Coronavirus lockdown: 60% MSMEs may get wiped out; real estate looks at nearly $1 billion business loss; and more
Industry experts voice their opinions on sectoral impact of the COVID-19 lockdown.
Anushruti Singh March 27, 2020
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Coronavirus has become a national emergency. Combating the battle against the COVID-19 outbreak, Prime Minister Narendra Modi ordered a 21-days complete lockdown across India –resulting in households scrambling for supplies. To help mitigate the challenges, Finance Minister Nirmala Sitharaman has announced a package of Rs 1.7 lakh crore under Prime Minister Garib Kalyan Yojna for immediate relief.
The country’s economic and financial conditions is also deteriorating as the coronavirus pandemic rages with the negative sentiment best captured by the continuous plunge in the stock market over last few days. Major sectors such as electronics, automobiles, entertainment, transport, tourism, and exports are in deep trouble due to disruption in the global supply chain and routine operations.
Pegging the cost of the COVID-19 lockdown at US$ 120 billion (approximately Rs 9 lakh crore) or 4 per cent of the GDP, analysts sharply cut their growth estimates and stressed on the need to announce an economic package.
“We estimate that the cumulative shutdown cost around US$ 120 billion or 4 per cent of the gross domestic product (GDP),” British brokerage firm Barclays said in a note. It revised down its FY21 growth forecast by 1.7 percentage points to 3.5 per cent. The cost of the three-week nationwide lockdown is estimated to be alone at US$ 90 billion, which is over and above the lockdowns announced by various states like Maharashtra earlier.
SME Futures spoke to several experts to understand how the impact of the lockdown is taking a toll on the country’s businesses, and their struggles.
MSMEs take the biggest hit
Micro, small and medium enterprises (MSMEs), the largest employment generator, are facing huge threat amid economic slowdown and demand contraction. The sector is set to lose further steam as economic activities have taken a hit.
While talking about the challenges small businesses are facing due to lockdown, M. Srinivas Rao, CEO, the Global Alliance for Mass Entrepreneurship (GAME), said,
“Many of the micro and small businesses do not have the luxury to work from home due to the nature of work. Another issue is a complete shut-down of transportation, and thus, a broken supply chain. Shrinking stocks and a limited or a lack of procurement options because of the lockdown means an imminent closure of their businesses,” Rao added.
Adding to Rao’s comment, Shrikant Dalmia, zonal VP-West, All India Manufacturers’ Association (AIMO) said that work from home (WFH) is applicable to less than 8 per cent of the core MSME and services sector. The WFH has resulted in over 63 per cent drop in productivity in the services industry as there has been a mass migration of labour to the villages.
As per the reports from our members and clusters of the MSME sector over the past few weeks – according to Sushil Vyas, secretary, AIMO – over 60-odd million MSMEs are in real danger due to market issues with over 92 per cent drop in domestic sales compared to the same time last year.
“There is a 100 per cent drop in export sales compared to the same time last year,” Vyas claims. Many of the small businesses also work on a monthly cash flow cycle and do not necessarily have enough saved for a “rainy day” – this has implications on not just their livelihood but also on people they employ.
Estimates indicate 30-60 per cent MSMEs will get wiped out in India if the current situation extends for 8-12 weeks. This in the context of an already existing situation of the highest job shortage in history, believes Rao.
Having said that, MSMEs are the second largest job providers, after agriculture. The implications are dire. Further, out of job immigrant labourers returning to villages pose a huge risk in carrying the virus with them – which in turn could lead to many coronavirus positive cases.
Food & Beverages industry survival in question!
The food services industry is worth Rs 4,23,865 crore. As the world’s biggest lockdown begins, the restaurant industry is under a huge dilemma of running their operations. Thus, the industry – that stares at massive job losses – seeks immediate bailout measures from the government.
The National Restaurant Association of India (NRAI) has written to Finance Minister asking for a package. NRAI president and deGustibus Hospitality CEO Anurag Katriar said,
“The restaurant industry with an annual turnover of approximately Rs 4 lakh crore providing direct employment to over 7 million Indians is in a very precarious situation currently – fighting a grim battle for its basic survival. In these times of unprecedented crisis, the fate of 7.30 million employees in the F&B sector is our biggest concern. We don’t want them to suffer, but unfortunately, we don’t have adequate resources to support them for long.”
Real Estate – construction in major cities halts, sales slump
The outbreak of COVID-19 has dampened business activities; and the struggles of real estate become even worse. Construction activities, too, have taken a considerable hit as the situation has been worsening with each passing day. The impact is such that it has put a significant dent across the real estate market.
According to the India Ratings estimates, a month’s lockdown can erode significant chunk of the fourth quarter revenue of construction companies. “Fourth quarter of every fiscal typically accounts for 30-35 per cent of the annual revenue of construction companies, of which a month’s lockdown can erode 8-10 per cent,” the agency notes.
The agency believes that construction activities across cities like Mumbai Metropolitan Region, Delhi, Pune, and Bengaluru are likely to be stalled or progress at a significantly slower-than-anticipated pace for a major portion of March 2020, which may continue in April as well.
Assessing the current scenario, Ram Naik, executive director, The Guardians Real Estate Advisory, said,
“Real Estate as a category thrives on customer footfalls at the project site for successful closure of transactions. With the outbreak, sites have been shut to prevent gatherings of customers and channel partners.”
“The lockdown could result in a year-on-year set-back of anywhere between 11-14%,” he adds.
The affordable and mid-income housing segment will also be hugely impacted as its success depends on large gatherings and higher footfalls. Some of the much awaited, project launches have been postponed for now. The scenario is equally grim for the ongoing projects, as real estate expects to do well in the last month of the financial year, March, as a result of buying to avoid capital gain tax and asset purchases, according to Naik.
According to The Guardians Real Estate Advisory, the Mumbai Metropolitan Region might see a 27 per cent reduction in property registrations YoY. The region has managed only 9,300 home registrations between January 1 to March 15, 2020, as against 12,800 home registrations in the January-March 2019 quarter. The lockdown till March 31 will see the most expensive region in the country losing on business worth anywhere between Rs 5050 crore-Rs 6500 crore.
Although the sales have been impacted, a lot of developers are showing solidarity to curb the further spread of the deadly coronavirus. Many developers are skeptical on launching new projects considering the current situation, whereas some have opted for digital launches; and are also introducing online sales opportunities to the customers.
“As a responsible corporate, Runwal Group has taken an important step to sanitize all our construction sites for the safety of our workers and have stopped all the work till further notice. We have postponed our launch and all our campaigns too. All our site offices will also remain closed,” said Subodh Runwal, director, Runwal Group.
On the other hand, Vijay Khetan Group has converted the launch of its new project, ‘Codename Amazon’, at Andheri East into the digital one.
“Earlier a physical launch with channel partners and brokers was planned but now due to the Covid-19 situation, we will be conducting a digital launch where we will accept request from customers online. To avoid crowd gathering, we will give time slots to the customers once the impact of this virus settles down,” the company’s director Anuj Khetan said.
On the online buying and selling opportunities, Bhasker Jain, head-sales, marketing and CRM at The Wadhwa Group, says
“The Corona outbreak may have halted the on-ground project operations; it has impacted sales too in short term to a certain extent. We have a business continuity plan and necessary project finance in place. Our design philosophy backed by strong execution capability has helped us to meet customers’ obligations and generate further interest digitally. Our virtual site tours are appreciated by the customers. Although the sales numbers may not see an instant spurt this season, but we are expecting around 30% sales through our digital virtual platform.
The co-working startup dilemma
The co-working spaces and start-up sectors are in limbo with the current lockdown situation. In this situation, they seek government support to bail them out.
Akshit Mehta, founder of Vorq Space, which operates in three locations, says,
“The dilemma with the co-working spaces is that we are private companies, providing service to private companies. Hence, we do not know whether we shall remain open or not.”
The co-working spaces are facing challenges to maintain the current clientele and explain that they have no authority to take any stance as a company, like the IT sector, to operate with minimal workforce. Explaining about a recent case in his boutique workspace, Mehta shares,
“We have a company regulated by the RBI. As per the circular such companies are allowed to work with a low capacity of employees. Although, we have informed them that the space would be shut due to lockdown.”
With the place instructed to be shutdown by the government, there is no provision that Mehta could give any relief to such companies. “Currently we have put the onus on the RBI-regulated entity to get us the necessary permission to access and use our space,” he adds.
There are several other challenges that such companies are facing – one also includes losing clients. On this, Mehta informs that a few clients of his are asking for a rent-free period. “In fact, they emailed us mentioning that with the place shut, there would not be any operating expenses and we would save money.” He claims that his revenue losses are calculated to be Rs 15-17 lakh per month and cash flow losses of about Rs 15 lakh a month.
“The key aspect to understand here is that if the companies aren’t stopping any salaries of their teams due to the “work from home”; the same should be applied to a co-working space. We, as well, aren’t stopping any of the ancillary operation costs. Hence, a rent waiver would not be possible,” Mehta states, also fearing that he might lose some members due to shutdown of startups.
Co-working spaces face the same fate as that of cab services or food delivery services sectors such as aggregators, the co-working space industry remains equally un-recognized.
Another co-working space founder Vandita Kedia Purohit, who own Daftar, says,
“The community should allow some time for the government to process this surreal crisis. It is also the time when co-working space owners should reach out to its stakeholders to seek relief.”
Waivers to the members and start-ups could be worked out in the long term, but it is the time that these members also support to come up with a solution that works for all, she urges.
Lockdown has hit hard the IT/ITeS industry.
Call centres and IT firms are struggling to function as work from home situation is hard to execute. Many of the companies that provide business services such as call centres, information technology services and business process automation were not prepared for work-for-home arrangements.
“The industry has been scrambling to set up its own business continuity plan,” R. Chandrashekhar, a retired federal government official and a former president of India’s IT services lobby group, NASSCOM told Reuters.
In the southern tech hub of Bengaluru, an employee working at a JPMorgan call centre said that until last Friday, her managers had repeatedly declined staffers’ pleas to work from home. “Even if I am infected with the virus, I know the death rate for young people isn’t very high, but I am very very scared that I might transfer it to family,” she told Reuters on the condition of anonymity.
In some cases, companies are seeking client permission before allowing employees to work on sensitive projects, outside the office, a senior human resources executive at a top Indian IT firm told.
“These days the challenge is not really the technology, the challenge is the regulation, and, in case something goes wrong, who’s going to take the responsibility,” the person said on condition of anonymity to Reuters.
Indian software services firms, led by Tata Consultancy Services and Infosys, gained prominence by giving Western clients low-cost solutions to routine computer problems. Over time, they assumed a major role at many global companies.
On the other hand, HR solution provider firm Ascent HR believes that lockdown situation has hampered the way industry vertical on services we work as an IT/ITES firm.
“It has changed the landscape of the work area pushing it to a new paradigm. Redefining methods of work particularly when you are bound by several standards of information security/process controls/application controls in a short span of time is a burden on the industry. It was not geared up and had to cope with it,”Subramanyam Sreenivasaiah, founder of Ascent HR told SME Futures.
Sreenivasaiah further adds that due to lockdown, the changed methods of operation have increased costs. “It would hit the bottom line possibly flattening the margins, increasing pressure on working capital,” he believes.
Most IT firms, including Ascent HR, seeks several measures from the government:
- Increased banking limits without any additional demand on collaterals presuming a 3-month period – 20 per cent increase in cash credit or OD limits
- Defer all regulatory payments by 30 days and related filings for two months enabling industry to recover
- Provide a soft loan for employee payments during this period or like western countries, provide government grants against such payments up to 80 per cent of the quantum
B2B foresees growth in business development
While most of the businesses are wary of the challenges on the overall operations, some firms especially in the B2B segment seem undeterred.
One such firm is excess2sell, a B2B online marketplace which has received a boost towards its expansion plans after raising $1 million funding. Founder Rajan Sharma says,
“We feel that the challenges of situation will be realized across functions – in short-term we expect the revenue to drop in absolute terms, but from a business development perspective, we expect major scale up as sellers and buyers will start looking for liquidating unsold and overstock inventories. Fortunately, none of our buyers or sellers has backed out from the deals so far. In fact, we have witnessed a spurt in the E2S Premium Membership as more partners are looking to align with excess2sell in the long run. We have already tasked and equipped our customer support, logistics and tech teams to face any eventuality in current scenario.”