The Long Haul

The country has, and rightly so, chosen public health over economic health. While the fatality rate is expected to be around 2%, the value of even a single human life would more than offset the economic setback that we would suffer. Steps have been taken by the government to ensure public health and as we go along, these may perhaps be further refined and re-oriented to meet emerging challenges, the response till now has been extremely commendable.

On the economic health in the country, let me begin by sharing a conversation I was privy to between my grocer and his supplier. The vendor was asking for payment of the supplies made in the past and the grocery shop owner was pleading that he had no money as it was all stuck in receivables and if he did not continue the supplies to his customers they would shift to other grocers and further delay payments due to him. While assuring the vendor that all his payments would be made, the grocer was requesting for more supplies. It was a fact that the grocer’ stocks had indeed been depleted as people were stocking more than required, but it was also a fact that the grocer had stopped supplying on credit and all of us had to make cash or digital payments for our supplies. I am sure there would have been a few exceptions but by and large, the grocer had converted his inventory into cash.

Juxtapose the same equation across all value chains in all sectors, trade, services or manufacturing – the endeavour would be to collect all dues, delay all payments, reduce all expenses, pay only for the essentials to the extent that they can not be deferred and reduce all activities to maintenance levels only.

I choose to christen the present crisis as the 4 L problem that we are facing in the country beginning from the Lockdown due to Covid 19 – Liquidity  to maintain if not sustain businesses, Liability which would be required to be deferred, Logistics which have been severely impacted across value chains, and Labour which would be required to be remobilised once normalcy returns.

This is primarily happening because neither the creditor nor the debtor across all value chains can predict with any degree of certainty as to when will normalcy return. The first response to all liquidity measures, in these circumstances will naturally be of self-preservation. Most players in the value chain would tend to preserve as much cash as possible. This is normal. Even if the liabilities are extended by three months as has been announced by RBI, there is no guarantee that the problem will end in three months time and therefore all liquidity will go towards meeting essential expenses which is rent, salaries, wages, taxes etc, and just keeping a minimal amount of activity level with a major portion of the liquidity going towards maintenance of more than required cash balances. This is also normal. The question is then, when will normalcy return and when will the cash flow cycles restart. 

One important thing to bear in mind for complete normalcy to return is that Labour, which is behind the chain of logistics apart from being the backbone for any construction industry, harvesting for the agriculture sector, delivery in the services sector, and in fact behind every shop in the trading sector, is going to be impacted greatly. Almost 37% of urban India consist of migrant labour. This level is not going to return in a hurry. As and when normalcy returns, businesses should have enough money and enough demand to progressively increase the amount of labour that is required.

Considering that perhaps the spread of the coronavirus would abate with increased temperature apart from the social distancing/isolation measures initiated by the government, and possibly some sort of a vaccine at its even early stage would have been introduced, resumption of normalcy would take at least six months post such events. Given that we are at the end of March, and taking into consideration the trend of the spread of the virus in other countries, it would not be unreasonable to assume that perhaps we would be flattering the curve at the earliest only in 2 to 3 months time i.e by June 2020, specially given the size of our population. In which case, while normalcy would return gradually, we would see the return of the labour only post Diwali, which means late October or early November. During this period we need to have sustainable businesses across all sectors and that would be a challenge. 

India has faced many challenges and sure shall overcome this one as well in its own ingenious ways and our responses at the policy level would be calibrated to ensure the resumption of normalcy in a graduated fashion without any inflationary impacts. We may have to tighten our belts for a while longer than we originally anticipated.