Causes of Disequilibrium

Various causes of disequilibrium in the balance of payments or adverse balance of payments are
as follows:
1. Development Schemes:
The main reason for adverse balance of payments in the developing countries is the huge
investment in development schemes in these countries. The propensity to import of the
developing countries increases for want of capital for industrialization. The exports, on the other
hand, may not increase because these countries are traditionally primary producing countries.
Moreover the volume of exports may fall because newly created domestic industries may need
them. All this leads to structural changes in the balance of payment resulting in structural
disequilibrium.
2. Price-Cost Structure:
Changes in price-cost structure of export industries affect the volume of exports and create
disequilibrium in the balance of payments. Increase in prices due to higher wages, higher cost of
raw materials, etc. reduces exports and makes the balance of payments unfavorable.
3. Changes in Foreign Exchange Rates:
Changes in the rate of exchange is another cause of disequilibrium in the balance of payments.
An increase in the external value of money makes imports cheaper and exports dearer; thus,
imports increase and exports fall and balance of payments become unfavourable. Similarly, a
reduction in the external value of money leads to a reduction in imports and an increase in
exports.
4. Fall in Export Demand:
There has been a considerable decline in (he export demand for the primary goods of the
underdeveloped countries as a result of the large increase in the domestic production of
foodstuffs raw materials and substitutes in the rich countries. Similarly, the advanced countries
also find a fall in their export demand because of loss of colonial markets. However, the deficit
in the balance of payment due to the fall in export demand is more persistent in the
underdeveloped countries than in the advanced countries.
5. Demonstration Effect:
According to Nurkse, the people in the less developed countries tend to follow the consumption
patterns of the developed countries. As a result of this demonstration effect, the imports of the
less developed countries will increase and create disequilibrium in the balance of payments.
6. International Borrowing and Lending:

International borrowing and lending is another reason for the disequilibrium in the balance of
payments. The borrowing country tends to have unfavourable balance of payments, while the
lending country tends to have favourable balance of payments.
7. Cyclical Fluctuations:
Cyclical fluctuations cause cyclical disequilibrium in the balance of payments. During
depression, the incomes of the people in foreign countries fall. As a result, the exports of these
countries tend to decline which, in turn, produces disequilibrium in the home country's balance
of payment.
8. Newly Independent Countries:
The newly independent countries, in order to develop international relations, incur huge amounts
of expenditure on the establishment of embassies, missions, etc. in other countries. This
adversely affects the balance of payments position.
9. Population Explosion:
Another important reason for adverse balance of payments in the poor countries is population
explosion. Rapid growth of population in countries like India increases imports and decreases the
capacity to export.
10. Natural factors:
Natural calamities, such as droughts, floods, etc., adversely affect the production in the country.
As a result, the exports fall, the imports increase and the country experiences deficit in its
balance of payments.
A mixed economy is a golden mean between a capitalist economy
and a socialist economy. It is an economic system where the price
mechanism and economic planning are used side by side. There is
mixture of private and public ownership of the means of production
and distribution. Some decisions are taken by households and firms
and some by the planning authority. All developing countries like India
are mixed economies.
Features of Mixed Economy:

A mixed economy possesses the following features:

1. Public Sector:

The public sector is under the control and direction of the state. All decisions
regarding what, how and for whom to produce are taken by the state. Public
utilities, such as rail construction, road building, canals, power supply, means of
communication, etc., are included in the public sector. They are operated for

public welfare and not for profit motive. The public sector also operates basic,
heavy, strategic and defence production industries which require large
investment and have long gestation period. But they earn profits like private
industries which are utilised for capital formation.
2. Private Sector:

There is a private sector in which production and distribution of goods and

services are done by private enterprises. This sector operates in farming,
plantations, mines, internal and external trade, and in the manufacture of
consumer goods and some capital goods. This sector operates under state
regulations in the interest of public welfare. In certain fields of production, both
public and private sectors operate in a competitive spirit. This is again in the
interest of the society.
3. Joint Sector:

A mixed economy also has a joint sector which is run jointly by the state and
private enterprises. It is organised on the basis of a joint stock company where
the majority shares are held by the state.
4. Cooperative Sector:

Under a mixed economy, a sector is formed on cooperative principles. The state

provides financial assistance to the people for organising cooperative societies,
usually in dairying, storage, processing, farming, and purchase of consumer
goods.
5. Freedom and Control:

A mixed economy possesses the freedom to hold private property, to earn profit,
to consume, produce and distribute, and to have any occupation. But if these
freedoms adversely affect public welfare, they are regulated and controlled by
the state.
6. Economic Planning:

There is a central planning authority in a mixed economy. A mixed economy

operates on the basis of some economic plan. All sectors of the economy
function according to the objectives, priorities and targets laid down in the plan.
In order to fulfill them, the state regulates the economy through various
monetary, fiscal and direct control measures. The aim is to check the evils of the
price mechanism.
7. Social Welfare:

The principal aim of a mixed economy is to maximise social welfare. This

feature incorporates the merits of socialism and avoids the demerits of

capitalism. To remove inequalities of income and wealth, and unemployment

and poverty, such socially useful measures as social security, public works, etc.
are adopted to help the poor. On the other hand, restrictions are placed on the
concentration of monopoly and economic power in the hands of the rich through
various fiscal and direct control measures.
INDUSTRIAL SICKNESS

Definition:
-According to the Reserve Bank of India, a sick unit is that which has incurred a cash
loss for one year and likely to continue incurring losses for the current year as well as in
the following year and unit has an imbalance in its financial structure.
- An appropriate definition of sick unit is given by the Sick Industrial Companies Act,
1985 (SICA).
According to the Act, a sick industrial company is a company ,being a company
registered for not less than seven years, which has at the end of the financial year
accumulated losses equal to or exceeding its entire net worth and has suffered cash
losses in that financial year and in the financial year immediately preceding it.
- The definition of sickness has been widen by the Company Act 2002,
According to the Act, a company becomes sick when it fails to repay debt within any
three consecutive quarters on demand made by creditors.
Distinction is made between actual sickness and potential sickness.
Actual Sickness:
I] Erosion of net worth by 50 percent or more.
II] Units being closed for a total period of six months and more during last.
III] Default in payment of loan instalments.
Potential Sickness:
Capacity utilization is less than 50% of the highest achieved during the preceding five
year.
According to State Financial Corporation (SFC), any unit which fails to pay three
consecutive instalments of interest and/or principal is sick.
In small scale sector, a unit is treated sick, if it has:
1] Incurred loss in previous financial year, is likely to continue to incur cash loss in
current year and has erosion in its net worth to the extent of 50% or more.

2] Defaulted on any interest payment for consecutive four quarters /instalments of

principal for consecutive two quarters, with persistent irregularity in the operation of its
cash credit limits.
Causes of Sickness:
Causes of industrial sickness can be broadly classified in to two categories: a] internal;
and b] external.
A] Internal factors:
I] poor quality of top management:
a) Poor financial control.
b) Excessive centralization.
c) Weak board and weak watch dog function.
d) Excessive commitment to policy.
e) Poor Marketing Management.
B] External factors:
These further classified in to:
Industry Specific
Government Related Factors
Financial Institutes
Others
Industry Specific:
These relate to stagnation or recession in the industries (Textile), competition faced by
the unit (small unit, rayon), and excess capacity in the industries (type of industries).
Entries of MNCs and strict quality and hygiene specification prescribed and enforced by
them have contributed to the sickness of several firms, particularly SSIs.
e.g. metal cap for Pepsi and Coke.
b) Govt. related factors:
These include tax burden, import duties, excise duties and sales tax; legal
restrictions, frequent changes in govt. policies, poor law and order etc.
c) Financial Institution related factors:
These include harshness in dealing with the units, delay in providing finance to the
units, inadequate working capital.
d) Others: These include customer resistance to the units products, erratic availability of
raw materials/component/power/fuel to the units and inadequate transport facilities.
Signals of Sickness:

1] Continues irregularity in cash credit account.

2] Low capacity utilization.
3] Profit fluctuation, downward trend in sales and stagnation or fall in profits followed by
contraction in the share of the market.
4] High rate of rejection of goods manufactured.
5] Reduction in credit summation, whenever the companies are in financial difficulty.
6] Failure to pay statutory liabilities.
7] Larger and longer outstanding in the bills.
8] Longer period of credit allowed on sales documents negotiated through bank and
frequent returns by customers of the same.
9] Constant utilization of cash credit facilities and failure to pay in time.
10] Non submission of periodical financial data/stock statement in time.
11] Financing capital expenditure out of working capital.
12] Decrease in working capital.
13] A general decline in that particular industry.
14] Rapid turnover of key personnel.
15] Existence of a large no. of law suit against a company.
16] Rapid expansion and too much diversification within short period of time.
17] Frequent changes in management /or dominated by one man.
18] Diversion of fund other than running the unit.
19] Any major changes in share holding.

Definition of Disinvestment
At the very basic level, disinvestment can be explained as follows:

Investment refers to the conversion of money or cash into securities, debentures, bonds or any
other claims on money. As follows, disinvestment involves the conversion of money claims or
securities into money or cash.
Disinvestment can also be defined as the action of an organisation (or government) selling or
liquidating an asset or subsidiary. It is also referred to as divestment or divestiture.
In most contexts, disinvestment typically refers to sale from the government, partly or fully, of a
government-owned enterprise.
A company or a government organisation will typically disinvest an asset either as a strategic
move for the company, or for raising resources to meet general/specific needs.

Objectives of Disinvestment
The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very
negative rate of return on capital employed. Inefficient PSUs had become and were continuing to
be a drag on the Governments resources turning to be more of liabilities to the Government than
being assets. Many undertakings traditionally established as pillars of growth had become a
burden on the economy. The national gross domestic product and gross national savings were
also getting adversely affected by low returns from PSUs. About 10 to 15 % of the total gross
domestic savings were getting reduced on account of low savings from PSUs. In relation to the
capital employed, the levels of profits were too low. Of the various factors responsible for low
profits in the PSUs, the following were identified as particularly important:

Price policy of public sector undertakings

Underutilisation of capacity

Problems related to planning and construction of projects

Problems of labour, personnel and management

Lack of autonomy

Hence, the need for the Government to get rid of these units and to concentrate on core activities
was identified. The Government also took a view that it should move out of non-core businesses,
especially the ones where the private sector had now entered in a significant way. Finally,
disinvestment was also seen by the Government to raise funds for meeting general/specific
needs.
In this direction, the Government adopted the 'Disinvestment Policy'. This was identified as an
active tool to reduce the burden of financing the PSUs. The following main objectives of
disinvestment were outlined:

To reduce the financial burden on the Government

To improve public finances

To introduce, competition and market discipline

To fund growth

To encourage wider share of ownership

To depoliticise non-essential services

Importance of Disinvestment
Presently, the Government has about Rs. 2 lakh crore locked up in PSUs. Disinvestment of the
Government stake is, thus, far too significant. The importance of disinvestment lies in utilisation
of funds for:

Financing the increasing fiscal deficit

Financing large-scale infrastructure development

For investing in the economy to encourage spending

For retiring Government debt- Almost 40-45% of the Centres revenue receipts go
towards repaying public
debt/interest

For social programs like health and education

Disinvestment also assumes significance due to the prevalence of an increasingly competitive

environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid
erosion of value of the public assets making it critical to disinvest early to realize a high value.
The various methodologies include:

1.

STRATEGIC SALE

2.

CAPITAL MARKET
a.

Offer for sale to public at a fixed price

b.

Offer for sale to public through book building

c.

Secondary market operation

d. International offering

3.
4.

e.

Private placement

f.

Auction

WAREHOUSING
REDUCTION IN EQUITY
a.
b.

5.
6.
7.
8.
9.

Buy-back of equity
Conversion of equity into debt exchangeable into capital market
instruments

TRADE SALE
ASSET SALE / WINDING UP
MANAGEMENT / EMPLOYEE BUY OUT (M/EBO)
CROSS SALE
SALE THROUGH DEMERGER / SPINNING OFF