for even 1 hr. during the
week preceding the survey, despite being available for work.
3. Current Daily Status: Unlike previous methods which are person rates this is a time rate. A person
working for one hr. but less than 4 hrs. During a day is said to denote half person day of employment
while one working for 4 hrs. Or more hrs. During a day denotes 1 person day of employment. In this
manner total person day of employment is measured during 7 days preceding the survey.
Chronic unemployment is typically measured by first two while the last data gives more realistic short term
employment estimates.
Occupational structure of India
It refers to the distribution of workers in 3 major sectors which are (a.) primary (b.) secondary and (c.) services
sectors. In India primary sector has traditionally accounted for the maximum share in employment. The primary
share has however consistently decreased over time (75% in 1970 to 52% in 2009-10). This is natural
development across all countries facing the process of economic growth however Indian experience has been
unique in 2 ways-
1. Initially the share of primary sector employment was decreasing with the share of secondary sector
increasing simultaneously. However this trend came to an abrupt halt during 1970s and 1980s with the
share of service sector employment increasing rapidly.
2. In India the share of employment in different sectors slowly than corresponding shift in GDP share for
example at 1
st
agricultural share in GDP is only 17.5% employing 52% of labour force. Services sector
on the other hand contributes 62.6% to GDP employing only 34% of labour force. The secondary
sector contributes 20% of GDP and 14% to employment.
Estimates of Employment and Unemployment
Different rounds of survey by NSSO are the main source for such estimates. The 55
th
round estimates of NSSO
compared these rates between 2 periods i.e. 1983-94 & 1994-2000. The rate of growth of employment on
Current Daily Status (CDS) declined from 2.7% per annum in first period to 1.07% per annum in 2
nd
. This
decline in employment growth was mainly due to stagnation of employment in agriculture. The rate of
unemployment increased from 5.99% in 1993-1994 to 7.32% in 1999-2000. The decline in employment growth
rate during the 1990s was associated with comparatively higher growth in GDP. This phenomenon of increasing
GDP without generating employment is defines as jobless growth.
Jobless growth to some extent seems to continue even now. More recent NSSO data (60
th
% 61
st
round)
indicates increasing employment rate. The employment rate had increased further to 8.28%in 2004-05.
Unemployment rate after 1999-2000 has increased despite faster growth of 2.62% in employment rate. This is
because labour force has grown faster than job opportunities (2.84%).
Organized/Formal & Unorganized/Informal Sector
All public and private sector establishment which employ 10 hired workers or more are said to provide formal
employment. All other private enterprises and workers working in these enterprises form informal sector. The
informal sector includes all farmers, owners and employees of small enterprises and self employed with less or
no hired labourers. Unlike the formal sector, the informal sector does not enjoy higher wages and social security
benefits.
With economic development an economy is expected to employ more workers in formal sector. But for India
the case is different. According to NSSO data in 1999-2000 and 2004-05 more than 86% of total employment
was in informal sector. The actual number of informal workers is even higher when we include casual labourers
and informal employment in formal sectors. According to National Commission for Enterprises in Unorganized
Sector (NCEUS) 91.2% of workers in 1999-2000 were informal workers. The proportion further increased to
92.4% in 2004-2005. This phenomenon of increasing share of informal workers is called informalisation of
work force. Among the informal workers the proportion of casual workers is also increasing leading to
casualisation of work force. It worsens the quality of employment and is an important reason behind poverty.
The formal employment has grown very slowly during 1990s. It increased by only 0.53% during 1994-2000 as
compared to 1.2% during 1983-1994. This decline has been entirely due to sharp fall in public sector
employment which experienced growth rate of -0.03%.

Poverty
Measurement of inequality or relative poverty
1. Lorenz Curve: It is a graphical way of measuring inequality in income. It plots the cumulative
percentage of total income received against cumulative percentage of recipients starting with the
poorest individuals. The diagonal in this graph is the line of perfect equality. The farther is a countrys
Lorenz curve from this line; higher is the inequality in that country.
2. Gini Coefficient/Lorenz Ratio: It is the ration of area between the diagonal & the Lorenz curve
divided by total area of the half square in which the curve lies. Its value lies between 0 & 1 and higher
the value higher is the inequality. Gini index is simply Gini Coefficient represented in percentage
terms.
Measurement of Absolute Poverty
Poverty line: It is defined as the expenditure level of a household needed to fulfill a minimum desired
nutritional requirement per person per day. For India, the official nutritional requirement is 2400 Kilo
Calorie/person/day in rural areas and 2100 Kilo calorie/person/day in urban areas.
Head Count: It means the total number of people below poverty line. HC Ration (HCR) is the ration of HC to
total population of a country
HCR= HC/Total Population
The incidence of poverty is estimated by Planning Commission. The current official methodology was
recommended by Lakadawala committee in 1993. The poverty lines are defined at state level and are updated
by state specific price index. These poverty lines are then applied to household consumption expenditure data
collected by NSSO. This data is based on recall of consumption of food and non-food items collected in 2 ways-
1. Uniform Recall Period (URP consumption): under this the person is asked to recall all items of
consumption (food and non-food) in last 30 days.
2. Mixed Recall Period (MRP consumption): under this the person is asked to recall items of food
consumption in last 30 days and non-food items in last 365 days.
Estimates of Indian Poverty
According to 61
st
round of NSSO survey the proportion of people below poverty line has decreased from 26.1%
in 1999-2000 to about 22% in 2004-05 on MRP basis. On URP basis the corresponding decline is from 36% to
27.8%. However many scholars think that official estimates are grossly underestimated. There are many
problems related to existing methods in calculating poverty line. Firstly using calorie norm for poverty estimates
has been found to be poorly co-related with nutritional outcomes. Secondly NSSO estimates of poverty line are
extremely low for example it is Rs. 356.30/person/month for rural and Rs. 538.60 for urban. Thirdly NSSO has
been using the consumption basket of 1973-74 to estimate poverty lines even today. While such consumption
basket has drastically changed both in urban and rural areas.
Many alternative poverty estimates have been proposed to tackle these problems. Arjun Sengupta the chairman
of NCEUS set on overall minimum of Rs. 20.person/day as poverty cut off and calculated that 77% of Indians
live below poverty line. The NC Saxena Committee suggested that about 50% of rural population was under
poverty. As far as international estimate is concerned according to World Bank poverty cut off of 1.25
$/person/day at PPP. 41.6% of Indian population is below poverty line.
Tendulkar Committee
TC submitted its report in Oct., 2009. Some key recommendations are
1. The new poverty line is uniform for all the residents of the country, correcting only for differences in
cost of living. This means that there will be no distinction between urban and rural households in terms
of calorie intake which is 1800Kcal/person/day.
2. New poverty line moves away from strict calorie norm and also incorporates a minimum expenditure
on education and health.
3. Poverty line should be estimated on MRP only to make comparison over time easier.
Using these recommendations for 2004-05 the rural poverty line is re-estimated at Rs. 446.68/capita/month and
urban poverty line at Rs. 578.8/capita/month. Accordingly 41.8% of rural population (28.7% earlier) and 25.7%
of urban population (25.9% earlier) are now below poverty line. Thus rural poverty has been revised upwards
with urban poverty remaining almost the same.
Committee recommendation will have significant impact in terms of central welfare scheme coverage in the
poorest states of India. However the committee recommendations have also been criticized despite significant
upward revision of rural poverty line. It converts to a minimal increase from Rs. 12 to Rs. 15/capita/day. This is
unlikely to have major impact in the background of inflation. The minimum calorie intake is also significantly
lower particularly for the rural areas.
Poverty Gap Ratio (PGR)= measures depth of poverty
Other measures of poverty
Poverty line fails to capture the extent to which an individual is below poverty line. Some alternative measures
of poverty are:
1. PGR/PG Index- It is the ratio of average income needed to get all poor people to the poverty line
divided by the average income of the society. PGR measures the depth of poverty.
2. Squared PGR- It is defined as the simple average of squared proportionate poverty gaps. It is sensitive
to inequality of income among poor unlike PGR.
3. Sens P Index- This index also takes into account inequality amongst poor by using Gini-Co-efficient
for people below poverty line
Reasons for Poverty
Poverty can be explained either by individual circumstances or by overall problems associated with the society.
Some important reasons are:
1. Lack of basic human capital like education and health which restricts people to work productively.
2. Rising unemployment and casualisation of work force.
3. Social and economic exclusion being faced by certain sections of society.
4. Rural indebtedness-This may arise because of (a) shift from traditional to modern farming without
awareness and technical support. (b) Debt at very high interest rate (36 to 120% per annum). (c) crop
failure
5. Population pressure particularly in rural sector
6. Lack of physical and social infrastructure
7. Lack of social security benefits on the part of government.
Poverty Alleviation Programme
TRYSEM- Training Rural Youth for Self-Employment-1979 (18-35 years)
IRDP- Integrated Rural Development Programme (50% beneficiaries SC & ST)
DWCRA- Development of Women and Children in Rural Areas- Self Help Groups (SGHs)-10-15 women in
each group. Fund of Rs. 25000/-
All programmes grouped into one in 1999-2000 called Swarna Jayanti Gram Swarajya Yojana (SJGSY)-
beneficiaries called Swarojgaris
Wage Employment Programme
NREP (1980)- National Rural Employment Programme
RLEGP (1982-83)- Rural landless Employment Guarantee Programme- 100 days employment was guaranteed
Jawahar Rozgar Yojana-1989
Gram Samruddhi Yojana-1999 + Employment Assurance Scheme-1993 (both restructured as Sampoorna Gram
Rozgar Yojana)
National Food for Work Programme-2004
MGNREGA- 2005- Right to work- at least one from each household for 100 days
1. Chronic poverty, drought
2. Demand based
3. Gram Panchayats
4. Minimum wages
619 rural districts implemented the programme. 182 crore person days, 29% SC, 22% ST and 50% women
Swarna Jayanti Shahari Rozgar Yojana
Till the first phase of planning the Indian government depended on the trickle down approach to remove
poverty. Due to failure of this approach the government has tried to tackle poverty by launching directed
poverty alleviation programmes and minimum needs programmes. Since the 5
th
FYP poverty alleviation
programme targets the employment generation among the rural poor, particularly for small farmers, SC or ST
population and women. 2 types of poverty alleviation programmes are 1. Self-employment programme which
provide productive asset to the beneficiaries through subsidies and credit facility and 2. Wage employment
programme which utilizes labour to create community assets like roads, irrigation facilities etc.
1. Swarna Jayanti Gram Swarozgar Yojana (only SEP) - launched in 1999-2000. This programme
merged all SEP in rural areas like IRDP, TRYSEM, and DWCRA. Its objective is to establish a large
number of micro enterprises in the rural areas. The beneficiaries of the programme called Swarojgaris
are organized into SHGs and productive asset is provided to them.
2. NREGS- It came into force from 2005 under the NREGA. The act recognizes right to work and
provides a legal guarantee of at least 100 days of employment in a financial year to every rural
household. Some other features of NREGS are as follows:
a. The work under the scheme is chosen so that it addresses the causes of chronic poverty like
draught, deforestation etc.
b. The scheme is to be implemented mainly through Gram Panchayats at least 50%. Other
implementing agencies are upper level Panchayats and departments like PWD, Forest
Department, and NGOs. Private contractors are not allowed.
c. Demand based availability of funds which means that fund is made available once demand is
generated from lower levels.
d. Minimum wage should be paid equally to men and women
e. If a worker applies for work and is not provided employment within 15 days then
unemployment allowance shall be paid by state government.
f. For transparency a social audit system has been introduced which includes scrutinizing and
verifying authenticity of all records and expenditure of all programme.
By 2008-09, NREGS has been extended to 619 rural districts of the country. During 2009-10, 182 crore person
days of employment was provided by the scheme. 29% of beneficiaries were from SC and 22% from ST and
50% women.
3. Swarna Jayanti Shahari Rozgar Yojana- under this scheme all the self and wage employment schemes
of urban areas were merged in 1997. The scheme was restructured in April, 2009 and divided into 5
components-
a. Urban Self-Employment Programme (USEP)
b. Urban Women Self Help Programme (UWSP)
c. Skill Training for Employment Promotion amongst Urban Poor (STEP UP)
d. Urban Wage Employment Programme (UWEP)
e. Urban Community Development Network (UCDN)
4. Minimum Needs Programme/Social Sector
a. Indira Awas Yojana (1985-86)
b. Samagra Awas Yojana (1995-96)
These programmes address poverty by providing minimum basic amenities to the poor people. Some important
programmes are Indira Awas Yojana launched in 1985-86 to provide free shelter to Sc/ST community and freed
bonded labour below poverty line. By 1995-96 scheme was extended to non-SC/ST poor and families of armed
forces killed in action. From 1999-2000 this scheme has been revamped to Samagra Awas Yojana to provide
shelter along with sanitation and drinking water.
5. NRHM- launched in 2005 to provide affordable quality health service to rural poor. It recruits
community health workers called ASHA (Accredited Social Health Activists)
An Assessment of Poverty Alleviation Programme
There has been significant decline in poverty since 1960s and 70s. however, many visible aspects of poverty like
malnourishment and illiteracy point towards many loopholes in the poverty alleviation programmes:
1. Despite repetitive restructuring of these schemes they have hardly undergone any radical
transformation in terms of asset ownership, wages etc. these programmes have been poorly
conceptualized and there are overlaps between central and state schemes
2. Due to unequal land distribution non-poor people have benefitted more than poor ones. This is because
it is easier to get self employment if he already owns an asset.
3. Share of government expenditure on these schemes declined after 1991. Out of total social sector
expenditure share of rural development decreased from about 33% in 1991 to only 11% in 2003. It was
improved to 19% in 2008-09.
4. These schemes are implemented by government and bank officials. Many of them are inadequately
trained and prone to corruption. A study by CAG found that there was large scale misappropriation of
funds and less than required employment generation in Jawahar Rozgar Yojana between 1992-99.
5. These schemes have failed to address a majority of people who are living just above poverty line are
physically disabled and the tribal population
NREGS seems to be an improvement over earlier schemes. The rural wages in most of the states have increased.
Social auditing has improved governance due to transparency and accountability. The scheme has also
contributed in regenerating natural resources. However many problems remain as it were.
In states like Jharkhand lack of awareness has led to problems like fudging of muster rolls, flawed work
measurement, less than minimum wages etc. at some places gram Panchayats have not been capable of
implementation. Finally, out of total expenditure 60% wages and 40% cost of building material. This may affect
long term sustainability of the projects under the scheme.
Industry
Industries have been the key focus point of Indian planning throughout as the rapid industrial was perceived the
only panacea for generation of sufficient employment opportunity for upliftment of masses and also as a
cornerstone for overall development of Indian economy. The Nehru Mahalonobis model focused on the heavy
industries in general and iron and steel in particular. Gradually the sector was marked by ever growing control
by the government in terms of licensing, controls, quota, permit red tapism and bureaucratic control etc. The
situation was worsening in decade of late 60s and entire 70s due to wars, droughts, oil crisis, political and social
instability and other such reasons. In order to have control over the situation, the Govt came up with more
restrictions and stricter law such as MRTP, FERA etc. Situation got normalized by the decade of early 80s and
by this time, the much needed diversification of industries were also attained. The main drivers now were the
consumer goods industries, engineering goods, chemicals and petro chemicals to count a few. But due to long
protection and lack any competition in the closed economy framework, the industries became less competitive
and less productive and PSUs often proved to be the burden on the exchequer and on tax payers money. With
the advent of economic reform programmes starting in July 1991, the industries were thrown into domestic
competition initially and later into the global competition. This led to reforming of the PSUs by the Govt. and
that of the private units on their own. This led to technological upgradation, utilization of better technology and
better managerial practices better input use, new and aggressive marketing strategies along with Mergers and
Acquisitions to consolidate the market position.
Important Legislations Affecing Indian Industries.
IDRA 1951: Industrial Development & Regulatory Act
MRTP 1969: Monopolistic Restrictive Trade Practices Act.
FERA 1973: Foreign Exchange Regulation Act.
FEMA 1999: Foreign Exchange Management Act.
Competition Act (2002) was enacted in Place of MRTP (1967)
Competition Commission on India, CCI, (2003) was established under the Competition Act. It is a Quasi
Judicial authority.
CCI to control the misuse of power by large co.s. It regulates the Merger, Acquisitions, takeovers etc.
processes, It can levy penalty of Rs. 1 crore. High courts will enforce the decision of the CCI.
The various industrial policy resolutions were adopted in 1948, 1956, 1977, 1980, 1990 and 1991.
Industrial Policy Resolution 1948
Objectives and Targets
To establish Mixed and Controlled Economy
To achieve high and rapid growth
Industrial Diversification
Balanced Regional Development
Attracting foreign capital
Achieve Self Sufficiency
Restrict development of Monopoly
Maintain Industrial Peace
Steps Taken in IPR 1948
Industries were divided into 4 categories
(a) Exclusively reserved for the Public Sector Units (Govt. Sector): e.g. Arms and ammunitions, Atomic
Energy, Railways etc.
(b) Open for both Public and Private Sectors but New Industrial Units to be set up only by Govt.: e.g.
Coal, Iron & Steel, Aircrafts, Ships, Telephone, Telegraph, Wireless, Mineral Oils, etc.
(c) Industries of Basic Importance where govt. felt necessary to regulate: e.g. Autmobiles, Tractors,
Electro Chemical Industries, Electrical Engineering, Newsprint, Minerals, Salt, Defense related industries
etc.
(d) Remaining Industries: left open to private entrepreneurs, Individuals, cooperatives etc.
Industrial Policy Resolution 1956
IPR 1956 used to be called Economic Constitution of India
Objectives and Targets
To establish Socialistic Pattern & Mixed Economy
To achieve high and rapid growth
Industrial Diversification
Balanced Regional Development
Attracting foreign capital
Achieve Self Sufficiency
Restrict development of Monopoly
Maintain Industrial Peace
Steps Taken in IPR 1956
1. Industries were divided into 3 categories
a. Schedule A: Exclusively reserved for the Public Sector Units (Govt. Sector): Total 17 Industries
were put in this category. e.g. Arms and ammunitions, Atomic Energy, Iron and Steel Industries,
Railways etc.
b. Schedule B: Industries progressively to be owned up by the Public sector and the private sector
was expected to play only the supplementary role to assist the efforts of the Govt.: e.g. Coal,
Aircrafts, Ships, Telephone, Telegraph, Wireless, Mineral Oils, Autmobiles, Tractors, Electro
Chemical Industries, Electrical Engineering, Newsprint, Minerals, etc.
c. Schedule C: Remaining Industries: left open to private entrepreneurs, Individuals, cooperatives etc.
2. Fair and nondiscriminatory treatment to the private sector
3. State Support to Cottage and Village Small Scale Industries (SSIs)
4. Reducing the regional imbalance by even spread of industries over the country
5. Increasing the living and working conditions of the workers in order to raise efficiency
6. To attract more of Foreign Capital
7. Rapid increase in PSUs to create congenial conditions for growth in the Private Sector
Industrial Policy Resolution 1977
New govt. had a totally different economic ideology (good & bad)
Whatever can be produced in the Small and Cottage industries must be produced only in Small and Cottage
industries
Small Sector was classified into 3 groups:
Cottage and Household Industries: Only self employed labour. No labour taken from the market.
Tiny Industries: Total value of Machines used in the unit being less than Rs. 1 lakh in towns of population
less than 50,000.
Small Scale Industries (SSIs): Where investment is upto Rs. 10 Lakh.
Setting up of District Industries Centres
Revamping of the Khadi Village and Industries Commission (KVIC)
Policy towards foreign capital was to discourage them as far as possible. The MNCs and other foreign Co.s
were asked to bring down their equity below 50% with immediate effect or leave the nation.
Large industries to rely on their own capital for expansion.
Industrial Policy Resolution 1980
It was based on IPR 1956
Different Socio economic Objectives were set incorporating good features of IPR 1977 as well such as
development of Khadi Village Industries and protection to small industries.
Limit of Investment in the tiny industries was increased from Rs. 1 Lakh to Rs. 2 Lakh
Limit of Investment in the Small industries was increased from Rs. 10 Lakh to Rs. 20 Lakh
Limit of Investment in the Ancillary industries was increased from Rs. 10 Lakh to Rs. 15 Lakh
Industrial Policy Resolution 1990
Announced on 31.05.1990 by the then Industry Minister Mr. Ajit Singh
Promotion of SSIs
100% EOUs (Export Oriented Units) to be set up in EPZs (Export Promotion Zones)
It was a amalgamation of policies of Janata Dal Govt. and policy of Liberalisation.
Industrial Policy Resolution 1991 (New Industrial Policy)
It was announced in July 1991
Objectives:
To set free the Indian Industries from bureaucratic control
Introducing the concepts of Liberalisation, Privatisation and globalisation
Integrating Indian Industries with the world Economy
Removing the restrictions on the FDI
Free the entreprenures from the restrictions of MRTP Act
Reforming PSUs
Preparing Indian Industry and economy for Global Competition

Steps Taken:
Delicensing: Need for licenses were done away for all industries except for 18 industries. Later on licenses
were done away for 13 more industries. Now only 5 industries need licenses.
Automatic Approval to foreign capital: Upto 51% in 34 high tech industries
FIPB (Foreign Investment Promotion Board) set up
SIA (Secretariat for Industrial Approval) set up
OCB (Overseas Continental Banks) set up
Automatic Approval to foreign Technology agreements to and delinking equity participation from the
technology inflow from abroad
PSUs Reforms:
Industries reserved for PSUs brought down from 17 to 8 and later on to 3 only.
Disinvestment of Govt. Equity in PSUs
Sick PSUs to be referred to BIFR (Board of Industrial and Financial Reconstruction)
Change in management
Giving autonomy in decision making on daily basis and maintaining an arms length distance
MRTP changes: The limit of Rs. 100 crore investment was done away with in order to promote expansion,
Mergers & Acquisitions (M&As), Amalgamations, Takeovers etc in Indian Industries so that their size grows
and they become able to compete with MNCs by harnessing the economies of Scale. Need for approval for
appointment of directors was done away with.
New SSI policy:
Package for Small, Tiny and Village industries announced with objective of increasing the installed
capacity & growth impetus
Location restrictions for setting up SSIs removed
Equity participation upto 24%by other industrial undertakings allowed including foreign collaborations
Modernisation and Technology upgradation programme for SSIs
Setting Up of Abid Hussain Committee to suggest measures for development of SSIs.
Abid Hussain Committee Report 1997
Limit of investment in SSIs increased from Rs. 60/75 Lakhs to Rs. 3 crore and later it was brought down to
Rs. 1 Crore on demand of SSIs.
Limit of investment in Tiny Industries increased from Rs. 5 Lakhs to Rs. 25 Lakh
Existing reservation for 749 products should be abolished
The limit of 24% on foreign capital should be removed
Package of Rs. 2500 crores should be announced for SSIs during next 5 years
Nayak Committee Recommendations should be implemented
Revolving fund should be established to meet requirements of the Tiny Industries.
Concept of SSIs to be widened to include the small units of service sector as well and it should be known as
SMALL SCALE ENTERPRISE SECTOR.
Similar Small Scale Units (SSUs) should be located at one place to harness more benefit from existing
infrastructure. Cluster based approach to harness economies of scale.
Develop credit rating system for small units
70% of the priority sector lending should be allocated to the tiny sector
Instead of protecting the SSIs on the ground of infant industry argument, they should be promoted by
adequate supply of credit, service, technological assistance, infrastructure and low transaction cost.
Industrial Sickness
Definition: Sick Industrial Co.s Act (SICA) defines it as An industrial company which at the end of any
financial year has accumulated losses equal to or exceeding its entire net worth and has also suffered cash losses
in immediately preceeding F.Y.
It means:
Loss = 100% of Net worth
Co. registered for at least 7 Years
Cash loss in urrent and preceeding F.Y.s.
Causes: Internal (endogeneous) and External (exogeneous)
Internal Causes:
Wrong selection of site of production
Wrong product mix
Obsolete technology
Labour Problems
Weak or inefficient management
Wrong estimation of demand
Wrong estimation of consumer preferences
Poor marketing and advertising strategy
External Causes:
Change in consumer preference
Excessive Govt. control
Faulty Govt. Policies in terms of Fiscal, Monetary and Credit policy
Increased domestic and international Competition
Infrastructural Bottlenecks
Effect:
Erosion of productivity and efficiency of Industries
Erosion of profit of Industries
Closure of Industries
Loss of Employment
Loss of supply of commodities leading to inflation
Rise in NPAs of Banks
Impact on Exports and Balance of payments
Impact on Agricultural and Services sectors by backward and forward linkages
Slowdown in the GDP growth
Solutions
Arent they self explanatory?
Working of the BIFR:
As per SICA, it is mandatory on the company falling sick that it should report itself to the BIFR.
The BIFR gives some time (as much it deems fit) to the management of the company to reform itself. In the
meantime, the BIFR puts moratorium on recovery of loans and therefore now banks cannot enforce the
recovery.
If the problem of sickness is overcome, then the process ends or otherwise, the BIFR takes over the
management and implements the reform programme on its own.
After all out efforts, if the BIFR is satisfied that there is no scope of improvement, then it suggests closure
of the company by its liquidaton.
The assets (if anything left by now, which would be hardly possible) of the company will be liquidated and
will be distributed among the creditors of the company
The recommendation of BIFR are binding in nature and the provisions of SICA prevails over any other
ACT except for FERA (now FEMA) and Urban land Ceiling Act.
Problems in working of BIFR:
The definition of sickness is faulty and therefore the rehabilitation programme gets started very late and this
leaves hardly ant scope of improvement. As per definition any unit is treated sick when there is 100% erosion in
net worth. When there is 100% erosion in the net worth, then is there anything left? Actually the unit is dead by
then.
The procedure of BIFR is full with loopholes and is extremely slow.
Therefore the industrialists have taken BIFR for a ride and deliberately used it as a mechanism to siphon off
the fund of Public, shareholders and banks by accounting manipulations.
Long legal battles even after verdict of BIFR ensured that sickness was never to be overcome.
Steps Taken by Govt. to control Sickness
Approach of govt. has been to somehow rehabilitate sick industries and avoid their closure at any cost to
save the employment opportunities. This policy of Govt. has been misused by the Pvt. Co.s and BIFR has been
taken for a ride to siphon off money of shareholders, banks and other financial institutions apart from massive
tax evasions by consistently showing losses by manipulations in the accounts.
1985: Tiwari committee was set up
1985: SICA (Sick Industrial Co.s Act)
1987: BIFR (Board for Industrial and Financial Reconstruction) established under SICA
1993: Goswami Committee set up on Industrial Sickness and Corporate Restructuring. It suggested change
in the role of SICA and BIFR. It suggested that the approach of rehabilitation of the Sick Units should be
abandoned. The committee suggested that the definition of sick units is itself faulty and needs to be changed. It
held that A Stich in Time, Saves Nine should be the motto to deal with the problem of industrial sickness. It
also suggested to establish Fast Track Winding Tribunal in 4 metros.
2000: Eradi Commission set up on Bankruptcy of Co.s (Justice Balakrishna Eradi). It suggested repealing
SICA and enactment of Insolvency Law in its place. Similarly it also suggested that NCLT (national Company
Law Tribunal) should be established for speedy justice in place of BIFR to avoid delay.
Small and Medium Enterprise (SME) Policy:
Announced on 10
th
Aug 2005
To boost Small and Medium Enterprise sector
Medium enterprise defined as units where investment in Plants and Machinery is less than Rs. 10 Crores but
more than that in SSIs (Rs. 1 crore in usual units except in Pharma Sector where it is Rs. 5 Crores). In case of
service sector small units are those with investment of Rs. 2 Crores and accordingly medium sector are those
with investment between Rs. 2 5 Cro.res.
Credit Rating agency to be established by SIDBI with the assistance of CIBIL (Credit Information Bureau
of India Ltd.)
The new agency is called SMERA (Small and Medium Enterprise Rating Agency)
NSMEB (National Small and Medium Enterprise Board to be established).
Fund of Rs. 10000 crores set up by SIDBI.
80% of it will be used for assistance to small scale enterprises @ interest 2% below PLR (Prime Lending
Rate) of SIDBI.
Fund of Rs. 500 Crores set up as SME growth fund for SME in knowledge sector like biotechnology,
information technology etc.
Policy of doing away with the Inspector Raj
National Commission of Enterprise in the unorganized and small sector to be set up to make
recommendation for technology transfer, production improvement, enhancement of credit zone, improvement of
input supply, better marketing etc. in this sector.
Credit limit available to SME under Credit Linked Capital Subsidy Scheme as well in other revised
schemes revised to increase
Specific instruction given to banks to evolve mechanism for one time settlement of their dues for treating
NPAs of this sector separately.
SIDBI Act to be remodeled to include specific provisions to assist SMEs.