Business wishlist to drive the bounceback9 min read . Updated: 23 Aug 2020, 07:50 PM IST
- India Inc has been generous with suggestions to lift the economy. But can the government bankroll them?
- The government is hobbled by lack of funds. That said, faster approvals for both large and small projects are doubly crucial during a slowdown when the labour market is stressed
NEW DELHI : On a rainy Wednesday evening, there were few customers at Sunglass Hut, a designer eyewear retailer in south Delhi’s upmarket shopping mall DLF Avenue. Nearby, Kama Ayurveda, which sells skin care and hair care products, looked deserted too. The sales folks at cosmetics and beauty brand Nykaa chatted among themselves.
Popular restaurant brand Smoke House Deli opened at the mall in March, promising to champion local produce. Workers, here, were busy getting it up and running again. Restaurants that reopened in large Indian cities after the lockdown are reporting dismal numbers.
“Right now, in Mumbai, dining out is not allowed. Restaurants in Delhi are doing 10-12% of pre-covid sales. Bangalore was doing better but then it went into a re-lockdown," said Riyaaz Amlani, CEO and managing director of Impresario Entertainment & Hospitality Ltd, which owns Smoke House Deli among other brands.
“At the end of the day, it is about customer confidence. The demand side will remain under pressure. If the government starts making things easier for us, the future can be brighter. Maybe. But this year is a washout. We will be happy if we come out alive," he added. Impresario runs 57 restaurants in the country—a tenth of them could close down this year.
The battered food and beverages sector, nonetheless, is not representative of the economy. While overall consumer mood remains downbeat, companies across many other sectors have reported sequential improvement in demand.
Even in retail, footfalls in DLF’s premium malls in the national capital region (NCR) have revived to over 50% of pre-covid levels during the weekends. India’s factory output continued contracting in June but at a slower pace than in May. And data from the Employees Provident Fund Organization (EPFO) stated that nearly half a million joined the formal workforce in June, up from about 300,000 the previous month.
As green shoots appear in an economy which was at a complete standstill a few months ago, the conversation has shifted to the immediate steps needed to sustain the recovery. “Making things easier" or the ease of doing business is expected to be an important fulcrum of the recovery, one that sustains both businesses and jobs.
Restaurants in India, for instance, need about 17 licences to get started versus four in Singapore and China. The high cost of compliance, particularly around regional regulations, cuts across every industry.
Businesses have been generous with suggestions—everything from putting money in the hands of the consumer to higher government spending. Industry bodies have been lobbying for goods and services (GST) rate cuts, which in theory could translate into demand in the short-term. Nonetheless, all this is easier said than done considering the narrow fiscal window. The central government is staring at a large deficit in 2020-21.
Sunil Kumar Sinha, principal economist and director of public finance at India Ratings & Research, a ratings agency, pointed out a contradiction in the demands raised by the private sector. “The industry will obviously want GST to be rationalised because it would ease the pressure they are facing. It could help them reduce the prices of goods and services, which could be favourable for a demand pick up. However, the government’s revenue would go down further," he said. “On the other hand, the industry associations want the government to spend—if you collect less revenue, how can you spend more? This is a contradiction," he added.
While the government’s revenue coffers are expected to fall short even without GST cuts, compressing expenditure by a similar rate wouldn’t be easy. “During any previous crisis, the government cut spending on capital expenditure and the social sectors such as health and education. This time around, they can’t cut down on healthcare expenditure because the problem is in this sector," Sinha said. India’s fiscal deficit in 2020-21, therefore, will be far higher than what was budgeted in February.
Where does the government direct its spending, if at all?
The CEO of a large cement business who didn’t want to be identified invoked history. “The best use of capital is for the government to spend on infrastructure through a fiscal stimulus," he said. “Most Indian kings built their palaces during times of drought—it was their way of spending to restart the economy. Public spending has a multiplier effect. You only need to look at China and the rest of the world post the 2008 recession to see that this works."
There is unanimity among industrialists who think spending on infrastructure could do the trick. A ripple effect of this sort of spending on allied industries would ensue, everything from transport to supplies of material. Meanwhile, a section of the industry as well as opposition political parties have been batting for a large cash transfer programme as a way to fuel demand.
Harsh Pati Singhania, director at JK Organisation, said that insufficient or a delayed fiscal stimulus would only prolong the recovery. Initially, the rationale against any cash transfers was that it would be used up to bolster savings during the lockdown months.
“But now with the unlocking of the economy, things have changed," he stressed. “Providing a monthly grant of ₹1,000 per member to the public distribution system (PDS) household ( ₹5,000 per family) for three months will cost about ₹3.5 lakh crore, or 1.7% of GDP. Since Aadhaar is seeded with both ration cards and bank accounts, transfers could be made directly into bank accounts linked to each ration card," he suggested.
Where will the money be raised from? The government has got to stretch itself in the short term, says Singhania. “It can also look at disinvestment, selling some of its non-core assets to come up with the requisite funds," he added.
In a recent piece in The Hindu, former prime minister Manmohan Singh and political economist Praveen Chakravarty suggested that the government borrow. “India must make full use of loan programmes of international institutions such as the International Monetary Fund and the World Bank. Our long track record as an impeccable borrower with no default, timely repayments and full transparency make us an ideal borrower for these institutions," they wrote.
Curse of micro lockdowns
LT Foods Ltd, a processor of packaged basmati rice with brands such as Daawat, quickly got its supply-side issues sorted as soon as the national lockdown took hold. Kitchens from its five factories packed food for truck drivers doing long hauls from one state to another. To secure the supply of workers, the company carved out space within the factories for them to stay. As more people consumed food at home, the company saw strong demand for its staples. Nonetheless, the supply-chain headaches resurfaced.
“After the national lockdown, a lot of districts and states went into another round of lockdown. That disrupted the supply-chain all over again. This is what is creating bigger issues," Ritesh Arora, India and Far East business head at LT Foods said.
Lingering supply-chain disruptions can, going ahead, impact the capacity of companies to service demand. Factories are often located outside city and municipal limits. Micro lockdowns thereby impact movement of employees. Industrialists are now worried about psychosis —employees may become overly cautious and wouldn’t want to step out.
Manufacturing that is assembly oriented is particularly reliant on the component supply-chain. In the automotive business, the entire vehicle manufacturing operations could come to a standstill if even one component can’t be sourced.
“A big reason that is affecting revival of business activity is the disruptive nature of lockdowns which are governed at the state level. There is a sense of uncertainty that has affected business sentiment. We believe that this can be tackled by adopting a micro containment strategy and better coordination between the center and the states," Uday Kotak, managing director and CEO of Kotak Mahindra Bank and president, Confederation of Indian Industry (CII), told Mint.
Tamil Nadu is one state that has extended its lockdown till 31 August. The Uttar Pradesh government has imposed weekend restrictions. Free movement of people is not just crucial from a manufacturer’s perspective but also from a consumption point of view.
Fashion company Benetton India Pvt. Ltd has a network of 950 stores in India. Only about 70% of the stores are fully operational. “The top 10 states account for 60-65% of the GDP. If they are under lockdown in different periods, business definitely gets impacted," Sundeep Chugh, CEO & MD at Benetton India said. He is pinning his hopes on the festival season, since despite the disruptions “things are getting better" with every passing month.
Pushpa Bector, executive director at DLF Retail, argued that seamless travel between borders would aid consumption. At the least, it would send a message that things are getting back to normal. Second, from a retail consumption point of view, alcohol being allowed for table service is a sign of normalisation—that is when eating out culture will make a comeback, she said.
The Delhi government, on 20 August, directed the excise department to issue necessary permits allowing service of liquor but bars would still remain shut. Allowing alcohol service can double the ‘ticket size’ of what consumers spend. At Bharti Realty Limited’s Worldmark in Delhi’s Aerocity, a retail and commercial development, average ticket sizes are currently trending at sub ₹750 per person. Pre-covid, people spent between ₹1,250 and ₹1,500 each.
Making it easy
Paramount Surgimed Ltd, a maker of surgical blades and other medical products, began making N-95 face masks after the covid-19 pandemic hit. So did many other companies—by one estimate, nearly 100 factories pressed the accelerator on N-95. The result is overcapacity.
“In a knee-jerk reaction, the government allowed imports of N-95 free of duty. The objective was to secure personal protection equipment. However, the Indian factories are running at 20-30% capacity. This means, we have more supply than demand today," Shaily Grover, managing director at Paramount Surgimed Ltd said.
On the other hand, the government prohibited the exports of N-95. Considering that the current capacity of manufacturing in India is eight to 10 times the country’s needs, Grover thinks the government should have allowed exports two months ago. “Where is the ease of doing business?" he asked. “If the exports were not regulated, production in 40-50 factories would have been up, the Make-in-India flag would have been up, jobs would have been created, and foreign exchange earned." In the World Bank’s Doing Business rankings, India jumped from ranking a dismal 142 in 2015 to looking better at 63 in 2020. Nevertheless, businesses don’t think the rankings reflect ground realities.
“Unfortunately, the corruption in the country has not reduced," Niranjan Hiranandani, the co-founder and managing director of the Hiranandani Group, said. How could the needle move? Hiranandani suggested the creation of a nodal agency to sort out delays in projects that involve large investments. “There could be a problem at the panchayat level, for instance. And the project doesn’t take off. That is why we need a nodal agency to assist. The nodal agency must be provided at the level of additional chief secretaries," he added.
Faster approvals for both large and small projects are doubly crucial during a slowdown when the labour markets are stressed. Ease of doing business has a direct correlation to jobs creation, and by extension, to demand creation. There is much left to be done.
Tanya Elizabeth Thomas contributed to this story from Mumbai