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    Not all SMEs will survive the Covid-19 crisis, but what should an economic bailout package look like?

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    Does India have the fiscal and monetary headroom to come up with a bailout package of such proportions?

    Story outline

    • It has been a particularly distressing time for SMEs who stare at an uncertain future.
    • MSMEs have been hailed as the backbone of the Indian economy who can contribute well in achieving India’s dream of a $5 trillion economy by 2025.
    • Every crisis results in a fall in GDP and revenue growth leading automatically to expansion of the fiscal deficit, believe experts.
    The world over, financial packages have already been announced by nations in a bid to restore their economies amid the Coronavirus pandemic gripping countries across the globe. The US, for instance, is looking at a Senate vote to rollout a $2 trillion package, touted as one of the largest rescue packages in American history. One of the most widely impacted by the crisis, Italy, came up with an emergency plan of $28 billion that could help them inch slowly towards normalcy. Indonesia announced a $725 billion stimulus package in February to rescue its travel, aviation and property industries, followed by a second package of $8 billion in March.

    India’s latest figures, according to the Union Health Ministry, have already moved up the scale and crossed the 600 confirmed cases mark. The question then that does spring up is that why has India not announced an economic package yet? While businesses across sectors are finding it a challenge to stay up and running, it has been a particularly distressing time for small businesses and SMEs who gloomily stare at an uncertain future.

    Time and again, MSMEs have been hailed as the backbone of the Indian economy who can contribute well in achieving India’s dream of a $5 trillion economy by 2025. However, such businesses will simply not be able to survive if booster steps are not taken - on urgent priority - to pull them out of the current bleak situation that they find themselves in.

    Can India raise the bar?Before getting into what can be done, it is important to understand the country’s economic capacity to provide a bailout. Does India have the fiscal and monetary headroom to come up with a bailout package of such proportions? Economists shove off this thought, saying that every crisis results in a fall in GDP and revenue growth leading automatically to expansion of the fiscal deficit.

    “This is recognised as an automatic stabiliser which is good (not bad) for the economy. On the expenditure side, the government has to focus on the economic and welfare problems linked directly on crises and not waste resources on the pet programmes and projects of intellectuals,” Arvind Virmani, Chairman, Foundation For Economic Growth & Welfare and President, Forum for Strategic Initiative candidly states.

    Arun Maira, former member of the Planning Commission of India and the former India Chairman of Boston Consulting Group, likens the situation to the Great Depression of the 1930s, when economies were in particularly bad shape as well after the stock market crash in October 1929. Calling it an old debate, he says that one should go by the adage of looking after one’s own health first than anything else. “The economy is dying anyway. We have to see that the economy doesn’t die completely amid such a crisis,” says Maira.

    What can be done?
    All industry experts and economists that ET Digital spoke to were forthright in their views on what a financial package intended at stimulating the economy and, in particular, SMEs should look like.

    Virmani, who also served as the Executive Director, International Monetary Fund (IMF) and India’s Chief Economic Adviser, says, as far as the monetary policy is concerned, it has to ensure that the risk free interest rate remains low (including by reducing Repo Rate) and provide short, medium and long term liquidity to ensure the financial system (markets, institutions, instruments) continues to function smoothly.

    Maira says that the package needs to be directed towards the small scale sector and should also include those not necessarily directly employed in SMEs such as the farmers. “We need two things. First is to save the lives of the people employed in the formal and informal SME sector who do not have adequate social security. And the second is enterprises. We have to look at the health of the small companies. Their biggest issue is always liquidity. Liquidity in the hands of enterprises is like oxygen right now. Workers should be given wages directly at this time. Money needs to be in the hands of the people,” he elucidates.

    Maira directs attention towards labour costs, which are 10% of the overall costs for large companies. However, in small companies, they are atleast 30-50% of their entire cost as these are labour intensive industries.

    Upholding Maira’s views, Sunil Sinha, Principal Economist, India Ratings and Research clearly states that prudential, regulatory norms may need a revisit right now as extraordinary circumstances call for extraordinary measures.

    Sinha agrees that while creating a package which will help SMEs won’t be an easy task, it is necessary that the stimulus includes traditional liquidity lines which can be tapped into by the sector. “Liquidity support will be needed at a cheaper rate of interest. Prudential norms which guide the system may have to be tweaked in the current situation. The government will have to take a number of such steps to address the situation,” he says.

    Small enterprises, Sinha adds, have a lesson to learn from such a crisis and is frank in his view that some may not survive the storm. “They must prepare themselves for the future where they involve IT in their operations from the start. Not all SMEs will be able to survive at this point,” he says.

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    More relief should flow
    Others suggest that this is the time when all payments and refunds should be handed over to the concerned representatives. Saurabh Agarwal, Principal, IIF College of Commerce and Management Studies says that the first step should be to pay off all payables.

    He cites the examples of the Andhra Pradesh government, which has payables of Rs 45,000 crore acknowledged by the state FM, and not paid for one year. “If we conservatively estimate, the total payables for legitimate reasons, completed works will be a minimum of 20 times of AP which amounts close to Rs 10 lakh crore (from all state governments/state owned corporations and central government agencies and PSUs.) The Government must first get the correct amount acknowledged. Next, the government must ask RBI to give overdrafts to these governments/PSUs as a one-time loan and pay the pending amount,” he shares.

    Agarwal also adds that this is the time when all the pending refunds related to GST and tax need to be duly processed. Moreover, all deadlines to make loan payments need to be rescheduled for 3-6 months so that defaults do not happen.

    In view of the recent announcement by the FM on suspending Section 7, 9 and 10 of the Insolvency and Bankruptcy Code (IBC) for a period of 6 months if the situation persists, Agarwal suggested that IBC as a whole should be suspended for the said 6 month time period.

    Endgame?
    While no one knows how long the crisis will last or what will be the real extent of the damage, there is concern that a large bailout may have an adverse impact on the Rupee and bring in volatility. On Monday, the Rupee had touched a record low above 76 a dollar with the rise in the number of Covid-19 cases. Sinha adds that the exodus of Foreign Institutional investors (FIIs) has already taken place. “Look at how the exodus has happened. FIIs have pulled out the money. So any of the measures that are announced won’t really bring any volatility in the market and will have a much less impact. Atleast Rs 10-12 billion have been withdrawn in a week. So it really won’t make much of a difference,” he says matter-of-factly.

    Maira talks about the silver lining that has ensued in the midst of all the chaos. “It is anyway said that if you want to export more from India, let your exchange rate rise. So basically this crisis is making us do what was healthy for the sustainable growth of the economy. It is making us pay attention to the stability of the economy and is breaking through ideologies. People don’t care about the value of the Rupee. These things matter more to investors and financial markets. Time to get real,” he asserts.
    ( Originally published on Mar 26, 2020 )
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