The shock demonitisation of 2016, the haphazard implementation of GST and the liquidity crisis that followed the collapse of IL&FS meant MSMEs across the country were struggling. What more could have gone wrong? It seems the worst was yet to come.
Coronavirus disease 2019 or Covid-19, is an infectious disease that leads to severe and acute respiratory problems in humans, but has now left MSMEs across the country gasping for breath. As cities across the country go under lockdown, people stay at home and ‘social distancing’ becomes the norm, the sheer timing of the worldwide pandemic could not have been worse for millions of small businesses.
Perhaps, the segment that gets impacted the most during any turmoil is the F&B industry. There is no full scale lockdown in India, but the F&B Industry is already in distress.
“The food service industry has been going through a very tough time for the last few months due to a change in consumption trends and some because of certain regulatory issues. For example, denial of input tax credit on the GST as well as no concrete policies in the online business in food. While we were dealing with all this, coronavirus has come and created an almost existential crisis for us. In our business, the proportion of fixed operating assets is frightfully high and with the kind of revenue reduction that we have seen, the mall outlets in the major cities have shut down and standalone are probably working at a 60-70% lesser numbers than what they would normally do,” says Anurag Katriar, NRAI President and CEO & Executive Director, deGustibus Hospitality.
Katriar adds that there is a real scare of jobs being lost and companies just shutting shop because everyone may not have the economic ability to deal with these kinds of losses.
“This could not have come at a worse time and every segment of the business, whether it is restaurant, dining, deliveries or banqueting, every segment is impacted and right now we are in a very, very bad shape,” says Katriar.
Another sector that is in dire straits is the automotive sector. Auto sector plays on sentiments and the current situation has made things even tougher for the sector. According to Vinnie Mehta, Director General, Automotive Component Manufacturers Association of India (ACMA), the auto industry has been facing many upheavals lately, and the coronavirus scare has only added to the segment’s woes.
“While the challenges faced by the industry is not just alone due to coronavirus, but this one is coming at a juncture when the industry has been grappling with multiple issues. Month-on-month sales have been dropping, and the industry has been simultaneously transitioning from BS-IV to BS-VI. So, all these factors make this crisis a challenge,” he opined.
The auto industry is going through its worst slowdown for a year now and hopes for a turnaround this year has quickly fizzled. The slowdown in demand had led to total wholesale automobile sales in the country declining by a little over 19% during the month of February 2020. However, things are expected to get worse for the month of March, which is expected to see the full impact of Covid-19 play out.
Mahendra Sanghi, Ex-President, Assocham and Group Chairman, Sanghi Group of Industries says the impact will ruin MSMEs in the coming days. “While we are trying to cope with demonetisation and teething and compliance issues of GST, this virus has come. It is definitely, the worst time that the virus has hit us,” Sanghi says.
Auto is not the only sector facing turbulent times. The electronics industry is also battling production and supply woes. The Electronic Industries Association of India (Elcina) believes that while the demonetization shock and adjusting to the GST processes and compliance requirements have largely played out, many electronics segments have been facing a depressed market. “To that extent, the Covid- 19 epidemic is an added challenge, making things even more difficult,” says Rajoo Goel, Secretary General, Elcina.
These are uncharted waters for every business and the most can only hazard a guess on how things will play out. The entire concept of quarantine and large sections of the working populace working remotely shows a paradigm shift in how businesses need to operate. If this would lead to permanent behavioral changes, which in turn has an impact on the shape of the economy, is difficult to tell.
According to Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small Medium Enterprises (FISME), “It is certainly not a good news for the economy in general, and MSMEs in particular. They are more vulnerable to shocks an our worry is that the current crisis could lead to an exodus of workers to their rural roots, bringing the economic engine to grinding halt.” With no endgame in sight, if the crisis is prolonged Bhardwaj says several sectors, from pharma to electronics to raw material for a range of sectors, would be hit hard.
What is worrying is the fact that what we are witnessing now could be just the tip of the iceberg and the contagion could get worse. Consumer demand has not fallen rapidly yet in India, but will eventually go that route, says Mahavir Pratap Sharma, Past Chairman, Carpet Export Promotion Council (CEPC). “Exports are reducing and will reduce further. If people stop doing the basics, such as not go to the movies, to the mall, avoid travel etc, the sentiment will naturally go down. Sentiments are also lower due to the uncertainty that currently looms large in the market,” he says.
Sharma says small shops and traders will suffer far more, but it will soon trickle down to exports and reduced industrial output. “Export targets for this year will see a downward trend. The impact will be seen across businesses. I anticipate a 1% spiral of GDP growth rate if this doesn’t subside soon enough,” he adds.
There is definitely a loss of confidence among Indian MSMEs and the manufacturing industry India at large would bear the brunt. There is a realization that acute dependence on one source for key inputs is a highly risky and that the world is staring at an economic slowdown.
Goel says the crisis is now across the value chain and not only due to shortages of material supplies, but also due to restrictions put in place across the globe.
As lockdown of entire cities takes place, consumer confidence has fallen sharply. No industry has been spared and major shows and events across the world have either been cancelled or postponed. Stefanie Bauer, Director, Circular Apparel Innovation Factory (CAIF), Intellecap says that while it is too early to say how much of the exports will get affected; the coronavirus has taken a toll on major fashion events around the globe that are critical events for the Indian industry.
“While events in Asia like Intertextile Shanghai, Tokyo Fashion Week and Beijing and Shanghai Fashion Week have already been cancelled, a number of annual European or US-based events are either postponed or cancelled, such as the Copenhagen Fashion Summit. Many brands and designers have cancelled their 2020 fall fashion shows that are supposed to happen in March or April and showcase their fall season online on their websites, social media or newly created platforms.
While it is too early to say the size of the impact, estimates state that the impact could be as big as $ 64 million.
Shipping and transportation has the largest exposure to a global slowdown induced by coronavirus and U Shekhar, Chairman, Galaxy Surfacent Ltd says the real impact of the virus would be felt across logistics and cargo movements. “Transportation certainly is impacted as a result of the outbreak, where clearances of containers have not taken place smoothly at various ports. Such instances put huge pressure on the availability of containers for movements, and we do see a lot of ‘blank sailing’, which means while there are movements of ships, but not much cargo is contained therein. This is one aspect we see the virus impacting the international flow of trade,” says Shekhar.
Bhardwaj says it is difficult to predict the impact of Coronavirus in Indian economy as of now, but there is a need to be very alert. “Looking at what happened in China it could be imagined that it can completely paralyze the economic activity within no time if allowed to spread,” he says.
(With contributions from Neha Dewan and Shariq Khan)