Covid-hit industry needs policy tonic

R Ganapathi | Updated on March 30, 2020 Published on March 31, 2020

Total shutdown: No services, no production, no jobs, no incomes   -  VIVEK BENDRE

The rate cuts will not reverse demand contraction. Export incentives, tax breaks and health sector support are called for

Prime Minster Narendra Modi needs to be complimented for taking stringent measures to control the spread of conoravirus. The government’s first economic stimulus package of relief measures for the most vulnerable sections of society for three months is welcome.

However, the cost of the Covid-19 lockdown is pegged at around $120 billion (around ₹9 lakh crore) or 4 per cent of the GDP, and a sharp cut in growth estimates is predicted.

It is now certain that the world will enter into a significant recession and India is not likely to “remain decoupled”. Further, 90 per cent of India’s workforce is employed in the unorganised sector and this lockdown will effectively put over 45 million migrants living off daily earnings out of work. Employment in sectors like construction projects, mobility services, housekeeping and other informal areas will come to a sudden halt.

The manufacturing sector faces a triple challenge. First, there are going to be serious supply chain distortions, not just when dealing with foreign parties, but also the domestic industry. Second, sectors like automobiles, pharmaceuticals, electronics, chemical products, etc., are facing an imminent raw material and component shortage. Third, the shutdown and resulting loss of revenue is certain to cause a number of bankruptcies and closures, especially in the MSME sector with corresponding disruption to supply chains.

On the demand side, several industries would get impacted starting with the consumer durable goods and will cascade to other intermediate goods and basic goods.

The government was the major investor in the infrastructure sector, which will slowdown now with resources and attention being diverted. Hence industries like steel and cement, which did well last year, will stumble. Consumers who are locked up at home cannot spend on goods other than essentials, and corporates will not think of investing. Hence, manufacturing output and investment will be under pressure for the next several quarters.

India’s foreign trade saw a dip in both imports and exports. The deeply integrated global value chain of the export sector has been impacted by disruptions.

The service sector has been affected directly because the fall in use of services means a fall in demand. The services include aviation, hotels, restaurants, tourism, retail, etc. The shutting down of the railways along with other public transport is a major blow. The real estate sector, which was already in deep trouble, could well slide even more in the medium term at least.

Even 10-20 per cent job losses among its 7.3 million employees in restaurants across the country would mean up to 15 lakh unemployed, something that would have severe social consequences.

While the immediate focus has to be on the health and safety of the citizens, any delay in addressing the economic consequences will lead to massive job losses. The government also has to recognise that the bulk of non-agricultural employment in India is from the informal and MSME sectors, which do not have the cash reserves to continue to pay salaries with no or restricted production.

The RBI has to address two problems. First, the transmission of rate cuts has been inadequate. Also, rate cuts will shorten spreads with US Treasury, and FPIs could withdraw from our markets resulting in exchange management issues. Rate cuts by themselves are unlikely to stimulate demand as the primary cause for demand contraction will be on account of consumer confidence being low.

The second problem is with the banking system. Though the RBI has provided some relief to industries, it is inadequate considering the gravity of the situation. SICCI feels that only the stronger firms in any sector have the capacity to keep salary payments going.

To tide over the present crisis, banks should give three months salary as overdraft facility to the employees and this will be escrowed to companies with a nominal rate of interest not exceeding 3 per cent. The same could be recovered from the companies over a period of three months, six months after commencement of production, post the present crisis.

As regards the electronic component and semi-conductor industry, the impact will be felt in the areas of logistics, packaging and testing. A special package should be designed and the concept of “one fit for all” cannot be applicable to this highly skilled industry.

In the case of contract workers, many casual and informal workers are directly or indirectly dependent on the survival of small and medium enterprises for jobs. The government could lend support through tax holidays and zero interest loans for three months.

In the case of the services sector, where the bulk of the workers are employed, the government should consider contributing the employers’ share of PF for all employees earning less than ₹20,000 per month and ESI contribution for all employees earning below the statutory threshold level of ₹21,000 per month, for a period of 12 months.

For firms that have difficulties in managing their cash flows, the government should extend government-backed loan guarantee, on the basis of which firms can raise loans from the banking sector on preferential terms to the extent of 25 per cent of their existing working capital arrangements.

All rating agencies may be advised to suspend rating reviews till the lockdown is over.

The RBI needs to come up with a special window to provide liquidity to NBFCs and microfinance institutions in this period.

The government should ensure that all refunds — up to 75 per cent — across tax legislation should be given without any verification and any wrongful claim can be recovered without any interest.

Expedite speedy approval for reputed private hospitals in Chennai such as Apollo, CMC, and Fortis that have developed testing facilities and are awaiting approval from the Indian Council for Medical Research. Private sector hospitals need to be encouraged to provide specific number of isolation wards to the poor and extend financial assistance on soft terms. Also, the Pradhan Mantri Swasthya Suraksha Yojana (PMSSY) rules need to be relaxed.

Export incentive schemes like Section 10AA for SEZ units under the IT Act should be extended for one more year — that is, up to March 31 2021. Further, the recent Export-Import Policy should be extended for one more year. In the absence of new Export-Import Policy, all export incentives viz MEIS,SCIS, EPCG license etc should be extended for one more year. All charges including, port charges, penal charges, demurrages should be waived.

Fixed charges levied may be waived and industry may be charged on the actual consumption of electricity; immediate refund of IGST will help exporter in dealing with liquidity issues.

In order to have business continuity plans, the government should halve GST rates on laptops, routers, cloud services, dongles and such other equipment.

All companies should be asked to devote their CSR funds exclusively towards creation of clean quarantine centres, and addition of hospital beds, ventilators and PPEs, besides investing in testing and other facilities.

HNIs should be encouraged to do likewise. Additional tax concessions may be looked at for this sector.

Women's self-help groups (SHGs) and the informal sector should be asked to produce masks, hand sanitisers, among others in a big way.

In conclusion, as the poet Shelly says: “If winter comes, can spring be far behind.” India’s best days are ahead, despite this distraction.

The author is President, Southern India Chamber of Commerce & Industry

Published on March 31, 2020

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