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Rising above

by Dr Debasish Sur and Pramit Sur
Indian Management March 2022

Covid-19 pandemic has affected the Indian economy on all fronts. What can the government and the corporates do for a holistic recovery of the economy?

The Covid-19 pandemic has thrown tremendous challenges at Indian corporates, resulting in certain intricacies in their various fronts. Our article highlights these complexities and proposes some measures to tackle them. The world has been facing an unprecedented challenge due to the outbreak of Covid-19 pandemic, since the last two years. The pandemic has posed grave threats to countries in terms of health and safety as well as the lockdowns that brought, and are still bringing, social and economic life to a standstill. It can be compared to the Great Depression of 1929; but the fact remains that the Great Depression did not affect production units, whereas in case of the Covid-19 pandemic, a lot of these have either been suspended or have downsized their operations. On an average, 85 per cent of the business operations are done through physical purchasing cycles which have been potentially disrupted during this pandemic period.

India is no exception, with various economic indicators disclosing a rise in unemployment to unprecedented levels along with a drastic fall in real GDP growth to a record low level of -24.4 per cent in the first quarter of the financial year 2020-21. This huge loss of job and income has resulted in a major drop in aggregate demand in India. So, the Indian economy has been hit hard by the Covid-19 pandemic-driven global crisis. Ever since the country-wide Covid-19 lockdown was implemented, on March 25, 2020, India has not been able to all the curbs imposed as a result of the lockdown.

Under the present circumstances, the intricacies leading to uncertainty of the company’s capability to generate operating earnings as well as the possibility of failing to meet contractual obligations have resulted in significant changes in the profile of corporate business and financial risks. The business risks emanated from economy-, industry-, and company-related factors are translated into economy risk, industry risk, and company risk. Inflation has gone up significantly. As per the reports published by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation, Government of India, the average annual retail inflation rate (as reflected in the Consumer Price Index) in February, 2020 as compared to February, 2019 was 3.6 per cent which stepped up to 4.2 per cent, 4.9 per cent, 5.7 per cent, 6.3 per cent, 6.93 per cent, 7.34 per cent, 7.27 per cent, and 7.61 per cent in March, April, May, June, July, August, September, and October, 2020 respectively. Similarly, the wholesale price-based inflation between April, 2021 and April, 2020 was 10.49 per cent whereas those between May, 2021 and May, 2020; between June, 2021 and June, 2020; and between July, 2021 and July, 2020; they were were 12.94 per cent, 12.07 per cent and 11.16 per cent respectively. It was the 12.54 per cent in October, 2021 which spiked to a record high of 14.23 per cent in November, 2021. A wide fluctuation in the foreign exchange rates in this abnormal situation has also been observed. There have been noticeable changes in the framework of restrictive regulations. The Government of India, Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and even the Institute of Chartered Accountants of India (ICAI) have taken some initiatives to recast their rules and regulations. The RBI issued certain regulatory measures in the wake of the disruptions on account of the pandemic in order to provide relaxation of repayment pressure, enhanced access to working capital by liberalising the debt serving burden,and ensure the continuity of viable businesses. However, these measures were implemented for a short period of time from March 1, 2020 to August 31, 2020.

As per the recommendations of the Kamath Committee, the RBI also specified five financial ratios, such as total outside liabilities to adjusted tangible net worth ratio, total debt to EBITDA ratio, current ratio, debt service coverage ratio and average debt service coverage ratio and sector-specific thresholds for resolution of COVID-related stressed assets in 26 sectors including auto components, aviation and tourism. RBI issued December 4, 2020 the Statement on Developmental and Regulatory Policies for improving liquidity support to targeted sectors of the economy with linkages to other sectors, conserving capital among banks and NBFCs through regulatory initiatives, strengthening supervision through the audit function, facilitating external trade by improving ease of doing business for exporters, upgrading payment system services etc. RBI also eased lending and restructuring norms for all stakeholders, especially for MSMEs to tackle the second wave of the pandemic.

Similarly, SEBI has issued from time-totime certain circulars/guidelines relating to the relaxations from compliance with certain provisions of the SEBI guidelines. Some noticeable ones are the circulars relating to relaxation from default recognition due to restructuring of debt issued on August 31, 2020, the circulars associated with relaxation with respect to validity of SEBI observations, and revision in issue size issued on September 29, 2020, the different circulars in connection with relaxation in timelines for compliance with regulatory requirements issued on October 1, 2020, December 1, 2020, December 31, 2020, April 29, 2021, the guidelines for investment advisors issued on September 23, 2021 etc. ICAI has also identified the possible impact of the pandemic and made relevant modifications in the different accounting standards resulting in notable changes in inventory measurement, impairment of non-financial assets, different issues such as impairment losses, fair value measurement and hedge accounting associated with financial instruments, leases, revenue from contracts with customers, going concern assessment, borrowing costs, presentation of financial statements, interim financial reporting etc.

So due to significant changes in economic environment gleaned from the pandemic, the economy risk associated with the corporate sector in India has stepped up noticeably. Similarly, factors affecting the industry have also changed rapidly with the passage of time, leading to considerable hike in the degree of industry risk associated with the companies in this adverse situation. The company-specific factors, such as cost structure, asset structure, efficiency of employees, skill of workers etc, which directly influence company risk have also been adversely affected in this abnormal phase. Moreover, company risk is indirectly affected by certain economy-specific factors and industryspecific factors. Thus, increase in both economy risk and industry risk coupled with negative impact on company- specific factors has resulted in an upward trend in company risk in the Indian corporate sector. More specifically, the increase in weaknesses on the company’s different fronts, such as instability in cost behaviour pattern, dispersion of revenue generating capacity, variability in short term obligation meeting capability leading to cost structure risk (CSR), capital productivity risk (CPR), and liquidity risk (LR) is responsible for increase in company risk. A tremendous volatility in the costs of materials, labour, and other inputs used in running business wheel leading to a hike in CSR in the Indian corporates has been observed during the pandemic period.

Similarly, a swelling in instability in revenue generating capability of the corporates resulting in an escalation in their CPR has been noticed during this adverse situation. The LR in the Indian corporates is not an exception. Drastic fall in demand, erratic behaviour of the curves representing costs of inputs as well as price of output, massive fluctuation in revenue generating capability, all have resulted in a surge in instability in companies’ short term obligation meeting capability. A clear upward trend in the LR has, therefore, been evident in the Indian corporate sector during this abnormal period. So, all the components of company risk, industry risk, and economy risk have stepped up significantly leading to a remarkable rising trend in the business risk associated with the Indian corporates in the present day situation.

Financial risk, which emanates from the financing decision of the company, is influenced by not only the sources used for the creation of the pool of funds but also the volatility in foreign exchange rates as well as interest rates. Thus, due to wide dispersion of foreign exchange rates and interest rates, acceleration in the financial risk associated with the Indian corporate sector has been noticed in the present day situation. Moreover, the high-high blend of business and financial risks culminating into the multiplicative impact on the risk profile of the Indian corporate sector has been observed during the Covid-19 era.

Concluding remarks
One of the major contributory factors for massive fall in aggregate demand in the Indian economy during pandemic is the mammoth decline in consumer confidence, which has ultimately enhanced instability on all fronts of the corporates leading to considerable growth in different components of risk. Though a significant drop in COVID cases has been observed in the last few weeks in India, the level of consumer confidence has not improved as the general economic condition has continued to remain grim as per the report of the survey conducted by the RBI in May, 2021 (published on June 4, 2021). As per this survey report, the Future Expectations Index (FEI) measuring consumers’ perception of the economy in May, 2021 has been 96.4 while it was 97.9 in May, 2020. In fact, an FEI score below 100 indicates the consumers’ pessimism. Thus, consumers were pessimistic in May, 2020. The FEI has returned to optimistic territory in July, 2021, but the consumer confidence has not been able to reach a satisfactory level.

The values of FEI in India in July, 2021, September, 2021, and November, 2021 have been 103.98, 107, and 109.6 respectively which are far below the average FEI (ascertained by taking 55 observations) for the period December, 2010 to November, 2021 (118.6). It is also to be noted that in March, 2019 (i.e. just before outbreak of the Covid-19 pandemic) the FEI in India was 133.4. Weak confidence has been attributed to the consumer sentiments on general economic situation, employment scenario, price levels, and household incomes. So, appropriate measures should be taken by both the Central and State governments for improving such vital economic indicators which would ultimately help in bringing back the consumer confidence. Similarly, for exercising control over company-specific factors of business risk in the present day situation, the corporates should put emphasis on the adoption of suitable strategies. The corporates should redesign their cost structure to bring stability in cost behaviour pattern and to control CSR. Similarly, CPR should be minimized by adopting pertinent measures to mitigate volatility in revenue generating capability and LR should be controlled by making necessary changes in working capital policy. In order to exercise control over financial risk in this adverse situation, the Central Government should look into the matter relating to fluctuations in foreign exchange rates as well as interest rates to maintain stability as much as possible and at the same time the corporates should redesign their capital structure in such a way as to minimise the possibility of failing to meet contractual obligation and bring stability in income available to owners’ equity, which will ultimately resist in amplifying the degree of financial risk associated with the corporates.

Dr Debasish Sur is Professor of Commerce, The University of Burdwan.

Pramit Sur University of Calcutta.

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