77th Independence Day Celebrations | PM Modi’s address to...
August 15, 2023
Coronavirus: Delayed relief package makes Covid-19 recovery tougher
Vadodara News Network May 07, 2020
It has been over a fortnight since the government started discussing another relief package to support the industry, especially MSMEs. However, with no relief in sight, most small companies may not have any other option but to shut shop.
Small companies may have to shut shop if they don’t get urgent support
Liquidty crunch remains a major issue for smaller firms operating in sectors worst affected by the pandemic
More than 12 crore Indians lost their jobs in April due to prevailing economic conditions
ore than 12 crore Indians lost their jobs in April as companies across sectors keep urging the government for immediate release financial assistance to survive the Covid-19 lockdown.
Industry bodies and trade unions, who represent a bulk of these companies, have been persistently requesting authorities for a sizeable financial package to support sectors worst hit by the contagion.
While Reserve Bank of India (RBI) and the central government announced some relief measures earlier, no direct liquidity aid has been announced yet.
And liquidity remains the biggest issue for all smaller companies, which may cease to exist if some form of relief is not released soon.
Unlike bigger companies, which have large cash buffers to support minimum operations during the crisis, smaller ones are running out of cash required for bearing expenses including wage payments.
If more companies continue to face a credit crunch, unemployment could spike exponentially in India besides a sharp drop in the country’s GDP. This could have a direct impact on the country’s recovery as people would have less money to spend — an essential facet for jumpstarting the economy.
Early signs of a growth paralysis have already started emerging as more agencies slash India’s growth outlook.
Ratings agency ICRA expects the country’s GDP to contract as much as 20 per cent in the first quarter of 2020-21.
Although many prominent economists have asked the government to give direct cash handouts to the poor or those who have lost their livelihoods, trouble may emerge when millions are left without jobs after the lockdown when inflation is expected to skyrocket.
This is a key reason why many experts have asked the government to focus on job or wage guarantee schemes, which are far more reliable than direct cash transfers.
Paralysed industry seeks relief
At the moment, the outlook of jobs and companies in many sectors remain uncertain in India.
Companies are either struggling to pay full salaries or asking employees to go on leave without pay. Some are even laying off employees citing lack of relief from the government or banks.
Many industry leaders recently stressed on the importance of direct liquidity measures to not only facilitate recovery but to support employees. Voices from the industry also resonate similar demands.
They say that delaying relief measures can have serious and long-lasting effects on the economy, especially those sectors which have been completely taken out of action since March 25.
There is evidence to show that companies in India have been completely paralysed by the Covid-19 lockdown, and a restart may not be possible without adequate financial support.
For instance, India’s manufacturing and services activity have touched record lows in April.
Manufacturing activity contracted sharply in April amid the lockdown due to lower demand and massive supply chain disruptions, showed the Nikkei Manufacturing Purchasing Managers’ Index (PMI) compiled by IHS Markit. It is the lowest since the survey began in 2005.
Likewise, the Nikkei/IHS Markit Services Purchasing Managers’ Index dipped sharply to just 5.4 in April from 49.3 in March.
In a release, Joe Hayes, an economist at IHS Markit, said, “The extreme slide in the headline index, which fell by over 40 points, shows us that the strict lockdown measures have led to the sector essentially grinding to a complete standstill.”
These unprecedented numbers show how several firms across key sectors that have been brought to a standstill and literally have no fresh revenue inflow to meet monthly expenditure, making it extremely difficult to pay staff.
The Hydraulic Trailer Owner’s Association (HTOA) is one such industry body that has appraised government about the difficult challenge for heavy logistics operators in the country.
The body, which represents the modular hydraulic trailer operators responsible for road transportation of heavy equipment and machinery, recently wrote a letter to the government seeking policy reforms and aid.
“Almost 50 per cent of our normal revenue is towards salary and interest/EMIs on fixed periodic costs. To add to this, all our reserves, personal saving and equity are blocked in outstanding,” the letter read.
“We foresee pan India logistics service providers heading towards closure of business and further rise in unemployment. The impact is much severe in our industry.”
HTOA has shared a list of recommendations with the government including an extension on the validity of documents required for plying of commercial vehicles and waiver on over-dimensional cargo (ODC) fee for a minimum of one year.
There are plenty more letters requesting financial or policy relief that have been forwarded by industry bodies to the government.
Add unemployment to the equation and the recovery picture becomes grimmer.
Data from Mumbai-based think tank Centre for Monitoring India Economy (CMIE) puts the unemployment rate at 27.1 per cent as of May 3. Not only is the unemployment rate higher than ever but also indicates how potential job seekers have no opportunity left to exercise.
In April 2020, the unemployment rate has been pegged at 23.5 per cent by CMIE. As of today, the unemployment rate is at 24.6 per cent.
Among all those who have lost jobs, labourers and small traders top the list. Many working as entrepreneurs or in start-ups, salaried employees and farmers have also lost their livelihoods.
The loss of employment could have a direct impact on the demand-supply equation, making the recovery even harder.
Ratings agency Crisil recently said that some sectors like retail trade, education, travel, logistics, real estate, entertainment, hotels and restaurants may see a permanent loss of demand if the situation does not improve.
If key sectors keep witnessing lower demand in the post-pandemic world, it could lead to more job losses and the vicious demand-supply cycle may batter the economy for a longer period.
Over 6 crore MSMEs in India are struggling with cash flow and many such businesses were predicted to be completely wiped out if the lockdown continues for three months or more.
Majority of these firms hire contractual workers or daily wage labourers, who have been affected severely by the lockdown. Not only did they lose their jobs but were stranded without money due to the lockdown.
Must Read: Further delay in stimulus for MSMEs can jeapordise India’s growth story
The government earlier announced a Rs 1.7 lakh crore package, primarily aimed at supporting the poorest groups through in the wake of the Covid-19 pandemic.
However, the large exodus of migrants made it clear that it was impossible for the government to micro-manage the situation.
In such a scenario, a job guarantee scheme seems best tailored to deal with the situation. A report on the Financial Times suggested that the UK government’s job retention scheme has helped it keep small businesses afloat during the crisis.
Though India, a $2.9 trillion dollar economy, does not have the required financial resources or space to prevent job losses across all sectors like the UK, it could make up through additional tax and liquidity relief for the worst affected sectors in India.
Experts indicate that India could do more on the economic front, considering it has spent just slightly over 1 per cent of the GDP, compared to steps taken by relatively smaller economies like Malaysia.
Part of the recovery plan also needs to address the large-scale layoffs and payouts across the private sector.
It is worth mentioning that financial impact of the lockdown on private-sector employees, especially those who have lost jobs, not only translates into lower spending but also chokes cash flow required to restart various engines of economic growth after the pandemic is over.
आपको यह भी पसंद आ सकता हैं
India's economy to contract by 3.2 per cent in fiscal yea...
India's economy will shrink by 3.2 per cent in the current fiscal, the World Bank said on Monday as it joined a chorus of international agencies th...
June 09, 2020