Jilian Consultants Co., Ltd.
Jilian Consultants Co., Ltd.

Covid-19 Impact On Business And Revenue

Jilian Consultants China

Impact over businesses:

Besides the impact on human lives, the Covid-19 pandemic is a shock wave that has affected the Indian economy. Majority countries are still going into lock down, and businesses across the globe are operating in the fear of an impending collapse of global financial markets. The economic growth is leading to extremely strained market conditions especially in a developing country like India. Challenges are impacting all the three major contributors to GDP private consumption, investment and external trade.

The most effected sectors in terms of risk on account of Covid-19 are aviation, hotels, restaurants, retail, shipping, ports and port services, whereas the medium impact sectors are automobiles, building materials, residential real estates and the low impact sectors being education, dairy products, fertilizers, FMCG and health-care among others. Major companies, both small and large-scale corporations in India have temporarily suspended or significantly reduced operations. Young start-ups have been impacted as sponsoring and funding fell short.

India’s growth in the fourth quarter of 2020 went down to 3.1% and this drop is mainly due to the Covid-19 pandemic effect on the Indian economy. However, after the announcement of the economic package in mid-May, India’s GDP will apparently be in a deep recession since independence. Unemployment has risen from 6.7% on 15 March to 26% on 19 April and then backs down to pre-lockdown levels by mid-June. More than 45% of households across the nation have reported an income drop as compared to the previous year. Those in the informal sectors and daily wage earners have been the worst effected under lock-down.

Impact on the revenue:

The Centre’s financial report card doesn’t seem promising for now as its fiscal deficit (the difference between income and spending) at the end of the June quarter is on an all time high (83.2%) with the budgeted deficit for the whole year. The fiscal deficit target of 3.5 per cent of the GDP is in most likelihood to nearly double, according to the huge revenue slippages expected and the fact that GDP will be shrinking rather than expanding, as believed when the budget was in talks.

Tax revenues too have reduces simultaneously with the economy. Taxes from goods and services have been reduced to half in the month of June compared to the same period last year, income tax collections fell to 36% and corporate taxes came in 23% lower. As a result, the Government’s borrowings for the year will steep up to an unprecedented amount and much more would be required to plug the income-expenses gap.

All this tacitly means India’s debt is rising. Debt as a percentage of GDP stood at 72.2% in the financial year gone by. More borrowings and a smaller GDP are expected to push this to 87.6%. Corporate revenues have been falling for three quarters prior to the last one due to the weak macroeconomic climate but had never declined by as high as the 31.1 per cent for the month of April-June 2020 as compared to the year-ago period.

Steps Taken by Indian Government to reduce the impact of Covid-19 on Business and Revenue:

  • Cheaper Cash : A number of measures were announced with the aim to encourage banks to lend. To name a few, (a) banks don’t need to set aside cash reserves for loans given to small businesses between Jan. 31 to July 31. (b) Policy lending rate was cut by 75 basis points in a single move last year. However, the effective deposit rate has been slashed by 115 basis points to discourage lenders from playing safe and parking the cash with the RBI. (c) Cash Reserve Ratio reduced to 3% from 4% in March 2020. (d) Liquidity Coverage Ratio was lowered to 80% from 100%.

  • Loan Freezing : RBI Governor stopped the clock on loan repayments amid-st an unprecedented three-week lock-down announced by Prime Minister Narendra Modi last year. Lenders were allowed to suspend interest payments on working capital facilities for three months; also accumulated interest was allowed be paid later so the loans won’t be in default. The steps add to previous measures that allow a one-off restructuring of loans to small businesses that were in default as of Jan1.  Loans to commercial property projects that are delayed for reasons beyond the control of the developer are allowed to treat as standard for another year.

  • Regulatory deferrals: Implementation of stricter regulations has been delayed. Rules requiring banks to fund activities through stable sources have been deferred to Oct. 1 from April 1. Completion of Capital Conservation Buffer is pushed to Sept. 30 from March 31. Lenders are allowed an additional 90 days to reach a resolution plan on large accounts in default.

  • Special windows : These include support for corporate borrowers as well as rural industry. Targeted long term funds from the central bank to banks for investing only in corporate bonds were aimed at easing cash crunch at firms. Special refinance to umbrella organizations were to go to pan-India financiers like SIDBI, NAHBARD, NHB that affordably fund the rural  and agriculture sector.

  • Higher provisions : Banks were ordered to maintain higher provision of 10% on all frozen loans spread over the January-March and April-June quarters, which can be adjusted later against actual slippages.

  • Dividends were paused : Banks can’t pay dividends for the year ended March 31 to conserve capital and the decision were reviewed on the basis of their financial position on Sept. 30, 2020.

  • Borrowing by the States : State administrations were permitted to borrow as much as half their annual target for the year starting April 1, 2020 whenever they chose. In a typical year, strict rules govern the timetable, which would include cash transfers from the federal government that were under threat as the lock-down erodes revenue.

Conclusion:

India is at a crucial juncture in its fight against COVID-19. The country has responded with urgency and determination as reflected in the Prime Minister’s bold and decisive leadership. The government has also aggressively stepped up the response measures to find, isolate, test, treat and trace. However, the government of India announced a variety of policies and measures to tackle the situation, from extra funds to food security, health care and to the states, to sector related incentives and tax deadline extensions. A number of economic relief measures for the poor were announced.  Like India, several international economies are becoming cognisant of the risk they have faced by being overly dependent on one market. Making the current situation a learning opportunity, it is believed that this is the time India can work on capturing potentially 40% of their competitor’s market share by looking at indigenous production of goods, furthering the country’s Make in India campaign. Covid-19 has hit hard on the business industry as many companies have shut production, manufacturing of new items. In such a times when the business industry is facing the brunt of COVID-19 outbreak, a series of measures are announced minimize the impact of the pandemic on the business industry.

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