NEW DELHI :
DK Aggarwal, president of the PHD Chamber of Commerce and Industry and chairman of SMC Investments and Advisors Limited believes that small companies in India may face stiffer competition in the months ahead as the demand pie has shrunk. Since everyone will chase a few customers, it would impact their pricing and margins. The government must reconsider the Goods and Services Tax (GST) rates to revive demand, he told Mint during an interview.
What is your assessment of the current economic situation?
We have to live with covid-19 until we have a vaccine. Most of the industries have started. Some of them are at 50% capacity utilisation; others are at 75%. By Diwali, we should be back to 80-90% capacity utilisation. Earlier, there was uncertainty about covid-19. Now, there is more confidence among people who are coming out of their homes, going to offices and factories. Things are much better as compared to what it was two months back.
What about the demand side?
So far there was an equilibrium because there was less demand and less supply. The supply-side is more in control of the businesses. It is the demand side that is not in control. Here, we need some support from the government. If the ₹3-trillion package to the micro, small and medium enterprises (MSME) sector comes to circulation, it could boost some demand but not entirely — much of the money will be used for working capital, for buying inputs.
What more do you expect the government to do on the demand side?
GST can be reduced across all the four slabs. The 12% and 18% slabs are for manufactured items. If the 18% slab is merged with 12%, it would be ease of doing business and would have a much bigger impact on demand. Second, the reduction in repo rates have to be passed on by the banks. Demand would revive if the interest rates are low for home loans, vehicle loans, and consumer appliances. Third, if the export income of MSMEs are made tax-free, it would be a boost when domestic demand is low.
What are the headwinds MSMEs particularly face today?
The loss MSMEs suffered for three months have broken their backbone. If the moratorium period (on repayment of loans) is not extended, there will again be cash flow issues. Many MSMEs fear these loans might turn into non-performing assets (NPAs), which would mean closure of business. The second challenge is the cost of finance. The banks are lending at between 7.5% to 9%. However, not everyone is getting that finance. Most MSMEs don’t have exposure to banks. They have exposure to non-banking financal companies (NBFCs), where the cost of funding is 12-14%. Third is the demand side. Unless immediate measures are taken to boost the demand, there would be more competition — more companies would target the same demand. That would affect pricing and margins. MSMEs require a second round of package because covid-19 is going to last between six and nine months.