Chapter VII

FINANCIAL PERFORMANCE AND SICKNESS OF

SMALL SCALE INDUSTRIAL SECTOR IN
PUNJAB AND HARYANA
The changing global economic scenario has thrown up many opportunities
and challenges in front of the small scale industrial sector. Capital availability and
its formation is a necessary concomitant to enhance productivity and look for new
markets in other countries. Availability of sufficient funds is a pre-requisite for the
mobilisation of real resources for organising production. It would be imprudent to
plan for industrial development without ensuring the provision of adequate and
timely finance and credit facilities. The issue of credit dispensation is especially
important for small scale industrial units because of greater dependence on
borrowed capital in their day to day operations. Small scale industrial units
invariably rely on the friends, relatives or borrow from money lenders at
exorbitant rate of interest for initiating the enterprise and later on try to obtain loan
from banks and other financial institutions. Though, government of India has been
laying emphasis on providing financial and technological support to small scale
industrial sector through initiation of various measures, the most significant being
the setting up and promotion of Small Industries Development Bank of India, yet
lack of adequate and timely financing on competitive terms remains the single
most important constraint to the growth and development of this vital sector. The
demand for finance, implicit as well as explicit, from small scale industrial sector
will be substantial considering its size, structure, growth pattern, need for
restructuring and technology development (Bala Subrahmanya et. al., 2002).
Although small scale industrial sector of Punjab, Haryana and All India
experienced growth in terms of number of units over the period, yet these units
191

suffer from paucity of funds and heavy overhead burden leading to severe resource
crunch. To fulfill the economys warranted growth rate and to successfully bear
upon both national and international competition in the wake of current reformed
era and accelerated pace of deregulation of financial sector, it becomes imperative
to examine the performance of small scale industrial sector from the financial
perspective. In this context, present chapter endeavours to analyse the financial
performance and sickness in small scale industrial sector of Punjab, Haryana vis-avis All India alongwith the assessment of working capital requirements in the
reformed era. To present the analysis, in a lucid way the chapter has been divided
into four distinct sections. Section-I focuses on financial infrastructure alongwith
various policy measures undertaken by the Government for the development of
small scale industrial sector. Section- II provides the definition of sick units along
with magnitude of sickness in the small scale industrial sector of Punjab, Haryana
vis-a-vis All India, whereas, Section-III examines the estimates of working capital
gap in small scale industrial sector of Punjab, Haryana vis-a-vis All India during
the period 1981-82 to 2006-07. The growth rate of working capital gap have also
been calculated for the aggregate period (1981-82 to 2006-07) as well as for the
two sub-periods, viz. pre reforms period (1981-82 to 1990-91) and post reforms
period (1991-92 to 2006-07) and the last section concludes the discussion
alongwith policy implications.

Section-I
The institutional credit acts as a catalyst and lubricates in the process for
vigorous growth of the small scale industrial sector so as to accelerate the
countrys economic growth. Availability of credit would contribute to the
modernisation of the sector and enhance its productivity and competitiveness.

*The comparable data regarding sick small scale industrial units in Punjab, Haryana and All India was
available since 1986-87.

192

Indian credit system, as it has emerged, is a product of evolution as well as

intervention. The broad objectives of the policy have been to (i) institutionalise
credit (ii) enlarge its coverage and (iii) ensure the provision of timely and adequate
credit at reasonable interest rates to large segment of the population as far as
possible. In this context, the objective of the present section is to discuss in detail
the financial infrastructure and various support measures undertaken by the
government for the development of this sector.

Institutional Structure of Small Scale Industrial Sector

In order to give more impetus to small scale industrial sector, a number of
central and state level institutions have been set up to look after different aspects
of the development programmes government also established the Ministry of
Small Scale Industries and Agro and Rural Industries (SSI and ARI) in 1999, as
the nodal Ministry for formulation of policies and central sector programmes/
schemes, their implementation and related co-ordination, to supplement the efforts
of the states for promotion and development of these industries in India. The
ministry of small scale industrial sector and ARI was bifurcated into two separate
ministries, namely, ministry of small scale industries and Ministry of Agro and
Rural Industries in 2001. The role of the Ministry of Small Scale Industries is thus
to mainly assist the States in their efforts to promote growth and development of
the small scale industrial sector, enhance their competitiveness in an increasingly
market-led economy and generate additional employment opportunities. The
specific programmes undertaken by the organisations of the Ministry seek to
provide one or more of the following: (i) Adequate credit from financial
institution/banks; (ii) Funds for technology upgradation and modernisation; (iii)
Integrated infrastructural facilities; (iv) Modern testing facilities and quality
certification laboratories; (v) Access to modern management practices,

193

entrepreneurship development and skill upgradation through appropriate training

facilities; (vi) Assistance for better access to domestic and export markets; and
(vii) Cluster-wise measures to promote capacity-building and empowerment of the
units in addition to all or some of the above mentioned supports. The Ministry of
small scale industry is supported by a host of other Central/State Government
departments, promotional agencies, autonomous institutions, non-government
organisations etc. which provide for small scale industrial sector in different ways.

Central Level Organisations

Small Scale Industries Board (SSIB)
The government of India constituted a board, namely, Small Scale
Industries Board (SSIB) in 1954 to advice on development of small scale
industries in the country. The SSIB is also known as central small industries
board. The range of development work in small scale industries involves several
departments /ministries and several organs of the central/state governments.
Hence, to facilitate co-ordination and inter-institutional linkages, the small scale
industries board has been constituted. It is an apex advisory body constituted to
render advice to the government on all issues pertaining to the development of
small scale industries.

Small Industries Development Organisation (SIDO)

SIDO is created for development of various small scale units in different
areas and is a subordinate office of department of SSI and ARI. It is a nodal
agency for identifying the needs of small scale industrial units coordinating and
monitoring the policies and programmes for promotion of the small scale
industries. It undertakes various programmes of training, consultancy, evaluation
for needs of small scale industrial sector and development of industrial estates. All

194

these functions are taken care with 27 offices, 31 SISI (Small Industries Service
Institute), 31 extension centers of SISI and 7 centers related to production and
process development.

National Small Industries Corporation (NSIC)

The National Small Industries Corporation (NSIC), an enterprise under the
Union Ministry of Industries was set up in 1955 in New Delhi to promote aid and
facilitate the growth of small scale industries in the country. National Small
Industries Corporation provides a wide range of services to the small scale
industrial sector in the fields of marketing, equipment financing, technology
upgradation, exports, training and common facilities. Over the years NSIC has
proved its strengths within the country and abroad by promoting modernisation,
quality consciousness, strengthening the linkage of the small with large and
medium enterprises and enhancing exports of the small scale industrial sector.

Small Industries Service Institutes (SISI)

The small industries service institutes have been set up in state capitals and
other places all over the country to provide consultancy and training to small
entrepreneurs both existing and prospective. The main functions of SISI include:
(i) To serve as interface between central and state government.
(ii) To render technical support services.
(iii) To conduct entrepreneurship development programmes.
(iv) To initiate promotional programmes.

State Level Organisations

The promotion and development of the small scale sector primarily rests
with the State government. The Directorate of Industries (DIs), District Industries
195

Centre (DICs), the State Small Industries Development Corporations (SSIDCs)

and State Financial Corporations (SFCs) are the major state level institutions set
up by the government alongwith commercial banks to support the small scale
sector. The major thrust of the state government programmes is to provide a sound
infrastructure base and support to entrepreneurs of small and medium enterprises.

Directorate of Industries (DIs)

The directorate of Industries is the executive agency for the promotion and
development of the village and small scale sector. The functions of DIs are both
regulatory and development in nature. The DIs have a network of District
Industries Centres at the District Level, Industrial Offices at the sub-divisional
level and extension offices at the block level, functioning under its control.

District Industries Centres (DICs)

The scheme of District Industries Centres was introduced in 1978 with the
prime objective to provide a focal point for the development of small scale
industrial sector. These centres were charged with the responsibility of providing
all the services and support required at pre investment and post investment stages
to the small scale entrepreneurs and institutions setting up modern small scale
units and traditional cottage industries. The district industries centres provide and
arrange a package of assistance of facilities for credit guidance, raw materials,
training and marketing alongwith necessary help to unemployed educated young
entrepreneurs. These centres establish close links with Development Blocks on
one hand and with specialised institutions concerned with the development of
small industries on the other hand. The institutional support for the promotion of
small scale industrial sector is summarised in Table 7.1.

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TABLE 7.1
INSTITUTIONAL SUPPORT FOR PROMOTION OF SMALL
SCALE INDUSTRIAL SECTOR
Institutions

Major Activity

A. Central Level
Small Industries Development Organisation
(SIDO)

Apex Body for SSI Promotion

1.

Small Industries Service Institutes (SISIs)

(28), Branches (30), Extension centres (38),
Field Testing Centres (18), Production
centres 94) and Foot wear training centres
(6) etc.

Training Manpower resources for

promotion of SSI

2.

National Small Industries Corporation

(NSIC)

Marketing machinery on hire

purchase, import of raw materials,
exhibition etc.

3.

National Institute of Small Industries

Extension Training (NISIET)

Research, Training, Consultancy,

etc.

4.

National Institute for Entrepreneurship and

Small Business Development (NIESBUD)

Co-ordination of Entrepreneurship
Development Programmes (EDP)
organised by various EDP
Institutions in the country

5.

Small Industries Development Bank of

India (SIDBI)

Finance, direct and indirect

assistance.

B. State Level
1.

Directorate of Industries

State level apex body for SSI

promotion

2.

Small Industries Development Corporation

(SIDC)

Promotion of SSI through

industrial estate, etc.

3.

Small Industries Marketing Corporation

(SIMC)

Long Term Finance

C. District Level
District Industries Centres

Provision of multiple services and

support under a single roof.

Source: Development Commissioner, SSI, New Delhi

197

State Small Industries Development Corporations (SSIDC)

The State Small Industries Development Corporations were sets up in
various states under the companies act 1956, as state government undertakings to
cater to the primary developmental needs of the small tiny and village industries in
the state/ union territories under their jurisdiction. Incorporation under the
companies act has provided SSIDCs with greater operational flexibility and wider
scope for undertaking a variety of activities for the benefit of the small sector. The
important functions performed by the SSIDCs include:
(i)

To procure and distribute scarce raw materials.

(ii) To supply machinery on hire purchase system.

(iii) To provide assistance for marketing of the products of small-scale industries.
(iv) To construct industrial estates/sheds, providing allied infrastructure facilities
and their maintenance.
(v) To extend seed capital assistance on behalf of the State government and
provide management assistance to production units.

State Financial Corporations (SFCs)

State Financial Corporations (SFCs) came into being under the provision of
the SFCs Act, 1951. These corporations were mandated to serve as regional
agencies for promoting balanced regional growth through the development of
small and medium enterprises by grant of term loan and participation in their
equity base in the country. Their main objectives are to provide financial
assistance to industries, catalyse investment, generate employment and widen the
industrial base. Moreover, these also operate scheme of refinance of Small
Industries Development Bank of India (SIDBI) and have tailor made financial
schemes for artisans and special target groups.
198

Financial Institutions Providing Credit to SSI Sector

In providing credit to SSI sector multiagency approach has been adopted
so as to take advantage of the strength of different institutions comprising (i)
Scheduled Commercial Banks (SCBs) consisting of public and private sector
banks, and foreign banks (ii) Regional Rural Banks (RRBs) (iii) District Central
Cooperative Banks and Primary Agricultural Credit Societies (iv) Urban
Cooperative Banks (v) Small Industries Development Bank of India (SIDBI) (vi)
State Finance Corporations (SFCs) and (vii) Small Industries Development
Corporation (SIDCs)

Scheduled Commercial Banks (SCBs)

The SCBs extend credit to small scale industrial sector and other priority
sectors (service and business segment) under their mandated priority sector
lending. They also provide credit in the form of working capital, investment,
export etc to small scale industrial sector both at national and regional level.

Regional Rural Banks (RRBs)

These banks provide credit to micro/tiny and artisan-based units and village
industries and are actively involved in implementing most of the credit-based
development schemes of NABARD for non-farm unorganized enterprises.

Cooperative Banks
These banks finance those enterprises, which are formed on a cooperative
basis for production or marketing. Mostly, handlooms, power-looms, coir and
some village industries work on a cooperative basis and avail of cooperative loans.
NABARD uses this channel for extending credit to farm and non-farm enterprises.
Cooperatives banks provide working capital funds to traditional industries, micro
industries, tiny industries and small scale enterprises.
199

Small Industries Development Bank of India (SIDBI)

SIDBI is the apex bank and the principal development financial institution
committed to finance, promote and develop the small industries sector and to
coordinate the functions of other institutions engaged in similar activities. SIDBI
extends refinance as well as direct credit, however, it does not have a full
complement of services such as flexibility to offer working capital, fund based and
non-fund based guarantees, value added services, etc to its clients due to which it
is not able to capitalize on its competitive advantages in the market. SIDBI
provide loans for new ventures, diversification, technology upgradation,
industrialisation and expansion of well-run small scale industries. SIDBI channels
its finance through existing credit delivery system consisting of State level
institutions, commercial banks and regional rural banks. The assistance is also
available for (i) marketing of SSI products (ii) setting up of new ventures (iii)
working capital (iv) expansion (v) modernization (vi) human resource
development and (vii) diversification of existing units for all activities.

National Bank for Agriculture and Rural Development (NABARD)

It is specifically established to promote agriculture and agriculture-related
activities and rural development through Rural Entrepreneurship Development
Program, Training-cum-Production Program and action plan for Rural
Industrialization (District Rural Industries Project). Besides establishing
comprehensive infrastructure of financial institutions, the government of India
introduced innovative promotional measures to uplift the growth of small scale
industrial sector and the major ones being (i) widening the scope of national equity
fund to cover projects upto Rs. 10 lakh for equity support (upto 15 percent);
(ii) enlarging the single window loan scheme to cover projects upto 20 lakh to Rs.
1 crore in the year 2004-05; (iii) setting up a special monitoring agency to ensure
that the credit needs of the small-scale sector are fully met; (iv) announcement of
200

interest rate concession of 2 per cent for micro, small and medium enterprise upto
March 2011; (v) reservation of 14 items for the small scale sector ; (vi) enactment
of Limited Liability Partnership Act in 2008, to enable flow of funds without
sharing of decision making from sleeping partners to small limits; (vii)
liberalisation of Laghu Udyami credit card (LUCC) scheme by enhancing the
credit limit from Rs. 2 lakh to Rs. 10 lakh, for borrowers having a satisfactory
track record; (viii) operationalisation of the small and medium enterprises (SME)
Fund of Rs. 10,000 crore by the SIDBI since 2004; (ix) extension of the Integrated
Infrastructure Development (IID) scheme to cover the entire country

with

50 percent reservation for rural areas and (x) in addition, the commercial banks are
required to achieve 20 percent growth rate in credit and 15 percent annual growth
in the number of accounts of micro and small enterprises.
Concerned with the continuing problem and non-adherence of RBI
guidelines on credit to small scale sector, the RBI set up Kapur Committee to
review the working of credit delivery system for this sector in the year 1998. The
RBI also set up a working group on flow of credit to small sector under the
chairmanship of Ganguly which recommended; identification of new clusters and
adoption of cluster based approach for financing the small and medium enterprises
sector; sponsoring specific projects as well as widely publicising the successful
working models of NGOs; and exploring new instruments for promoting rural
industrialisation. The availability of financial infrastructure for small scale
industrial sector both at national and regional level is summarised in Table 7.2.
Inspite of well established infrastructure and various initiatives taken by the
government, the small scale industrial sector still remains plagued with the
problem of sparse finances. A plethora of conditionalities and eligibility criteria
insisted upon by the promotional agencies especially financial institutions restrict

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TABLE 7.2
AVAILABILITY OF FINANCIAL INFRASTRUCTURE FOR
SMALL SCALE INDUSTRIAL SECTOR
Bank/Institution

Area of Assistance

1.

Commercial Banks-exclusive Small Finance-working Capital + Term

Industry Branches
Loans

2.

State Financial Corporations (SFCs)

3.

National Bank for Agriculture and Refinance Facilities for Rural

Rural Development (NABARD)
Artisans, Village and Cottage
Industries

4.

Regional Rural Banks and Co- Credit Support to Small Industry,

operative Banks
Particularly Village Industries and
tiny Units

5.

National
Small
Industries
Corporation (NSIC) and State Small
Industries
Development
Corporations (SSIDCs)

Supply of Machinery on hire

purchase basis and provision of
technical and consultancy services
among others.

6.

Venture Capital Funds Companies

Risk capital to small Industries

7.

Small Industries Development Bank

of India (SIDBI)-State Level
Branches and Small Industry Cluster
Branches

All round support: Direct and

Indirect Finance, Technology
Upgradation and Modernisation,
Quality Improvement, Marketing
Support through exhibitions etc.

Finance-Term Loans, Soft Loans for

Technology Upgradation and
Modernisation, Rehabilitation and
Sick Units

Source: Reserve Bank of India Report of the Committee to Examine the Adequacy of
Institutional Credit to the SSI Sector and Related Aspects, Mumbai, 2005.

202

the small enterprises to avail requisite assistance (Chatterji, 1997). In many cases,
a handful of units get concessional credit particularly bigger units of the small
scale sector (Chhikara, 1996). Either the bulk of small producers do not get any
support because of cumbersome procedures or they do not have any knowledge of
incentives and assistance schemes at all (Panda, 1996). In addition, the lending
policies of the banks and financial institutions are based on the security-oriented
approach (Chadha, 1995). The banks and financial institutions generally follow a
conservative approach by insisting on collateral security especially in form of
housing premises before sanctioning the loan to small entrepreneurs (Vasal,
1996). Moreover, the small enterprises neither have corporate image nor brand
image and without these they cannot float capital issues in the market (Narain,
1997) and so they have to solely depend on banking industry for finance.
The banking sector reforms (on the basis of recommendations of
Narasimham Committee-I) have put credit support to small enterprises under great
pressure. Although the regulations for priority sector lending continue, subsidised
interest rates are now available to small units only for loans less than Rs. 2 lakhs.
All other loans are now to be given at commercial interest rates. With higher unit
transaction costs and the absence of good credit assessment capabilities, the
consequence in this scenario has been a significant jump in interest rates
applicable to small scale industrial units. Thus, small units have moved from lower
than commercial interest rates in the earlier regime to higher than large industry
interest rates in the 1990s (Mohan, 2001). Moreover, a harsh and discriminatory
treatment is meted out to the small players by the banks.
The above discussion reveals that though, government of India framed an
elaborate financial infrastructure comprising of banking and non-banking financial
institutions to meet the credit requirements of small scale industrial sector but over
the years, the organisational framework failed to render the desired services to

203

improve the efficiency of small scale industrial sector. This is because of an

overlapping in the functioning of several government organisations and virtual
absence of inter-institutional coordination in the working of these agencies. Hence,
the government organisations need to clearly ear mark the areas of their
functioning alongwith an improvement in coordination of activities for successful
implementation of policies designed for small scale industrial sector both at
national and regional level.

Section II
The sickness in small scale industrial sector has been defined differently by
different organisations and agencies. Small Industries Development Organisation
(SIDO) defined a sick unit as one which operates below 20 percent of its installed
capacity. In 1972, the State Bank of Indias Committee on Rationalisation of
Returns in respect of small scale industrial sector advances classified sick units as
those whose accounts are chronically irregular and sticky. In 1975, the State Bank
of Indias study team on SSI advances redefined the sick unit as a unit which fails
to generate internal surpluses on a continuing basis to meet its current obligations
and depends for its survival on frequent infusion of external funds.
In 1977, a working group constituted by the members of Small Industries
Development Organisation (SIDO) and National Institute of Small Industry
Extension Training (NISIET) described a sick unit in the small scale industrial
sector as an unit which did not fulfill minimum standards of productivity and
profitability over a reasonable period due to internal shortcomings or external
definition. It can be gathered that a unit may be considered sick when it does not
perform its primary functions such as production, sales, collection of debts, dues
and repayment of debts in the normal way, for reasons beyond the control of the
management. According to Sick Industrial Companies Act (SICA), 1985, A small
204

scale industrial unit is considered as sick when (i) Any of its borrowed accounts
has become doubtful advance i.e. principal or interest in respect of any of its
borrowed accounts has remained overdue for a period exceeding two and half
year; and (ii) There is erosion in the net worth due to accumulated cash losses to
the extent of 50 percent or more of its peak net worth during the preceding two
accounting years.
In 1987, Reserve Bank of India (RBI) issued a set of guidelines for
incipient sickness and small scale industrial unit considered sick if it has (a)
incurred cash loss in the previous accounting year and is likely to incur such loss
in the current accounting year and has an erosion, on account of cumulative cash
losses, to the extent of 50 percent or more of its net worth and/or (b) continuously
defaulted in meeting four consecutive quarterly instalments of interest or two half
yearly instalments of principal on term loans and there are persistent irregularities
in the operation of its credit limits with the bank. While both (a) and (b) should be
satisfied in the case of larger small scale industrial sector, it would be suffice if
either (a) or (b) is satisfied in the case of tiny and decentralised sector.
Reserve Bank of India (RBI) modified the definition of a sick small scale
industrial unit in 1989 as, A small scale industrial unit should be considered sick
if, it has at the end of any accounting year, accumulated losses equal to or
exceeding 50 percent of its peak net worth in the immediately preceding five
accounting years. However, if it is difficult to get financial particulars, a unit may
be considered as sick if it defaults continuously, for a period of one year, in the
payment of interest or instalment of principal and there are persistent irregularities
in the operation of its credit limit with the bank. RBI in 1991 set up a committee
under the chairmanship of Nayak, to examine the adequacy of institutional credit
205

to small scale industrial sector. The committee recommended several measures to

deals with sickness. So based on the recommendation of the Nayak committee,
RBI modified the definition of sick SSI units as, A SSI may be classified as sick
(i) Any of its borrowal accounts has a doubtful advance i.e. principal or interest in
respect of any of its borrowal accounts has remained outstanding for a period
exceeding 2 to 5 years. (ii) There is erosion in the net worth due to the
accumulated cash losses to the extent of 50 percent or more of its peak net worth
during the preceding two accounting years.
The latest definition of sickness given by the working group of
rehabilitation of sick unit set up by the RBI (Kohli committee) as A small
enterprise should be considered sick if (a) any of the borrowal accounts of the unit
remains substandard for more than six months; (b) there is erosion in the net worth
due to accumulated cash losses to the extent of 50 per cent of its net worth during
the previous accounting year; and (c) the unit has been in commercial production
for at least two years.
As per the third census following criteria were adopted to identify sick/
incipient sick units:
(i)

Continuous decline in gross output compared to the previous two financial

years;

(ii)

Delay by more than 12 months in repayment of loan taken from

institutional sources; and

(iii)

Erosion in the net worth to the extent of 50 percent of the net worth during
the previous accounting year.

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TABLE 7.3
YEAR WISE PERFORMANCE OF SICK SMALL SCALE
INDUSTRIAL UNITS IN INDIA
(Amount in Rs. Crores at current Prices)
Year

Sick
SSI
Units

Amt O/S

Potentially
viable
Units

%age of
Potentially
viable
Units

Amt O/S

Nonviable
Units

%age
of
nonviable
Units

Amt O/S

Viability
not
decided

1986-87

204259

1542

12256

6.00

406.19

185977

91.05

1269.97

6026

1987-88

217436

1980

12954

5.96

450.68

198635

91.35

1397.74

5847

1988-89

186441

2243

16042

8.60

568.27

168006

90.11

1576.54

2393

1989-90

218828

2427

16451

7.52

590.5

200092

91.44

1741.07

2285

1990-91

221472

2792

16140

7.29

693.12

202998

91.66

1997.16

2334

1991-92

245575

3101

19210

7.82

728.9

223336

90.94

2256.14

3029

1992-93

238176

3443

21649

9.09

798.79

213804

89.77

2506.94

2723

1993-94

256452

3680

16580

6.47

685.93

234265

91.35

2842.25

5607

1994-95

268815

3547

15539

5.78

597.93

249375

92.77

2842.40

3901

1995-96

262376

3722

16424

6.26

635.82

240168

91.54

2943.65

5784

1996-97

235032

3609

16220

6.90

479.31

213014

90.63

3031.59

5798

1997-98

221536

3857

18686

8.43

455.96

199634

90.11

3296.58

3216

1998-99

306221

4313

18692

6.10

376.96

271193

88.56

3746.07

16336

1999-00

304235

4608

14373

4.72

369.45

276643

90.93

4007.86

13219

2000-01

249630

4506

13076

5.24

399.17

225488

90.33

3943.2

11066

2001-02

177336

4819

4493

2.53

416.41

167574

94.50

4146.74

5269

2002-03

167980

5706

3626

2.16

624.71

162791

96.91

4868.62

1563

2003-04

143366

5773

2406

1.68

551

138081

96.31

4937.00

2938

2004-05

138041

5380

3922

2.84

435

132153

95.74

4884

1966

2005-06

126824

4981

4594

3.62

498.16

117148

92.37

4141.00

5082

2006-07

114132

5267

4287

3.76

427.46

109011

95.51

4757.00

834

GR (%)

(-) 2.41

5.50

(-) 8.15

(-)5.74

(-) 1.37

(-) 2.17

0.24

6.65

(-) 1.30

(P-Value)

(0.012)

(0.000)

(0.000)

(0.000)

(0.107)

(0.017)

(0.004)

(0.000)

(0.628)

Note:

O/S stands for amount outstanding in Rs.crores; Figures in the parenthesis are the pvalues; GR represents average annual growth rates.
Source: Handbook of Statistics on Indian Economy, RBI, 2010

207

Combining the three yardsticks used to measure sickness, viz. (i) delay in
repayment of institutional loan over one year, (ii) decline in net worth by 50
percent and (iii) decline in output during last three years, about 14.47 percent of
the units in the registered small scale industrial sector were identified to the either
sick or incipient sick, while this percentage was only 8.25 in case of unregistered
units (Third All India Census of Small Scale Industries, 2001-02).
The magnitude of sickness in the small scale industrial sector of India can
be accessed from visualisation of Table 7.3. The table shows that out of the total
sick small scale industrial units, numbers of non-viable units are more than 90
percent, in most of the years under study. Non-viable units are those units, which
have no chance of revival and rehabilitation. Further, the data shows that in the
small scale industrial sector, the figures of sickness were quite alarming as
114132 units at All India level were sick in 2006-07. Out of these sick units,
4287 units were potentially viable and 109011 units were potentially non viable
while 834 units are those, whose viability yet not decided. Moreover, the analysis
shows a negative annual growth rate of sick small scale industrial units to the tune
of (-) 2.41 percent during the time span of 1986-87 to 2006-07, yet the magnitude
of sickness in small scale industrial sector of India is quite high and non-ignorable
by all standards. Growth rates of potentially viable, non-viable and viability not
decided units are (-) 8.15 percent, (-) 2.17 percent and (-) 1.30 percent
respectively. Therefore, negative and highly significant growth rate of the
potentially viable units is a matter of serious concern in the reformed era. Further,
the growth rates of the amount outstanding for sick small scale industrial units is
5.50 percent per annum while for potential viable and non-viable units are (-) 1.37
percent and 6.65 percent, respectively. High indebtedness in small scale industrial

208

units and non-viable units hampers the expansion capacity and ability to generate
employment in Indian small scale industrial sector.
Thus, the high percentage of sick units in Indian small scale sector reiterates the
necessity to reformulate the existing policies dealing with this sector in the
reformed era.
Table 7.4 shows the extent of sickness in the small scale industrial sector of
Punjab during 1986-87 to 2006-07. The table shows that out of the total sick units,
number of non-viable units is more than 92 percent in most of the years under
study. In 2006-07, the total number of sick small scale industrial units in Punjab
are 1146, out of this 127 and 1015 units are potentially viable and non-viable units
respectively while 4 units are those whose viability not decided. Further, data
shows that out of the total sick units, 11.08 percent were potentially viable units
and 88.57 percent non-viable units during 2006-07. Moreover, the analysis shows
a negative annual growth rate of sick small scale industrial units to the tune of
(-) 4.52 percent in Punjab during 1986-87 to 2006-07, whereas, growth rate of
potentially viable, non-viable and viability yet not decided units were
(-) 7.52 percent, (-) 4.40 percent and (-) 6.36 percent respectively. Thus, highly
significant and negative growth rate of the potentially viable units pose a serious
question for the policy makers and planners. However, it is also observed that the
annual growth rate of the amount outstanding against small scale industrial sector
in Punjab was 3.29 percent per annum, while for potentially viable units and
potentially non-viable units it were (-) 6.90 percent and 3.90 percent respectively.
Therefore, high indebtedness of small scale industrial units and potentially
non-viable units hampers the development of small scale industrial sector in
Punjab and increases the non performing assets of the financial institutions.

209

TABLE 7.4
YEAR WISE PERFORMANCE OF SICK SMALL SCALE
INDUSTRIAL UNITS IN PUNJAB
(Amount in Rs. Crores at current Prices)
Year

Sick
SSI
Units

Amt O/S

Potentially
viable
Units

%age of
Potentially
viable
Units

Amt O/S

nonviable
Units

%age
of nonviable
Units

Amt O/S

viability
not
decided

1986-87

2434

44.97

116

4.77

6.92

2271

93.30

35.57

31

1987-88

2699

53.2

124

4.59

8.12

2538

94.03

41.87

37

1988-89

4467

71.31

247

5.53

14.61

4011

89.79

53.48

209

1989-90

5988

81.99

317

5.29

15.98

5423

90.56

63.16

193

1990-91

5288

91.79

337

6.37

14.16

4913

92.91

75.73

38

1991-92

5485

100.28

162

2.95

7.69

5306

96.74

91.1

17

1992-93

6362

111.68

223

3.51

11.59

6100

95.88

96.48

39

1993-94

2434

64.59

177

7.27

5.95

2258

92.77

58.12

-1

1994-95

2473

69.35

266

10.76

5.61

2203

89.08

61.66

1995-96

2362

64.16

145

6.14

4.36

2179

92.25

59.65

38

1996-97

2466

84.44

143

5.80

4.36

2322

94.16

79.98

1997-98

2376

91.7

75

3.16

5.22

2288

96.30

85.92

13

1998-99

3551

101.44

117

3.29

2.88

3413

96.11

94.1

21

1999-00

1897

97.06

117

6.17

5.46

1729

91.14

83.31

51

2000-01

1836

63.02

52

2.83

3.71

1774

96.62

59.16

10

2001-02

1902

144.26

68

3.58

4.25

1785

93.85

133.59

49

2002-03

3022

153.25

42

1.39

5.18

2964

98.08

136.43

16

2003-04

3025

157.96

26

0.86

4.97

2982

98.58

144.23

17

2004-05

2506

162.81

57

2.27

3.76

2376

94.81

123

73

2005-06

1695

101.37

85

5.01

2.98

1600

94.40

86.43

10

2006-07

1146

63.11

127

11.08

2.52

1015

88.57

60.56

(-) 4.52
(0.003)

3.29
(0.008)

(-) 7.52
(0.000)

(-) 3.01
(0.178)

(-) 6.90
(0.000)

(-) 4.40
(0.004)

(-) 0.12
(0.306)

3.90
0.002

(-) 6.36
(0.222)

GR (%)
(P-Value)

Note: O/S stands for amount outstanding in Rs.crores; Figures in the parenthesis are the
p-values; GR represents average annual growth rates.
Source: Various Loksabha and Rajya Sabha Unstarred Question.

210

TABLE 7.5

YEAR WISE PERFORMANCE OF SICK SMALL SCALE

INDUSTRIAL UNITS IN HARYANA
(Amount in Rs. Crores at current Prices)
Year

Sick
SSI
Units

Amt O/S

Potentially
viable
Units

%age of
Potentially
viable
Units

Amt O/S

nonviable
Units

%age
of nonviable
Units

Amt O/S

Viability
not
decided

1986-87

2096

43.81

76

3.63

3.5

2010

95.90

36.27

10

1987-88

2580

52.74

94

3.64

4.17

2475

95.93

42.64

11

1988-89

2179

55.92

77

3.53

9.68

2091

95.96

40.55

11

1989-90

3186

63.7

53

1.66

12.59

3097

97.21

44.22

36

1990-91

2720

64.53

86

3.16

17.23

2632

96.76

46.92

1991-92

3467

73.96

54

1.56

14.69

3402

98.13

57.31

11

1992-93

4563

92.33

73

1.60

5.79

4465

97.85

75.69

25

1993-94

1669

79.53

49

2.94

5.67

1596

95.63

73.19

24

1994-95

2339

82.99

63

2.69

3.7

2271

97.09

79.03

1995-96

2332

97.76

225

9.65

4.73

2083

89.32

92.64

24

1996-97

2574

63.95

33

1.28

1.89

2537

98.56

61.3

1997-98

2149

92.41

26

1.21

5.98

2038

94.83

83.11

85

1998-99

3180

87.33

39

1.23

1.17

3097

97.39

85.42

44

1999-00

2952

90.89

142

4.81

3.32

2797

94.75

87.18

13

2000-01

1285

34.88

14

1.09

0.21

1266

98.52

34.66

2001-02

889

50.25

0.79

6.22

882

99.21

44.02

2002-03

1515

57.02

10

0.66

2.32

1502

99.14

53.41

2003-04

1302

65.34

14

1.08

1.64

1281

98.39

58.67

2004-05

1000

84.97

12

1.20

2.27

981

98.10

78.33

2005-06

806

80.02

11

1.36

3.08

789

97.89

74.18

2006-07

650

75.36

10

1.54

3.85

630

96.92

71.46

10

GR(%)

(-) 6.21

0.85

(-) 1.21

(-) 5.92

(-)7.91

(-)6.10

0.11

(-) 2.07

(-) 4.25

(P-Value)

(0.000)

(0.400)

(0.000)

(0.009)

(0.019)

(0.000)

(0.207)

(0.066)

(0.277)

Note: O/S stands for amount outstanding in Rs.crores; Figures in the parenthesis are the
p-values; GR represents average annual growth rates.
Source: Various Loksabha and Rajya Sabha Unstarred Questions
211

TABLE 7.6
REASONS FOR SICKNESS/INCIPIENT SICKNESS IN SMALL
SCALE INDUSTRIAL SECTOR OF INDIA
S.No.

Reason for Sickness/

Incipient Sickness

% of Sick/ Incipient Sick Units*

Total SSI

Regd. SSI

Unregd.
SSI

1.

Lack of Demand

66

58

69

2.

Shortage of Working Capital

46

57

43

3.

Non-availability
Material

12

12

12

4.

Power Shortage

13

17

12

5.

Labour Problems

6.

Marketing Problems

36

37

36

7.

Equipment Problems

11

12

8.

Management Problems

Note: *

of

Raw

The total will exceed 100 percent, as some units reported more than one reason.

Source: Third All India Census of Small Scale Industries, 2001-2002.

212

Table 7.5 examines the sickness in small scale industrial sector of Haryana
during 1986-87 to 2006-07. The table shows that out of the total sick units the
numbers of non-viable units are more than 95 percent in most of the years under
study. It also shows that number of sick units in Haryana are 650 in 2006-07, out
of this, 10 and 630 units are potentially viable and non-viable units respectively
while 10 units are those whose viability yet not decided. Furthermore, it is also
observed that the annual growth rate of the sick units in small scale industrial
sector of Haryana turned out to be (-) 6.21 percent per annum, while for
potentially viable units, potentially non-viable units and viability yet not decided is
(-) 1.21 percent, (-) 6.10 percent and (-) 4.25 percent respectively but negative
growth rate of the potentially viable units is a matter of concern for policy makers
and planners in Haryana. Moreover, the growth rate of amount outstanding of sick
small scale industrial units in Haryana worked out to be 0.85 percent while for the
potential viable and non-viable units these are (-)7.91 percent and (-)2.07 percent
respectively, therefore, high indebtedness of small scale industrial unit in Haryana
hampers the expansion capacity, ability to generate employment and increase the
non-performing assets of the financial institutions.
Given the existence of a large number of sick small scale industrial units in
India, Punjab as well as in Haryana, it becomes imperative to analyse the reasons
of sickness for the effective formulation of policies for this sector. The reasons for
sickness are of varied nature and are highlighted in Table 7.6. The table shows that
lack of demand was quoted as a reason of sickness by 66 percent of sick small
scale industrial units. Similarly, shortage of working capital by 46 percent, non
availability of raw material by 12 percent, power shortage by 13 percent,
marketing problem by 36 percent and labour problem, management problem and
equipment problem collectively by 20 percent. In nutshell, lack of demand is the
largest contributor of sickness in small scale industrial units in India followed by
shortage of working capital and marketing problems. The paucity of knowledge
213

about problems of small enterprises coupled with cumbersome and complicated

procedures generally create delay in getting financial support to meet working
capital requirements, which push many small scale industrial units in the category
of sick units. Moreover, banks also insist on collateral, which the small scale
industrial units, with limited resources, are unable to furnish. Bank officials
frequently point out to the high level of non-performing assets and the poor culture
of repayments to justify their cautious lending policies. Therefore, shortage of
finance and credit creates a whole group of problems relating to size of the unit,
the quality of labour, market coverage, purchase of raw materials, machinery and
equipment and all these problems, in turn, lead to low and poor quality of
production.
In the present reformed era, any perspective policy for small scale industrial
sector must address itself to the need for developing and promoting economically
viable units. Therefore, emphasis of small scale industrial sector development
policy should be on the qualitative rather than quantitative growth of this sector
both at national and regional level.

Section-III
Finance is the life-blood of business in any productive sphere and its vital
need is more realised where it is lacking as in the small scale industrial sector of
Punjab, Haryana and All India. The importance of finance in this field is as
fundamental as elsewhere and every problem of the small scale industrial sector
concerning production, material, quality or marketing is in the ultimate analysis a
financial one. Adequate finance is a pre requisite for proper organization of
production and the purchase of raw materials. Therefore, credit is the prime input
for sustained growth of small scale industrial sector and its mobilisation for
meeting fixed and working capital needs poses the foremost problems. Credit
provided for creation of fixed assets like land, building, plant and machinery is
called long term credit and credit provided for running the industry for its day-to214

day requirement for purchasing raw material and other inputs like electricity and
water etc. and for payment of wages and salaries is called short-term credit or
working capital. The shortage of working capital has been found to be one of the
prime reasons for the widespread sickness in the small scale industrial sector. In
India, the government has made a strong commitment to assist small scale
enterprises in obtaining financial resources but still the inadequacy of credit exists.
The small scale enterprises also face hurdles in getting support from government
agencies because of lack of technical competence of staff of these agencies to
understand the industry specific problems.
One of the universal problems that hinders and unhinges the small scale
industrial sector is the paucity and non-availability of adequate finance at right
time. In small scale industrial sector of Punjab, Haryana and All India, this sector
encompasses a diverse range from handicrafts to ancillaries and their financial
requirements also differ and hence their needs are to be met differently. Though
many other elements such as technology, management etc., are important but
adequate and timely finance is a necessary pre-condition for the promotion and
development of small scale industrial sector.
The small scale industrial sector also face hurdles in getting support from
government agencies because of lack of technical competence of staff of these
agencies to understand the industry specific problems. Thus, as a result, there exist
crucial gap between the requirements and availability of working capital to small
scale industrial sector. In this context, an attempt has been made to compute
working capital gap using the methodology suggested by the Nayak Committee
(1992). According to the assessment made by the Nayak Committee (1992), the
working capital accounted for 78 percent of the total bank credit to small scale
industrial sector, while the remaining 22 percent is accounted for by the term
loans. Therefore, the present study approximated actual working capital
availability to small scale sector as:
215

Working Capital Availability (WCA) = 0.78 Total SSIs Advances by

Scheduled Commercial Banks
As per the recommendations of Nayak Committee (1992), the minimum
level of working capital credit to small scale industrial sector should be fixed at 20
percent of its annual turnover. Though, the credit requirement of different
industries vary due to the nature of the industry, production cycle and the
availability of credit from other sources, yet it may be used as suitable benchmark
for finding out an approximation of working capital requirements. Thus, the
working capital requirements for small scale industrial sector have been worked
out as:
Working Capital Requirements (WCR) = 0.20 Total Production of SSIs
After finding out the estimates of working capital availability (WCA) and
working capital requirement (WCR), the working capital gap has been computed
for each year from 1981-82 to 2006-07 for Punjab, Haryana and All India as
follows:
Working Capital Gap (WCG) = WCR WCA
Table 7.7 provides the estimates of working capital gap in Indian small
scale industrial sector during the period 1981-82 to 2006-07. If we compare the
minimum working capital requirement of small scale industrial sector, as
prescribed by the Nayak Committee, this is Rs. 141879.60 crore (20 percent of
SSIs production) in year 2006-07. The actual working capital credit given in the
year 2006-07 is Rs. 99311.94 crore (78 percent of bank credit to small scale
sector) and there is a short fall of working capital to the tune of Rs. 42567.66
crore in small scale industrial sector of India. Hence, there exists a huge gap
between the minimum credit requirement and the actual credit given to the small
216

TABLE 7.7
WORKING CAPITAL GAP IN SMALL SCALE INDUSTRIAL
SECTOR OF INDIA
(Rs. Crore)
Year

1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07

SSI
Product
ion
32600
35000
41600
50500
61200
72300
87300
106400
132300
78802
80615
84413
98796
122154
147712
167805
187217
210454
233760
261297
282270
314850
364547
429796
497842
709398

SSI
Advances
by SCBs
4464
5389
6537
7829
9127
10659
12968
14635
15969
17938
18939
20975
23978
29175
34246
38196
45771
51679
57035
60141
67107
64707
71209
83498
101285
127323

Advances as
percentage of
Production
13.69
15.40
15.71
15.50
14.91
14.74
14.85
13.75
12.07
22.76
23.49
24.85
24.27
23.88
23.18
22.76
24.45
24.56
24.40
23.02
23.77
20.55
19.53
19.43
20.34
17.95

Actual
Working
Capital*
3481.92
4203.42
5098.86
6106.62
7119.06
8314.02
10115.04
11415.30
12455.82
13991.64
14772.42
16360.50
18702.84
22756.50
26711.88
29792.88
35701.38
40309.62
44487.30
46909.98
52343.46
50471.46
55543.02
65128.44
79002.30
99311.94

Minimum
Credit
Requirement**
6520.00
7000.00
8320.00
10100.00
12240.00
14460.00
17460.00
21280.00
26460.00
15760.40
16123.00
16882.60
19759.20
24430.80
29542.40
33561.00
37443.40
42090.80
46752.00
52259.40
56454.00
62970.00
72909.40
85959.20
99568.40
141879.60

Note:* 78 Percent of Total Bank Credit to SSIs as per Nayak Committee (1992)
** 20 Percent of SSIs Production
Source: 1) Reserve Bank of India, Statistical Tables Relating to Banks in India
(Various Issues), Mumbai; and
2) Office of the Development Commissioner, Small Scale Industries, New Delhi.

217

Working
Capital
Gap
3038.08
2796.58
3221.14
3993.38
5120.94
6145.98
7344.96
9864.70
14004.18
1768.76
1350.58
522.10
1056.36
1674.30
2830.52
3768.12
1742.02
1781.18
2264.70
5349.42
4110.54
12498.54
17366.38
20830.76
20566.10
42567.66

TABLE 7.8
GROWTH OF WORKING CAPITAL GAP IN SMALL SCALE
INDUSTRIAL SECTOR OF INDIA

Entire Period

Pre-Liberalisation

Post-Liberalisation

(1981-82 to 2006-07)

Period (1981-82 to

period (1991-92 to

!990-91)

2006-07)

7.65***

8.00***

3.77***

(0.000)

(0.000)

(0.000)

0.055**

0.085

0.247***

(0.045)

(0.244)

(0.000)

R2

16%

16.5%

86%

4.46

1.58

83.91

(0.045)

(0.244)

(0.000)

Parameters

Note:

Figures in the parenthesis are the p-values;

** Indicates that coefficient is significant at 5 percent level of significance.
*** Indicates that coefficient is significant at 1 percent level of significance.

Source: Authors calculations

218

scale industrial sector. This reflects that there is a considerable shortfall in the
availability of credit to this sector from banks in the economy. It has been
estimated that bank credit to small scale industries comprises about 10 percent of
their estimated total production (Mohan, 2001). Kapur Committee (1998)
bemoaned that despite the central banks instructions and guidelines from time to
time,

banks

have

not

been

following

the

Nayak

Committee

(1992)

recommendations. According to the estimates of Kapur Committee (1998), only

15-20 percent of small units could access bank credit and others have to depend on
borrowing from private sources at exorbitant interest rates.
Further, it is essential to examine the growth rate of working capital gap
over a period of time. To find out growth rates of working capital gap, the whole
data has been divided into the entire period (1981-82 to 2006-07), pre-reforms
period (1981-82 to 2006-07) and post reforms period (1991-92 to 2006-07). The
following regression has been estimated to get annual growth rate.
Log WCGt = + t + t

It is evident from Table 7.8 that working capital gap (WCG) for the entire period
has increased at a statistically significant average annual growth rate of 5.5 percent
per annum. The comparison of growth rates of WCG over the two sub periods,
namely pre reforms and post reforms period shows that the growth rate of WCG
accelerated from 8.5 per cent during the period 1981-82 to 1990-91 and
statistically highly significant growth 24.7 per cent in the period 1991-92 to
2006-07. Thus, during the post reforms period, the gap of working capital has been
observed to be rising at a faster rate relative to the pre reforms period, thereby
reflecting a considerable shortfall in the availability of credit to small scale
industrial sector from the banks in the reformed era.
Table 7.9 shows the estimates of working capital gap in small scale
industrial sector of Punjab during the period 1981-82 to 2006-07, the minimum
working capital requirement of small scale industrial sector in Punjab, as
219

prescribed by the Nayak committee, this is Rs. 6654.63 crore (20 percent of SSIs
production) in year 2006-07, whereas, actual working capital credit given is Rs.
5946.72 crore (78 percent of bank credit to small scale sector) and there is a short
fall of working capital to the tune of Rs. 707.91 crore. Further, it is evident from
Table 7.10 that working capital gap (WCG) in Punjab for the entire period has
increased at a statistically significant average annual growth rate of 15 per cent per
annum, however, the comparison of growth rates of WCG over the two sub
periods, namely, pre reforms and post reforms period shows that the growth rate of
WCG accelerated from -13.1 per cent during the pre reforms period to statistically
significant growth rate of 10.3 percent, during the post reforms period. Thus,
during the post reforms period, the gap of working capital has been observed to be
rising at a faster rate, thereby reflecting a considerable shortfall in the availability
of credit to small scale industrial sector of Punjab from the banking institutions in
the reformed era.
Table 7.11 presents the estimates of working capital gap in small scale
industrial sector of Haryana during the period 1981-82 to 2006-07. If we compare
the minimum working capital requirement of small scale industrial sector, as
prescribed by the Nayak Committee, this is Rs. 1648.11 crore (20 percent of SSIs
production) in year 2006-07. The actual working capital credit given in the year
2006-07 is Rs. 3612.96 crore (78 percent of bank credit to small scale sector) and
there is sufficient availability of working capital to the tune of Rs. 1964.85 crore in
2006-07.
Further, it is essential to examine the growth rate of working capital gap
over time. To find out growth rates of working capital gap we have trifurcated the
whole data into three time periods and these are; the entire period, pre-reforms
period and post-reforms period. The following regression has been estimated to
get annual growth rate.

Log WCGt = + t + t
220

TABLE 7.9

WORKING CAPITAL GAP IN SMALL SCALE INDUSTRIAL

SECTOR OF PUNJAB
SSI
Production

SSI
Advances
by SCBs

Advances as
percentage of
Production

Actual
Working
Capital*

Minimum
Credit
Requirement**

Working
Capital
Gap

1981-82

1342.66

304

22.64

237.12

268.53

31.41

1982-83

1585.52

353

22.26

275.34

317.10

41.76

1983-84

1786.07

409

22.90

319.02

357.21

38.19

1984-85

1957.92

495

25.28

386.1

391.58

5.48

1985-86

2150.99

614

28.54

478.92

430.20

-48.72

1986-87

2358.64

688

29.17

536.64

471.73

-64.91

1987-88

2681.53

838

31.25

653.64

536.31

-117.33

1988-89

3108.59

870

27.99

678.6

621.72

-56.88

1989-90

3504.1

950

27.11

741

700.82

-40.18

1990-91

4049.84

1005

24.82

783.9

809.97

26.07

1991-92

4437.45

969

21.84

755.82

887.49

131.67

1992-93

5345.12

1092

20.43

851.76

1069.02

217.26

1993-94

7074.95

1289

18.22

1005.42

1414.99

409.57

1994-95

8737.82

1540

17.62

1201.2

1747.56

546.36

1995-96

9713.94

1947

20.04

1518.66

1942.79

424.13

1996-97

11106.22

2156

19.41

1681.68

2221.24

539.56

1997-98

13057.74

2689

20.59

2097.42

2611.55

514.13

1998-99

14444.48

3041

21.05

2371.98

2888.90

516.92

1999-00

16610.85

3238

19.49

2525.64

3322.17

796.53

2000-01

18324.5

3608

19.69

2814.24

3664.90

850.66

2001-02

20338.55

3914

19.24

3052.92

4067.71

1014.79

2002-03

22524.05

4093

18.17

3192.54

4504.81

1312.27

2003-04

24983.83

4668

18.68

3641.04

4996.77

1355.73

2004-05

28473.51

5018

17.62

3914.04

5694.70

1780.66

2005-06

30873.57

6032

19.54

4704.96

6174.71

1469.75

2006-07

33273.16

7624

22.91

5946.72

6654.63

707.91

Year

Note:* 78 Percent of Total Bank Credit to SSIs as per Nayak Committee (1992)
** 20 Percent of SSIs Production
Source: 1) Reserve Bank of India, Statistical Tables Relating to Banks in India (Various
Issues) Mumbai; and
2) Office of the Development Commissioner, Small Scale Industries, New Delhi.

221

TABLE 7.10

GROWTH OF WORKING CAPITAL GAP IN SMALL SCALE

INDUSTRIAL SECTOR OF PUNJAB
Pre-Liberalisation

Post-Liberalisation

Period (1981-82 to

period (1991-92 to

1990-91)

2006-07)

3.76***

5.00***

4.76***

(0.000)

(0.000)

(0.000)

0.15***

-0.131

0.103***

(0.000)

(0.362)

(0.000)

R2

59.5%

10.47%

77.61%

35.27

0.94

48.52

(0.000)

(0.362)

(0.000)

Parameters

Entire Period
(1981-82 to 2006-07)

Note: Figures in the parenthesis are the p-values;

***indicates that coefficient is significant at 1 percent level of significance.
Source: Authors calculations

222

TABLE 7.11
WORKING CAPITAL GAP IN SMALL SCALE INDUSTRIAL SECTOR
OF HARYANA
Year

SSI
Production

SSI
Advances
by SCBs

Advances as
percentage of
Production

Actual
Working
Capital*

Minimum
Credit
Requirement**

Working
Capital
Gap

1981-82

1310

186

14.20

145.08

262.00

116.92

1982-83

1396

214

15.33

166.92

279.20

112.28

1983-84

1585

248

15.65

193.44

317.00

123.56

1984-85

1943

288

14.82

224.64

388.60

163.96

1985-86

1959

330

16.85

257.40

391.80

134.40

1986-87

2223

311

13.99

242.58

444.60

202.02

1987-88

2403

399

16.60

311.22

480.60

169.38

1988-89

2583

451

17.46

351.78

516.60

164.82

1989-90

2772.15

472

17.03

368.16

554.43

186.27

1990-91

2969.88

537

18.08

418.86

593.98

175.12

1991-92

3180.33

553

17.39

431.34

636.07

204.73

1992-93

3374.43

601

17.81

468.78

674.89

206.11

1993-94

3573.84

695

19.45

542.10

714.77

172.67

1994-95

3773.25

929

24.62

724.62

754.65

30.03

1995-96

3948.54

1063

26.92

829.14

789.71

-39.43

1996-97

4113.33

1138

27.67

887.64

822.67

-64.97

1997-98

2775.03

1377

49.62

1074.06

555.01

-519.05

1998-99

2155.71

1800

83.50

1404.00

431.14

-972.86

1999-00

2195.7

1800

81.98

1404.00

439.14

-964.86

2000-01

2223.81

1989

89.44

1551.42

444.76

-1106.66

2001-02

3978.96

2095

52.65

1634.10

795.79

-838.31

2002-03

4562.42

2132

46.73

1662.96

912.48

-750.48

2003-04

5528.48

2360

42.69

1840.80

1105.70

-735.10

2004-05

6428.88

2845

44.25

2219.10

1285.78

-933.32

2005-06

6459.33

3691

57.14

2878.98

1291.87

-1587.11

2006-07

8240.53

4632

56.21

3612.96

1648.11

-1964.85

Note:* 78 Percent of Total Bank Credit to SSIs as per Nayak Committee (1992)
** 20 Percent of SSIs Production
Source: 1) Reserve Bank of India, Statistical Tables Relating to Banks in India (Various Issues), Mumbai; and
2) Office of the Development Commissioner, Small Scale Industries, New Delhi.

223

TABLE 7.12
GROWTH OF WORKING CAPITAL GAP IN SMALL SCALE
INDUSTRIAL SECTOR OF HARYANA

Parameters

Entire Period

Pre-Liberalisation

Post-Liberalisation

(1981-82 to 2006-07)

Period

period

(1981-82 to 1990-91)

(1991-92 to 2006-07)

8.23***

7.65***

9.79***

(0.000)

(0.000)

(0.000)

-0.073***

0.004

-0.152***

(0.000)

(0.007)

(0.002)

R2

42.34%

62.34%

50.65%

17.62***

13.24***

14.37***

(0.000)

(0.007)

(0.002)

Note: Figures in the parenthesis are the p-values;

***indicates that coefficient is significant at 1 percent level of significance.
Source: Authors calculations

224

It is evident from table 7.12 that working capital gap (WCG) for the entire
period has increased at a statistically significant average annual growth rate
of (-) 7.3 per cent per annum. The comparison of growth rates of WCG over the
pre reforms and post reforms period shows that the growth rate of WCG
accelerated from 0.04 per cent during the period 1981-82 to 1990-91 to (-) 15.2
per cent in the period 1991-92 to 2006-07. Thus, In Haryana, during the post
reforms period, the working capital gap observed to be declining relative to the pre
reforms period, thereby reflecting the availability of working capital to small scale
industrial sector of Haryana from the financial institutions.
For analysing the cause and effect relationship between working capital gap
and sickness in the small scale industrial sector of India, Granger causality test has
been applied. The following two variable Vector Auto Regressive (VAR) model
has been utilised to check the existence of Granger causality between the variables
of working capital gap (WCG) and number of sick units (SICK) under small scale
industrial sector.
WCG = f(WCG (-1) WCG (-2) SICK (-1) SICK (-2))
SICK = f(WCG (-1) WCG (-2) SICK (-1) SICK (-2))
The following possibilities are expected:
If the coefficients of SICK (-1) and SICK (-2) are significant in first
equation and the remaining coefficients of the system are insignificant then
unidirectional causality from sickness to WCG exists;
If the coefficients of WCG (-1) and WCG (-2) are significant in second
equation and the remaining coefficients of the system are insignificant then
unidirectional causality from WCG to sickness exists; If the coefficients of SICK
(-1) and SICK (-2) are significant in first equation and coefficients of WCG (-1)
and WCG (-2) are significant in second equation then the bidirectional causality

225

from WCG-sickness-WCG exists; If all coefficients of above two equations are

insignificant then the WCG and Sickness are independent. However, to check the
combined significance, F-statistics has been utilised.
Table 7.13 shows the results of pairwise Granger causality test of small
scale industrial sector in India which has been used to test the hypothesis of the
cause and effect relationship between the two aforementioned variables. The
analysis of the Table 7.11 reveals the hypothesis that Sickness in SSIs do not
Granger Cause WCG has not been rejected, whereas the hypothesis of WCG
does not Granger Cause sick has been completely rejected. It inferred from the
analysis that the rising WCG is a significant driver of sickness in small scale
industrial sector of India.
Table 7.14 shows the results of pairwise Granger causality test of small
scale industrial sector in Punjab which has been used to test the hypothesis of the
cause and effect relationship between Sickness in SSIs and WCG variables. The
analysis of the Table 7.14 shows that the hypothesis that Sickness in SSIs do not
Granger Cause WCG has not been rejected, whereas the hypothesis of WCG
does not Granger Cause SICK has been completely rejected. It can therefore, be
inferred from the analysis that in Punjab the rising WCG is also significant driver
of sickness in small scale industrial sector.
Table 7.15 presents cause and effect summary for small scale industrial
sector in Haryana. This analysis also shows that causality from sickness to WCG
is missing. Whereas, it do exit from WCG to sickness thus, a unidirectional
causality has been observed in case of small scale sector of Haryana. From the
above analysis, it can be concluded that in case of India and Punjab, WCG is
significantly causality sickness in SSIs, whereas, in Haryana impact is not so
strong. The F-statistics in India and Punjab are statistically significant at 5 percent
level of significance, whereas, in Haryana value is significant at 10 percent level.
226

TABLE 7.13

PAIRWISE GRANGER CAUSALITY TESTS OF INDIA

Sample: 1 21
Lags: 2
Null Hypothesis

F-value

P-value

SICK does not Granger Cause WCG

2.68476

0.1031

WCG does not Granger Cause SICK

4.22470**

0.0367

Note : **stands for significance at 5 percent level of significance.

Source: Authors Calculations

TABLE 7.14

PAIRWISE GRANGER CAUSALITY TESTS OF PUNJAB

Sample: 1 21
Lags: 2
Null Hypothesis

F-value

P-value

SICK does not Granger Cause WCG

0.08465

0.9193

WCG does not Granger Cause SICK

4.82748**

0.0254

Note : **stands for significance at 5 percent level of significance.

Source: Authors Calculations

TABLE 7.15
PAIRWISE GRANGER CAUSALITY TESTS OF HARYANA
Sample: 1 21
Lags: 2
Null Hypothesis

F-value

P-value

SICK does not Granger Cause WCG

2.48990

0.1188

WCG does not Granger Cause SICK

3.72400*

0.0505

Note : * stands for significance at 10 percent level of significance.

Source: Authors Calculations

227

On another site, causality from sickness to WCG is missing. Thus, a

unidirectional causality has been observed. Therefore, on the basis of the actual
availability and projected requirements of credit and the gap between the two, the
situation is critical and banks have still a long way to travel to meet genuine credit
requirements of the small scale industrial sector in post reformed era. Hence,
considering the needs of this sector, the volume and sources of industrial finance
are quite inadequate and unsatisfactory in case of Punjab and India. The
undergoing metamorphic changes in the Indian financial system must ensure less
burdensome and continuous flow of financial resources especially the working
capital for sustainable growth of small scale industrial sector both at national and
regional level.

Section IV
The analysis of financial performance and sickness of small scale industrial
sector in Punjab, Haryana vis-a-vis All India revealed that a large number of small
scale industrial units are afflicted with the problem of sickness and the prime
reason for this phenomenon is the shortage of working capital in this sector. The
data showed that in the small scale industrial sector, the figures of sickness were
quite alarming as 114132 units at All India level, 1146 units in Punjab and 650
units in Haryana were sick in 2006-07.

Out of these sick units, 4287 were

potentially viable and 109011 were potentially non viable at All India level.
However, the corresponding figures for Punjab were 127 units and 1015 units and
for Haryana were 10 units and 630 units respectively. For the remaining units both
at State level and All India level the viability has not yet been decided. Further, the
analysis showed a negative annual growth rate of sick small scale industrial units
to the tune of (-) 4.52 percent in Punjab, (-) 6.21 percent in Haryana and
(-) 2.41 percent at All India level during 1986-87 to 2006-07, which is a cause of
serious concern for planners and policy makers to meet the challenges of
globalisation in the reformed era.
228

Furthermore, it was also observed that the annual growth rate of the
amount outstanding against small scale industrial sector at All India level was 5.50
percent per annum, while for potentially viable units and potentially non-viable
units it were (-)1.37 percent and 6.65 percent respectively. In case of Punjab and
Haryana, the growth rate of the amount outstanding against this sector was 3.29
percent and 0.85 percent respectively. While for the potentially viable units it was
(-) 6.90 percent in Punjab and (-) 7.91 percent in Haryana and for potentially nonviable units the growth rates was 3.90 percent and (-)2.07 percent respectively.
Therefore, high indebtedness of small scale industrial units and potentially nonviable units hampers the development of this sector and increases the non
performing assets of the financial institutions.
To assess the working capital requirements and its availability in the small
scale industrial sector of Punjab, Haryana vis-a-vis All India during the period
1981-82 to 2006-07, the methodology suggested by the Nayak Committee (1992)
has been used to work out the working capital gap. A shortfall of the working
capital to the tune of Rs.42567.66 crore has been observed for the year 2006-07 in
small scale industrial sector of India, whereas in Punjab and Haryana it was Rs.
707.91crore and Rs. (-)1964.85 crore respectively. The comparison of growth rates
of working capital gap in Punjab, Haryana vis-a-vis All India, showed that at All
India level it grew at the rate of 5.5 percent per annum in comparison to 15 percent
per annum in Punjab and (-)7.3 per cent per annum in Haryana in the entire period.
Further, in the pre reforms period it grew by 8.5 percent at All India level (-)13.1
per cent and 0.4 per cent in Punjab and Haryana respectively. However, in the post
reforms period the working capital gap increased to 24.7 percent at All India level,
10.3 percent in Punjab and declined to (-)15.2 per cent in Haryana. Hence, during
the post reforms period, working capital gap has been observed to be rising in
Punjab and All India, thereby reflecting a shortfall in the availability of working
capital to small scale industrial sector from the financial institutions in the

229

reformed era. In Haryana, during the post reforms period, the working capital gap
observed to be declining relative to the pre reforms period, thereby reflecting the
availability of working capital to small scale industrial sector of Haryana from the
various financial institutions.
Furthermore, the application of Granger Causality Test and F-statistics
proved that in case of India and Punjab, working capital gap significantly caused
sickness in small scale industrial sector, whereas, the impact is not so strong in
Haryana. On the other hand, causality from sickness to working capital gap is
missing and a unidirectional causality has been observed, thereby showing that the
gap in working capital is a significant driver of sickness in small scale industrial
sector. Though, the government of India framed an elaborate financial
infrastructure comprising of banking and non-banking financial institutions to
meet the credit requirements of small scale industrial sector but over the years, the
organisational framework failed to render the desired financial services for small
scale industrial sector to meet the challenges of globalisation. Hence, on the basis
of the actual availability and projected requirements of credit, the situation is
critical as the financial institutions have still a long way to travel to meet the
genuine credit requirements of the small scale industrial sector. Therefore, Indian
financial system must ensure cheap availability and continuous flow of credit to
ensure the sustainable growth of small scale industrial sector both at national and
regional level in the reformed era.

***************

230