External Causes:
1. Power Cuts:
A large number of industrial units, particularly in West Bengal and Bihar, face power cuts from time to time. Power cuts are necessitated by the fact that generation of power is much below its actual requirements.
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2. Erratic Supply of Inputs:
Lack of regular supply of raw materials and other inputs disturb the production schedule causing losses to the unit. This is particularly the case of units depending upon the supply of imported inputs. Also transport bottlenecks sometimes affect the supply of inputs.
3. Recession:
General recessionary trends in the market adversely affect the demand for most of the goods resulting in unsold stocks and losses to individual units. Products with high prices like cars, tractors, VCR etc. depend for their sustained demand on easy availability of credit to buyers. If credit is restrained, the buyers are not able to arrange for finance and consequently the demands for such products suffer and ultimately such manufacturing units get sick.
4. Official Policy:
Sudden and unfavourable changes in the government policy regarding taxation, export and import can turn viable units into sick units. For example, liberal import policy for a particular product might cause damage on domestic units producing similar products.
Internal Causes:
1. Mismanagement:
The most important internal cause of sickness is mismanagement. Faulty managerial decision regarding production, finance, marketing and personnel and poor control can ruin a business.
According to a study of the Reserve Bank of India sickness of more than 52 per cent of large industrial units can be attributed to mismanagement, 23 per cent to market recession, 14 per cent to faulty initial planning and other technical defects and 11 per cent to other causes.
2. Faulty Initial Planning:
Wrong location of an industrial unit might lead to its ruin. If the place of industrial location lacks infrastrcutrural facilities, the industry is bound to face difficulties.
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Another fault is lack of proper demand forecasting for the products to be sold. Small industries start production without making a market survey and plunge into difficulties later.
Some industries start with a defective capital structure and some spend lavishly on unproductive assets. Moreover, inability to raise adequate finance to withstand operational losses is a severe constraint.
3. Financial Problems:
A growing shortage of working capital appears to be a real constraint. The equity base of many small scale units is very weak and slight disturbance in the market puts them into trouble and turns them into sick units.
4. Improper Choice of Technology:
Small entrepreneurs cannot afford to take technical guidance from experts in choosing proper machinery. An improper choice of technology, unsuitable product mix and single product technology contribute to industrial sickness.
5. Labour Problems:
Bad employer-employee relations result in strikes, lockouts and even closure of industrial units. If wages, bonus and dearness allowances problems are tackled promptly to the satisfaction of labour, these problems may not cause sickness.
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The Tiwari Committee in its report on industrial sickness (1984) pointed out the cause of sickness of industrial units.
Sickness of 52 per cent large scale industrial units is due to mismanagement, 23 per cent to market recession and environmental factors, 14 per cent to technical factors and faulty initial planning, 9 per cent to infrastructural factors and 2 per cent to labour troubles.