Discuss the Effects of sickness with remedies from sickness of an industry

 •    Industrial Sickness contributes to high cost economy. This in turn, will affect the competitiveness of the economy at home and abroad.

•    Dead investment is a burden on both banks and budgets and ultimately consumers should pay the high cost.

•    Money locked up in sick units gives no returns and effects the availability of resources to the other viable units

 Remedies

Majority ot sick units is retrievable in order to tackle the problem of sickness from the two angles the role of three agencies assumes significance:

A) The government

13) Financial institutions and

C) the industry associations

A) The Role of Government: If the number of units in the country has increased some 10 times since independence and if we have diversified industrial structure with wide spread entrepreneurship the credit for this largely belongs to government. Second area where the government can be helpful is Vis-a-vis industrial licensing. The very existence of licensing and monopoly regulation legislation implies that there is a stampede to "to get in" whenever licensing is liberalized for an industry or an economy as a whole

B) The Role of Financial Institutions: The following are the ways by which sickness can be prevented by financial institutions : a) Continuous monitoring of unit, b) Careful project appraisal c) Professional institutional response to unit's problems d) Required systems at client units e) Incentives to units to remain healthy.

 

C) The Role Of Industry Associations : A good practical review by each industry association of installed and usable capacity in the industry , capacity utilization , growth trends , problems etc should be useful for the potential new entrants for deciding whether to enter the industry or not. The industry can have some sort of 1 st aid cell this could consist of professionals who could go to the aid of a unit that is beginning to fall with the offer of managerial and technical help also.

 Curative measures :These measures include how to cure the sickness after it has crept in. The following measures initiatives will take and some agencies develop which help cure Industries from sickness:

 1.) There is Industries (Development and Regulation) Act, 1951, which provides for the takeover of a sick unit by the Government. Before resorting to a takeover, other alternatives like rehabilitation through the concerned state government and financial institutions or for the merger of a sick unit with a healthy unit could be explored.

 2.) It provides assistance for reconstructions and rehabilitation of the sick industrial units by granting loans and advances, underwriting shares and debentures etc.

 3.) For the sick units in the small scale sector, separate facilities are available. a scheme for the rehabilitation of sick units in the small scale sector, and the assistance given by them for the revival of such units will be eligible for refinancing at the confessional rate of interest.

 4.) Government should hike its spending to create more jobs and boost the manufacturing sectors in the country.

 5.) Government should try to increase the export against the initial export.

 6.) The way out for builders is to reduce the unrealistic prices of property to bring back the buyers into the market. And thus raise finances for the incomplete projects that they are developing.

 

(3) Profitability Index (PI)

(ii) Ranking of the 5(five) projects in terms of Profitability Index (PI) are as follows:­

Project	PI	Rating
Project C	1.35	1
Project B	1.31	2
Project A	1.27	3
Pro'ect D	1.22	4
, Pr~ject E	0.94	5

 

(i) Ranking of the 5(five) projects in terms of Internal Rate of Return(IRR) are as follows:­

Project	NPV	Rating
Project D	-22%	1
Project C	20%	2
Project A	18%	3
Project B	16%	4
Project E	8%	5

 

(4) The ranking in terms of Net Present Value (NPV) should be given preference. Because

(i)      NPV gives accurate results because of consider all cash flows,

(ii)     IRR gives misleading in non conventional investment project.

(iii)     IRR also gives multiple rates.

(iv)    Profitability Index(PI) is crude way to cope up the rate and it gives misleading if investment made reversal time.

 

(5) If capital rationing situation prevails in the company with a budget constraints of the 1.5 million, we should prefer project A and Project D

Because

(i)      Project A gives higher NPV

(ii)     Project D gives highest IRR

(iii)    Since Project B gives second highest NPV but it takes 12 years

(iv)    In considering PI the Project C is the best but some portion of our investment is

being idle if project C is chosen. SO project A and D would be best preference.

(6) The causes of difference in outcomes of the project under NPV and IRR methods are as follows:­

(i) NPV consider cash flows at the cost of capital rate over the year but IRR deals re-investment rate that may not prevail in the market.

(ii) If the outcome or inflows are great in recent year and smaller in later year than IRR gives misleading

(iii) For non conventional project, IRR gives misleading for that reason the difference is made.