Coronavirus Economic Crisis: Challenges and the Possible Safeguards
The coronavirus pandemic will sharply negate the global economic growth, warned the head of the International Monetary Fund (IMF). Its severe spread across countries is the root cause of the global economic turmoil. Industry lockdown, ceased manufacturing, as well as financial meltdown, will have a huge impact on the economy. Keeping in view the serious impacts, this viral pandemic can soon convert into an economic pandemic.
‘We are going to have a giant recession this year. The depth of the recession will be a lot large at the high end of the 100 worst recessions the whole world has experienced in the last 150 years.’ - Kenneth Rogoff (Professor at Harvard University)
Along with the whole world, India is also facing an unprecedented economic crisis due to the coronavirus outbreak.
Most credit rating agencies have cut India's FY21 GDP forecast sharply from its earlier estimates. India's forex reserves are drying up, the rupee has struck, and exports failed to keep pace in the middle of closed borders. The country has been effectively shut down since March 25, 2020 and companies are now facing an uncertain future.
In this article, we’ll dive deeper into the challenges that are showing up across various areas and the possible safeguards to recover from thefinancial collapse.
Cash Flow Management
Managing cash flow and collecting funds have become difficult during this period of crisis. As a consequence, many businesses, particularly the smaller ones are shutting down. As it might take long for the situation to normalize, the businesses that are still in a good financial shape can be affected in the long run. A Liquidity crunch might occur as people are cutting down on their expenses. However, this mindset would hamper the business in the coming times.
What can be the possible safeguard?
In times of uncertainty, swapping fixed costs for variable costs where you can preserve your core business while increasing flexibility on the fringes is generally a good idea. Selling assets and then leasing them back is one way to raise emergency cash.
Even for the stable companies that have not yet been adversely affected, it is recommended that their management teams actively evaluate their cash flow requirements, develop suitable actions under different scenarios and assess potential risks within their customer base and supplier network.
Work From Home (WFH) Productivity
Almost every company, big or small, has taken up work from home to ensure optimal operation, if not smooth. This can cause manufacturing and production to slow down as it gives priority to the critical services for sustaining.
In a business, only 40% of the labour can be productive while working from home.
What can be the possible safeguard?
Work from home is becoming the new standard among employees, where technological intervention is a boon for both small and large organizations. Businesses are attempting to thrive through SaaS (Software as a Service) based tools to ensure their employees' productivity.
Companies must help their workforce stay healthier and happier whether at work or at home. A responsive and empathetic communication in this case goes a long way. To maintain the continuity of work and productivity, they must provide their employees with the needed resources and support. The workforce planning should always be in sync with the business strategy so that the companies are ready for a recovery.
Startups & SMEs
Start-ups in India are already witnessing the aftermath of coronavirus havoc. Investors and businessmen claim that it is one of the worst economic situations. Apparently the world is slowly heading toward a Great Recession Crisis. The Chinese investors who earlier used to be one of the most prominent backers of Indian startups are now putting off the deals. And, as the domestic venture capitalists are postponing or cancelling meetings, the investments are not happening anytime soon. In addition, the financial institutions are not extending any new credit line, keeping in view the uncertainties.
What can be the possible safeguard?
Small business owners should make efforts to ensure enough liquidity to survive the next quarter. This can help the companies combat this challenge.The government can also come up with financial and economic policies to support small-scale businesses in the long term to stay rooted and climb the ladder.
Insurance is the best tool for addressing uncertainties in life/business and saving yourself from financial losses. It’s an ideal mechanism for mitigating risks with efficient risk management systems for handling contingencies. This could be a great help for companies.
Today, the global rating agency slashed India's FY21 GDP forecast to 0.8 percent. The Covid-19 pandemic has been a huge blow to India, especially since when the virus storm hit, many sectors were already facing a crisis. But if we keep trying to fight the situation then only we stand a chance to win.
Struggles of Labours
As thousands of workers have returned to their native villages, the labour shortage would continue causing troubles for the businesses in resuming their activities. Some companies have already started reporting labour shortages at factories and this can lead to a potential economic slowdown.
What can be the possible safeguard?
Now maybe the employers, who let these workers go, need to offer great incentives to bring them back. This may take around 6 months or more.
Additionally, the companies must provide the protective equipment that may be needed for on-site workers, such as gloves and masks, and consider installing new protective measures, where applicable, such as Plexiglas shields between cashiers and clients.
Tourism and Aviation Sectors
The tourism sector is being greatly affected by the pandemicand nearing a long-term shut down. This sector was the first to be disrupted by COVID-19's impact and can be the last to see any activity resumption. Currently, there is a loss of more than 3.8 crore jobs in the Indian tourism and hospitality industry.
A rash of layoffs and pay cuts can be seen in this critical situation across the aviation sector that links nations around the globe. Some staff members have been asked by the aviation firms to go on unpaid leaves. This is another sector which is hit equally as hard as the tourism and hospitality sector.
What can be the possible safeguard?
As tourism is one of the worst affected sectors, the Govt. can come up with the COVID-19 tourism relief fund with an interest-free working capital loan. In addition, it can implement a minimum wage package for the workers who are unemployed since the lockdown came into being.
Like the travel and tourism, aviation sector also urgently needs financial assistance to support its employees. Government can support the aviation sector by providing them with some relief packages.
Automotive & Real Estate Sectors
India's automotive industry was forced to halt the main manufacturing activity and contributed to a dramatic drop in production as well as sales due to the pandemic effect.
The outlook for the real estate sector has also suffered tremendously from the lockout, declared to prevent the spread of the deadly COVID-19 virus.
What can be the possible safeguard?
Government economic policies can play a major role in promoting the companies' financial stability. A flexible lending program, as well as an extended tax-payment period, will help automotive companies to heal as the COVID-19 pandemic is getting worse.
The government has urged employers not to cut wages or lay off such labourers; reports suggest businesses have no choice but to let their workers go because of cash flow problems.
Some welcome moves by the Government
- Registered persons whose aggregate annual turnover less than Rs. 5 crore can file GSTR-3B due in March, April and May 2020 by the last week of June 2020. No interest, late fee, and penalty will be charged.
- Others can file returns due in March, April, and May 2020 by last week of June 2020 but the same would attract reduced rate of interest @9 % per annum from 15 days after due date (current interest rate is 18 % per annum). No late fee and penalty to be charged, if complied before till 30th June 2020.
- 3 months buffer period for EMIs for all types of loans.
Sectors that have seen a boom amid the COVID-19crisis
Not everyone is hard-hit by this global pandemic.The sectors like Healthcare, Cloud-based SaaS Products, Packaged Food, Research & Development in health and humanity, and Clinical Research have seen a considerable boost in their business activities. As people are practicing social distancing from their homes, the demand for food and groceries is rising sharply. The pharmacies and medicine delivery startups are doing well. The businesses dealing in cloud-based products are also witnessing positive impacts as everything goes online.
Recovering and returning to normalcy might take long. Therefore, all we can do now is keep our composure and give a tough fight.
By Kapil Rana, Founder & Chairman, HostBooks Limited
