The Coronavirus pandemic is among the biggest crises the world has ever faced. It has taken the entire world in its grip. Almost every individual on this planet has been affected by this pandemic either directly or indirectly. This has caused a huge harm to humanity and the economy. Things are deteriorating day-by-day.

The impact of this pandemic is set to be disruptive. It has already brought disruptions in several sectors of the economy. The World Health Organization (WHO) has termed this pandemic as the “defining global health crisis of our time”. This is not the first time humanity is facing such a crisis. There have been several such crises in the past. Like the other crises, this too shall pass. However, be it in India or in other parts of the world, things are not going to be as usual. Life as usual is bound to be disrupted. There are going to be new benchmarks and new ways of doing business. 

How is India responding to this pandemic? The government claims that the response has been “pre-emptive, pro-active and graded.” In a statement titled ‘India’s response to COVID outbreak’, the Ministry of Information and Broadcasting said: “Central Government took a number of proactive measures, such as travel restrictions, adding more countries and airports to lists for screening, suspension of visas and self quarantine measures to effectively contain, prevent and manage the spread of the disease.” 

Containing and preventing the spread of the disease is crucially important. We also need to respond simultaneously to the social and economic challenges arising out of this pandemic. SKOCH Group has launched a series of consultations amongst experts and various stakeholders to highlight the issues and challenges facing the different sections of society and to ideate on the way forward. “While everybody else is getting depressed, especially the mainstream media, it becomes imperative for us to set the discourse on what will be the way forward after the crisis is over,” said Sameer Kochhar, Chairman SKOCH Group. 

He said SKOCH was the first to demand a moratorium on repayments of loans. It is heartening to note that the Reserve Bank of India (RBI) has allowed banks and other financial institutions to provide a three-month moratorium to all term loan borrowers. 

“In respect of all term loans (including agricultural term loans, retail and crop loans), all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, All-India Financial Institutions, and NBFCs (including housing finance companies) (“lending institutions”) are permitted to grant a moratorium of three months on payment of all instalments falling due between March 1, 2020 and May 31, 2020. The repayment schedule for such loans as also the residual tenor, will be shifted across the board by three months after the moratorium period,” the RBI said in a notification.

Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period, it said. The RBI has also instructed credit information companies to ensure that the credit score of the borrower does not get impacted due to moratorium. The central bank has also announced a substantial reduction in policy rates. The RBI’s measures are estimated to inject Rs 3.74 crore liquidity in the economy. 

“The moratorium provided by the RBI is a good step. It is the need of the hour,” said Ashwani Mahajan, National Co-Convenor, Swadeshi Jagran Manch. Other panelists who attended the Round 1 of the discussion on ‘India Responds: Adapting to the New Normal’ also agreed that the RBI’s decision is a step in the right direction. 

According to Deepali Pant Joshi, Former Executive Director, Reserve Bank of India, the steps taken by the central bank would help repair the confidence of businesses and investors in the economy. “These are confidence building measures. The markets move on business sentiments and confidence. Once the central bank is saying that, yes we will function as your lender of last resort and we will infuse liquidity, the business sentiments are bound to pick up,” Joshi said. 

However, there are a number of gaps in the system that need to be plugged in order to ensure that the benefits reach the people who need them the most. 

Micro, Small and Medium Enterprises (MSMEs) are among the worst hit due to this pandemic. Their businesses have been disrupted. Due to the lockdown a large number of small businesses are staring at an existential crisis. They would collapse if not provided proper support. 

The first important step in this direction would be identification of the genuine beneficiaries. The loan moratorium would not be of much help to the businesses who have hardly any access to the formal banking system. There is also a huge problem with the categorisation of MSMEs. 

It is a high time that the way of categorisation of MSMEs changes keeping in mind the underlying regulatory and technological changes. Currently, MSMEs in India are categorised on the basis of investment made in plant and machinery if they are operating in the manufacturing sector and investment in equipment for service sector companies. This investment-based categorisation is plagued with multiple issues and acts as a barrier to new enterprises. With the GST framework in place invoices and turnover can be accessed and monitored in an efficient and transparent manner. Therefore, turnover should be the only logical way of classification of MSMEs. 

While supply and access to credit is one issue, according to Yerram Raju, Adviser, Government of Telangana, a big issue in the coming months is going to be the demand for credit. 

“Only 10 per cent of the manufacturing sector is functioning today. 90 per cent is not functioning. Therefore, 90 per cent of the manufacturing enterprises would not be able to demand from the system their credit requirements at the moment. It will take at least another 1 month or 1.5 months when the lockdown period is over,” said Raju. 

Raju suggested that the Indian government should help MSMEs in the way South Korea has done. South Korea unveiled a prompt relief package for small businesses after the coronavirus outbreak hit the economy. The relief measures include rent subsidies, temporary tax breaks and payment of labour cost. “All the labour payments have been absorbed by the government. As a result no industry has shut down. Immediately they were able to cope with the crisis. They were able to put their wheels in motion,” Raju said. 

Governments and central banks across the world have announced relief packages to limit the impact of Coronavirus on their economy. The United States has unveiled a $2.2 trillion emergency relief package. This is the biggest rescue deal of its kind in the US history. The relief package passed by the US Senate includes $1,200 in direct relief for American adults, creates a $500 billion lending programme for businesses, cities and states as well as a $367 billion fund for small businesses. The plan is also to provide $130 billion to hospitals and expand unemployment insurance.

The European Central Bank has announced a EUR 750 billion ($814 billion) stimulus package. Countries in Europe have also announced relief packages worth trillions of Euros. Germany has unveiled a EUR 756 billion package. This includes EUR 600 billion for business loans and to buy direct stakes in companies and EUR 156 billion in debt to finance higher social spending. France has announced EUR 45 billion in an aid package for businesses and workers 

Japan is in the process to unleash a 60 trillion YEN ($556 billion) relief package to help the economy survive the fallout from the Coronavirus outbreak. Singapore has unleashed $34 billion stimulus package aimed at protecting jobs and supporting small businesses. 

Similarly, other countries have also announced relief packages to the tune of 10 per cent of their respective GDPs. A key focus of such packages globally is supporting small businesses. 

For India the real challenge in providing support to small businesses is in their identification. 

“MSME as a sector getting support is extremely important. However, if the government today wants to give support to the MSMEs there is no way to find out who the real MSMEs are,” said Kochhar. 

According to Rohit Vaswani, President, Bhartiya Vitta Salahkar Samiti (BVSS) & Founder Partner, Raj K Sri & Co, agriculture and small businesses have turned saviors of the Indian economy in this time of crisis. “If we are self dependent today in food supply, it is because of the good agriculture. The supply is being managed by MSMEs. Large players have stopped,” said Vaswani emphasising on the need for more support to small businesses. 

“This situation comes, maybe once in a 100 years, but we must take a lesson from it,” he added. 

An important measure announced by the government include Rs 1.70 lakh crore relief package under Pradhan Mantri Garib Kalyan Yojana. This is focused on providing support to the poor in the form of food and other essential items. 

Vivek Agarwal, Partner, KPMG, said India has taken proactive and progressive steps to deal with the crisis. However, he warned that the crisis is set to last longer. “It is a little long road ahead,” he said. 

Emphasising on the need for the support to small businesses, Agarwal said: “Economic movement comes from the secondary sector. Not from the primary or tertiary.” 

This crisis will be over sooner rather than later, said M Ramachandran, Former Secretary, Government of India, highlighting the need for planning the action post crisis. “How prepared are we to take up the activities once we come out of this crisis? We need a parallel thinking and parallel listing of what all needs to be done,” he added. 

The initiatives announced by the Indian government as also by various state governments and the RBI are intended to provide immediate relief to poor and soothe the nerves of the markets. 

“The next announcement, which will come sooner rather than later, will be related to demand generation,” said Vivek Agarwal. 

While providing immediate relief to the poor is very important, it is equally important to support those in the middle in order to revive the economic growth. Agarwal pointed out that growth has always been led by the middle part of the economy. Ironically, the middle section of the economy has been most ignored. Whenever, there is a relief package or any other support from the government it goes either to the bottom or the top. The middle section mostly gets ignored. 

In order to revive the economic activities giving support to the secondary sector would be crucially important. “The economic movement will come from the secondary sector and not from the primary or tertiary. It’s the middle part which always drives the growth,” said Agarwal. 

There are also questions on which section of the economy should be given priority in providing the stimulus package. India’s economic growth has largely been driven by domestic consumption. The economy has been mostly inward looking. “As an economy we have always been inward looking, i.e. we have looked at domestic consumption. Now the injection of liquidity and the ability to lend should enthuse both banks and NBFCs to go ahead and extend loans to the aspiring middle classes so that the consumption cycle will in turn unleash the virtuous cycle of growth and development in the days to come,” said Deepali Pant Joshi. 

She pointed out that the RBI’s recent action has largely been on ensuring liquidity in the system. Another important issue that the central bank has tried to address is the monetary transmission. The RBI has promised long-term repo operation of Rs 1 lakh crore. 

“Cash credit and overdraft lending institutions can recalculate drawing power by reducing the margins and/or by pressing the working capital cycle for the borrowers,” said Joshi adding the RBI Governor has sought to ease working capital financing. 

In order to reduce arbitrage between onshore and offshore market, Joshi suggested that the Indian banks, which are operating, in say the GIFT city or in the international financial centre through their international banking units they can take a position in the non-deliverable forward markets, which would act like a kind of signalling device. 

The RBI’s action would put more money in the hands of banks, thus easing the liquidity. But what about the demands for loans? Just because there is money in the hands of the banks does not mean that businesses would demand it. Even a lowering of interest rates will not be of much help. A major issue here is the demand for credit. This will come only when consumption demand picks up and a conducive environment is created for businesses to function. The other issue is the risk appetite of banks. Due to spiraling Non-Performing Assets (NPAs) banks have become defensive. They are not coming forward to lend. 

“Pumping of liquidity at a time when the risk appetite is very low among the banks is one thing which needs to be pondered. Even in the past six months, liquidity is not a question. Liquidity is there but credit has not flown to the extent it is required,” said Yerram Raju.

India’s track record in handling the global crises have been better than other countries, including the advanced economies. During the global economic crisis when the major economies like the US, Japan and European Union were severely affected; the impact on the Indian economy was relatively muted. India also managed the 1997 Asian Financial Crisis and the impact on the Indian economy was not that severe. 

Experts hope that India would be equally successful in handling the COVID-19 pandemic.

“We have attacked and managed every crisis with absolute efficiency. We have responded both adequately and appropriately. So this is the time when we need to put in place appropriate measures,” said Raju.

“And whatever measures we announce have to be put in action. And this is where the criticality lies,” he added.