Industry shutdown must end

The International Labour Organization (ILO) made an important point on Wednesday: that immediate efforts are needed to support formal workers and enterprises to ensure that they do not “fall back into informality” as a result of the Covid-19 crisis. The ILO has hit the nail on the head, as it is by now obvious that the country just can’t afford a blanket extension of the lockdown after April 14.

The ILO data shows why: According to its estimates, around 400 million workers from the informal sector may fall into poverty as the ongoing nationwide lockdown, which began on March 25, has stalled major economic activities, pushing these informal sector workers to the brink. In a column in this paper on Tuesday, Mahesh Vyas of the Centre for Monitoring Indian Economy showed that unemployment rate was already a worrying 8.7 per cent in March, the highest on record since it began its survey over three years ago. More troubling was that, when the lockdown was imposed in the last week of March, unemployment surged to 23.8 per cent.

The reasons are obvious. While millions of workers are vulnerable to income loss and layoffs, the impact on income-generating activities is especially harsh for unprotected workers and the most vulnerable groups in the informal economy. The formal sector can’t obviously be far behind.
 

For example, despite the government’s “advisory” that companies should not cut jobs, more than half the CEOs surveyed by the Confederation of Indian Industry see large-scale job cuts ranging from 15 per cent to 30 per cent as inevitable. The Retailers Association of India has said that about 40 per cent of the six million employees working in the retail sector could lose their jobs if the government does not intervene.

That would be a disaster. So industry must be allowed to resume operations in areas other than the identified hotspots with proper safety guidelines in place as soon as possible. At the same time, government efforts are needed to facilitate the return of employees to workplaces in a phased manner. Migrant labourers need to be brought back as fast as possible as they do not have any daily income to support their families.

Otherwise, the list of industry victims will be endless: Tourism, entertainment, real estate, construction, and many others which employ a bulk of India’s labourers. Can the government prop up every business? For how long? As more businesses collapse under the pressure of lockdown, the need for support will grow at an exponential rate — much beyond any government’s means. And the fact of the matter is that when large businesses go down, they take many other businesses down with them, and the jobs they are currently providing may be lost forever. For example, if the lockdown continues and even a partial opening isn't allowed immediately, Indian exporters run the risk of losing huge export orders as they can't send product samples to their clients abroad for getting firm contracts later in the year. The time for sending such samples is April and May, and Bangladesh and China have already started sending the samples. So there is no time to be lost.

Even sectors which could weather a brief crisis, like financial services, etc will start to suffer. Consider the numbers put out by Bajaj Finance the other day. The company said it lost 350,000 accounts and Rs 4,750 crore worth of assets under management in the last 10 days of March after the nationwide lockdown was announced.

More interestingly, the management laid down three business scenarios depending on the lifting of the lockdown deadline. In the first scenario, if the lockdown is lifted on April 14 as scheduled, the company expects to return to 60 per cent of the normal business by May and 100 per cent by September. In the second scenario, if the lockdown is lifted on April 30, the NBFC expects to return to full normalcy only by October. But credit cost (the amount it has to set aside for bad loans) will be 50-60 per cent higher in this scenario.

In the third scenario, if the lockdown ends on May 15, the company expects to do zero business in April, 30 per cent of planned volumes in May, 50 per cent in June and full normalcy only by the fourth quarter. The worst part is that the impact on credit cost will be 80-90 per cent higher on a full-year basis. The company said it will then be forced to take a harder view on operating expenditure and explore a 12-15 per cent cut vs current cuts of 7-8 per cent.

The transparent commentary shows why India should not extend the complete lockdown beyond April 14. If this can happen to India’s most efficient non-banking finance company, imagine what damage a prolonged lockdown could do to others.

None of this is to suggest that the government should be blasé about relaxing rules. But it is also a fact that lockdowns cannot be extended indefinitely as the consequences are too great. So the nationwide lockdown must be wound down in phases keeping both Covid-19 hotspots and economic needs in balance. A good template could be the one suggested by a high-powered committee of the Kerala government about withdrawing it in a phased manner. That’s a must as the longer the complete shutdown of industry, the trickier would be the task of revival.