Critical Issues in India’s Industrial Sector: Sickness, Technology, and Productivity

India’s industrial sector stands at a crucial juncture. Despite decades of growth and liberalization, several persistent challenges continue to hold back the country’s manufacturing potential. From struggling sick units to outdated machinery, and from productivity gaps to competitiveness concerns, these critical issues demand attention if India is to realize its ambition of becoming a global manufacturing powerhouse.

Understanding industrial sickness: when factories fall ill 🔗

Imagine a once-thriving manufacturing unit that now struggles to pay salaries on time, accumulates losses year after year, and depends on external loans just to keep the lights on. This is industrial sickness-a phenomenon that has plagued Indian manufacturing for decades. According to the Reserve Bank of India, an industrial unit is considered sick when it reports cash losses for the year and is likely to continue incurring losses in subsequent years.

In simpler terms, a sick industrial unit cannot generate enough revenue to cover its costs and must rely on continuous external funding to survive. The most telling symptom? When a company’s loan account becomes a Non-Performing Asset (NPA), signaling that it can no longer meet its debt obligations.

What makes industries sick? 🔗

The causes of industrial sickness fall into two broad categories. External causes include factors beyond a company’s control-sudden changes in government policies, recession in the market, high input costs, irregular supply of raw materials, power shortages, and intense competition from better-equipped rivals. These forces can quickly push even viable units into distress.

However, research consistently identifies internal causes as the most critical factor in industrial sickness. Poor management decisions top this list. When executives misjudge market demand, create defective capital structures, or fail to maintain adequate working capital, the consequences cascade through the organization. Other internal factors include faulty project planning, wrong choice of location, inappropriate technology selection, incompetent entrepreneurs lacking basic business acumen, and labor disputes that disrupt production.

Consider a small textile unit that invested heavily in outdated machinery without proper market research. Within two years, it faced stiff competition from modernized competitors, couldn’t repay its loans, and eventually had to shut down-a classic case of mismanagement combined with poor technological choices.

The modernization challenge: stuck in the past 🔗

Walk into many Indian manufacturing units, and you’ll find machinery that should have been in a museum. Technological obsolescence represents another major hurdle for Indian industry. Studies show that a large segment of Indian industry suffers from outdated technology, leading to high production costs and poor product quality that cannot compete in global markets.

Why has modernization been so slow? 🔗

The roots of this problem lie in historical policy choices. For decades, India’s restrictive licensing policies-the infamous “License Raj”-discouraged investment in new technology. Price controls prevented companies from earning adequate profits to reinvest. Inadequate depreciation provisions meant that firms couldn’t set aside enough money to replace aging equipment. High corporate taxation further eroded the funds available for upgrades.

Think of it like trying to run a race while carrying heavy weights. Indian industries wanted to modernize, but policy constraints made it nearly impossible to accumulate the capital needed for technological upgrades. The Indian textile industry, for instance, has been suffering from technological obsolescence since the beginning of the 20th century because the vast majority of units never tried to regularly modernize their operations.

The consequences are severe. Companies operating with obsolete technology face higher costs per unit, produce lower quality goods, consume more power, and struggle to rationalize labor. In competitive markets, these disadvantages quickly translate into losses and potential sickness.

The productivity puzzle: measuring what matters 🔗

Here’s a question: What truly drives economic growth? Is it just investing more capital and hiring more workers, or is there something else at play? Economists point to a crucial concept called Total Factor Productivity (TFP)-essentially, how efficiently an economy uses its inputs of capital and labor to produce output.

TFP growth is like the secret sauce of economic success. It captures technological progress, better management practices, improved worker skills, and smarter ways of organizing production. When TFP grows, countries can produce more output without necessarily increasing inputs-a sustainable path to prosperity.

India’s productivity journey after liberalization 🔗

Research on Indian manufacturing reveals a fascinating pattern. Following the 1991 economic liberalization, TFP growth in manufacturing followed what economists call a J-curve. Initially, productivity actually dipped as firms faced the shock of import liberalization and increased competition. Many companies, comfortable in their protected markets, suddenly confronted efficient foreign competitors and had to scramble to adapt.

But then something remarkable happened. As firms adjusted to the new competitive pressures, adopted better technologies, and improved their management practices, productivity growth surged sharply upward. Studies found that reductions in trade protectionism led to higher levels and growth of firm productivity, with this effect being strongest for private companies.

This improvement wasn’t just about working harder-it was about working smarter. Companies invested in new machinery, trained workers in modern techniques, streamlined supply chains, and learned from global best practices. The result was a more efficient manufacturing sector capable of producing higher quality goods at competitive prices.

Why productivity growth is the golden ticket 🔗

Productivity growth isn’t just an abstract economic concept-it’s central to improving people’s lives. When workers and firms become more productive, they generate surpluses that can be distributed as higher wages and profits. These income gains boost domestic demand, as people can afford more goods and services. Higher incomes have helped India reduce extreme poverty from 16.2 percent in 2011-12 to just 2.3 percent in 2022-23-a remarkable achievement driven partly by productivity improvements.

Think about it this way: When a garment factory becomes more productive through better technology and training, it can pay workers more while also lowering prices for consumers. Those workers, earning higher incomes, can now afford better nutrition, education for their children, and healthcare-breaking the cycle of poverty. Meanwhile, the factory’s lower prices make its products more competitive in export markets, bringing in foreign exchange and creating even more jobs.

The virtuous cycle 🔗

This creates what economists call a virtuous cycle. Evidence from India shows that higher growth rates, driven by productivity gains, led to faster poverty decline because growth increased employment and real wages. Better-paid workers spend more, creating demand for goods and services, which encourages businesses to expand and hire more workers. Enhanced productivity also helps control inflation by increasing supply, making essentials more affordable for poor households.

For export competitiveness, productivity is equally vital. In global markets, Indian manufacturers compete with firms from China, Vietnam, Bangladesh, and other countries. Without continuous productivity improvements, Indian products become uncompetitive. But with strong TFP growth, Indian firms can offer quality products at competitive prices, capturing market share and generating employment.

What do you think? How can India accelerate the modernization of its industrial sector while supporting smaller units that lack resources? And what role should policy play in creating an environment where productivity growth can flourish across all types of manufacturing enterprises?

References

1. https://byjus.com/free-ias-prep/industrial-sickness/
2. https://uppcsmagazine.com/causes-of-industrial-sickness-in-india-and-remedies-for-revitalization/
3. https://indiantextilejournal.com/modernisation-indispensable-for-development-of-textile/
4. https://www.fibre2fashion.com/industry-article/5865/modernisation-of-indian-textile-industry
5. https://www.imf.org/external/pubs/ft/wp/2004/wp0428.pdf
6. https://www.worldbank.org/en/country/india/overview
7. https://ideas.repec.org/p/awe/wpaper/349.html