The Backdrop (Indian macro-economic indicators):
· India’s GDP growth forecast to be less than 2%
· Unemployment rate in India increases by 23% in the midst of lockdown
· Gold prices hit record high’s
· USD/INR: Rupee slides to all-time low’s
· Indian Stock markets crashed terribly (due to huge FII outflows)
Impact on Indian SME businesses:
· Low customer demand (other than for Essentials)
· Labour challenges: Large-scale migration of workers from cities to villages
· Challenges in Supply Chain logistics
It’s time to disrupt, or be disrupted!
Financial risks to companies:
· The pandemic is expected to have huge repercussions on real economic activity; first risk being financial tightening by banks and NBFC’s in India.
· With substantial fall in the customer demand, businesses are expected to face severe liquidity challenges, resulting in solvency crisis for organizations.
· With plummeting demands and production, listed companies will be hit by falling equity prices, along with risk aversion from lending bankers and NBFC’s.
· Indian banks will re-consider renewal of credit to businesses; and also reduce their exposure to forex risks, LC and BG limits
Silver lining:
· Inspite of the several challenges mentioned above, the Indian economy may do better than other developing countries that rely largely on international trade.
· Falling prices of India’s biggest import (i.e. Oil) might further ameliorate India’s international trade position.
· Imposing lockdown at an early stage of the epidemic has helped India to contain spread of the pandemic.
· Confederation of Indian Industry (CII) has announced to set up a fund specifically for MSMEs to tackle the pandemic challenges.
· ASSOCHAM India has also applied for businesses to get a three-month relief from payment of GST, utility and other statutory payments.
· RBI has granted three months moratorium on EMI’s to its borrowers; also has cut Repo Rate by 75 bps.
Conclusion:
· Recovery of the economy may take longer; it need not be a V-shaped recovery (as was expected earlier). Till then we need to ensure we contain the spread of the virus and also arrest incidences of job losses and bankruptcies.
· That requires “detailed planning” dovetailed with “meticulous control” for the next six months by businesses across industries pan India. Staying in control of business (and its cashflows) has become far more important in today’s scenario than it was ever before (especially for SME’s).
· Traditional ways of managing finances may no longer protect SME’s from these uncertainties; businesses today require to employ new age tools and techniques of managing their finances in a thoroughly professional manner.
CA Vikram Menda