Covid-19: It is a long haul for India Inc

N Madhavan | Updated on April 23, 2020

Corporate recovery hinges on how well the virus is handled, a strong economic stimulus and willingness of banks to lend

Nassim Nicholas Taleb gets irritated when people call coronavirus a ‘Black Swan’ event. The celebrated author who coined the term for describing events ‘that lie outside the realm of regular expectations’ but have ‘extreme impact’ in his 2007 book of the same name would rather prefer to call it a ‘White Swan’ event.

After all, people like Bill Gates had clearly warned of an impending pandemic. Whatever its classification, Covid-19 has caught companies across the world by complete surprise.

The resultant shock has upended established business models of many and laid to waste carefully crafted business plans of almost all of them.

After all, it took the virus just three months to infect over 2.6 million people across the world and kill as many as 1.80 lakh and, in the process, locking down half the global population.

The economic impact of the virus, still unravelling, is something the world has not seen before.

Under the circumstances, the question uppermost in the minds of entrepreneurs is ‘how bad will they be hit before normalcy is restored?’ While it is too early to provide a definitive answer, one thing is certain — they have to prepare for the long haul.

This crisis will be far worse than the 2007-08 financial crisis. When the global financial meltdown happened then, India was in the midst of a strong demand growth. Companies were in a better position to handle the shock supported by a banking system that was reasonably healthy. Also, the crisis lasted just six months.

Coronavirus, on the other hand, manifested at the most inappropriate time for India Inc.

Companies were already struggling in the wake of a slowdown in demand which has hurt their margins and stretched their balance-sheets.

In addition, the country’s banking system is in a crisis and government’s fiscal space to revive the economy is limited. What is worse, the effect of the virus could play out for a much longer time as the vaccine is not expected before 12 months.

Severe test ahead

While the impact is expected to vary for different sectors, what is clear is that weaker players will die and even the fittest of them all will be put through severe test. Collapse in demand, supply-side shocks, higher costs, people- and trade-related issues will challenge them.

Demand: The IMF has estimated the Covid-hit global economy to shrink by 3 per cent in 2021. In fact, advanced economies will de-grow by as much as 6 per cent. The WTO has projected that global trade will drop by a third this year. All this will badly hurt India’s export demand. In fact, the top 10 countries affected by Covid-19 accounts for 45 per cent of India’s exports. Both product and services exports are set to see a double-digit fall.

Domestic demand which has often come to the rescue is likely to remain muted this time around. Consumer confidence is set fall from already low levels as people hit by job loss and pay cuts tighten their purse strings and spend only on essentials.

Discretionary spending will certainly take a back seat. Government spending will also be low.

Most State governments have seen sharp fall in revenues (GST and their own taxes from sale of fuel and alcohol).

On top of that they are borrowing way beyond their means to fight the virus and will have no option but to cut back on productive expenditure.

Supply-side shock: Companies will face significant challenges in re-starting their operations as Covid-related restrictions are expected to continue for some time. Their capacity utilisation will be low due to social-distancing norms and restriction on number of workers they can employ at a given time. Bigger players will also face challenges from their supply chain who are typically smaller players.

These players will need additional working capital to even start their operations. Banks don’t offer these without additional collaterals which these entrepreneurs lack. Those depending on imported inputs will face delays and many, who employ migrant labour, will experience shortage of hands. Logistical issues will remain as truck fleet operators are struggling to find drivers.

Cost impact: With zero sales for 40-odd days and significant carrying stock, most companies will see their interest costs rise.

This, despite, fall in interest rates (provided banks pass on the lower rates to them). Even as commodity and fuel prices have come down, the benefit that will accrue to the industry will be marginal as their prices are typically linked to international rates.

Also, the rupee has weakened quite sharply and transportation costs have risen. That apart, low capacity utilisation means their fixed costs margin will be hit. In all, they will have to contend with higher costs.

Looking ahead

Considering the above factors, the next one year could well be hard for India Inc. The first quarter is expected to be almost a washout. Companies expect to ramp up production (demand supporting and Covid permitting) in the second and third quarters, but that will depend entirely on three factors:

Second wave: As the lockdown is eased, risk of a second wave increases. South Korea, China and Singapore are already battling such a scenario. If India sees a sharp increase in cases post-lockdown, restrictions will be have to be reintroduced. That will be a setback.

Strong government stimulus: As things stand today, all the four engines of economic growth — exports, private investments, consumption, government spending — are badly hit.

The economy will easily slip into a recession without a large stimulus to kick-start it. So far, only a welfare package amounting to just one per cent of GDP has been announced. A lot more is needed.

Bank support: A revival will not be possible unless banks give up their reticence to lend. No economy can do well if bank credit grows at less than its nominal rate of growth.

In spite of various measures by the RBI, if banks do not rise to the occasion, it will be driving the last nail into the coffins of a lot of companies — small, medium and large.

Published on April 23, 2020

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