The impact of the Covid 19 crisis and measures to be taken by Indian companies

India's gross domestic product (GDP) grew 3.1 per cent in January-March quarter as per the official data released on last Friday, reflecting the partial impact of the COVID-19 lock-down on the manufacturing and services sectors. That was much better than economists' estimates, but still lower than 4.1 per cent in the third quarter. The annual growth in the GDP stood at 4.2 per cent in fiscal year 2019-20 - the lowest pace of growth in past decade. The only saving grace was the growth in the agricultural sector painting a better picture of the rural economy.

The official rate of GDP expansion comes days after the country entered a third month of lock-down with few exceptions to curb the spread of the coronavirus pandemic, which has hampered an already-slowing economy and forced many businesses to trim their operations leading to thousands of job losses, especially in the unorganised sector.

The other worrying part of this results has been the increase in the fiscal deficit to 4.8 per cent as compared to the estimates of 3.5 percent for the fiscal year 2019-20.Obviously the extreme slow- down of the Indian economy in the fourth quarter has impacted the deficit in a very bad way. The implication of this is that the central government has very little elbow room now to offer further fiscal support to the economy going ahead. India did enter this crisis on a weak economic footing, and this seemed to just exacerbate that.  

The Indian government on its part had offered $300 billion stimulus package supporting the various sectors of Indian economy but especially putting focus on the small & medium scale sector. The idea has been to offer credit guarantees to loans given to these companies thus proving them with the required liquidity support to tide over these extremely tough times. It is expected that these credit lines would stimulate support these beleaguered companies and simultaneously generate strong demand the economy going further. The critics of these policies and the opposition parties have suggested that a better alternative is to directly deposit the money in the hands of people (in form of direct cash transfers) .This would then not only support the needy people at this point of time, but also play important role in generating the required demand going ahead. The government though seems to be no mood to relent to these demands especially in view of its own perilous financial situation. An alternate vision offered by the government is one of self-reliance.

On the other hand, the central bank of India (RBI) also played a very positive role in terms of its monetary policy and reducing the interest rates to reduce the cost of money for small and big enterprises going ahead. But clearly there would be limits on how much the interest rates can go down further. After all we should guard against high inflation when the demand in economy is so weak. In any case all these measures from the government and the central bank will takes its own time to play out on the ground level.

So, situation going ahead is extremely unclear and depends a lot on how the pandemic plays out from now on-wards. This creates poses extremely tough choices for the government on the decisions it needs to take going ahead.

Whatever actions the government takes, companies will have to learn from setbacks which they have had facing the crisis and plan for corrective actions in the future.

Surely business has suffered, and everybody is unsure about the near- term future. So, amid all this, what would be the key steps for Indian enterprises going ahead?

Cash is and will remain the king – The current crisis has highlighted for business to have liquid assets on their balance sheets. This is important to tide over the operational requirements in the times like this. One must play close attention to the liquidity ratio in order to meet contingent liabilities like salary and other fixed costs.

Avoid against over leveraging –The path to growth has been expanding the business by taking huge debts. Everybody was happy and even the banks were ready to oblige. When the going is good, this seemed to be a good move. But in a downturn, this turns out to be the noose which gets tightened quickly around the company finances. It is better to be prudent in the amount of debt that one has on the balance sheet and so other sources of financing a business must be explored to expand the business.

Ensure strong measures to improve operational efficiency – This is a very good opportunity to look at the existing process and initiate improvement measures. New technologies like automation, artificial intelligence combined with lean methods should be explored to improve the overall operational efficiency. The difficulty of getting back the migrant labour should also figure out in this calculation.

Paying close attention to the bottom line- Many of the business are occupied to improve their top line growth and, in the process, the bottom line gets ignored. Companies in a frenzy to gain market shares go out of the way to improve top line but it inevitably results in less than desired profitability. Indian companies must move ahead from cost plus to value added sales model. This will also ensure that areas like research and development gets the required focus and attention to ensure long term business sustainability.

The long-term winners surely will those businesses which will successfully tide over this pandemic and will be model for others to follow.