Industrial Finance and Problems of Indian Industry

Industry needs finance both to set up new capacity (fixed capital for land, buildings and machinery) and to run day-to-day operations (working capital for raw material, wages and inventory). In India, industrial finance is drawn from several sources:

• Owned capital — equity and retained earnings of the promoters/firm itself.
• Capital market instruments — shares and debentures issued to the public through the stock exchanges, an important source for larger firms.
• Financial institutions and development banks — specialised institutions historically set up to provide medium- and long-term project finance to industry (at the all-India and state level), alongside commercial banks, which today also provide substantial term lending in addition to working-capital finance.
• Commercial bank credit — mainly for working capital, though banks now also fund term loans for industrial projects.
• Public deposits and inter-corporate loans, and, for MSMEs specifically, dedicated credit and guarantee schemes intended to overcome the collateral problem discussed in the previous section.
• Foreign capital — external commercial borrowings and foreign direct/portfolio investment, whose access widened considerably after the 1991 liberalisation of FDI rules.

Problems of Indian industry. Even after decades of planned development and subsequent liberalisation, Indian industry continues to face several structural problems:

• Industrial sickness — a significant number of units, both large and small, become financially unviable (unable to service debt or meet costs from operating revenue) due to poor management, obsolete technology, demand shortfalls, or over-leveraged expansion; sick units tie up bank credit and, when large, raise employment and regional concerns that make simple closure politically and socially difficult.
• Infrastructure bottlenecks — inadequate and unreliable power supply, congested and poorly maintained transport (roads, rail freight, ports), and slow logistics raise the cost of doing business relative to competing manufacturing economies.
• Regional imbalances — industrial investment has historically concentrated in already-industrialised states and clusters, leaving many regions industrially underdeveloped, which is precisely why regional dispersal has been a repeated objective of industrial policy since 1956.
• Low capacity utilisation — many units, particularly in the public sector and in sectors facing demand or input constraints, have historically operated well below their installed capacity, raising average costs and reducing returns on the capital invested.
• Technological obsolescence and skill gaps, which limit productivity and export competitiveness in several traditional industries. …