Recently, I saw a cartoon strip of a small shop with several “Going out of business” signs hanging outside the shop. “Things must be tough”, consoled a passerby. “No”, replied the owner, “Business is booming - We just make the signs”. His business may be booming but there are 65 million small businesses in India which have been left high and dry due to the lockdown. These businesses are the lifeline of India as they give livelihood via low skilled jobs to 100 million workers, produce 45% of India’s manufacturing output and contribute to 29% of India’s GDP.
The survival of these businesses cannot be overstated but the current crisis has left them deserted. The banks, their primary lifeline, have shut the cashier window on them as they are focused on recovery of past bad debt and have become cautious as they anticipate a slew of defaults on personal, credit card and vehicle loans due to extended lockdown. The Reserve Bank of India (RBI) has been trying old tricks of lowering interest rates to disincentivize banks from parking funds with them, but the banks have just lost the appetite to take any risks. NBFCs, another avenue for small businesses to borrow, are also of limited help as they grapple with liquidity challenges due to the recent history of high-profile defaults.
To alleviate the woes of small businesses, there is a growing lobby asking for a bazooka package like being done in the US. We should definitely have a package which keeps these businesses in a state of suspended animation till everything is up and running but at the same time be cognizant that India’s fiscal limitations do not allow for an exuberant bailout. There is a reason why our headline bailout package was for just Rs 1.7 lakh crore, a meagre 1% of our GDP. India will have to do more with less and use resources judiciously. It may mean that some of the businesses do not make it to the finish line but the fact is that irrespective of the size of the bailout, there will be some businesses which will go down under.
Despite having a $2 trillion coronavirus rescue package, 100 times the size of India’s package, there are many US businesses which have shut shops and as a result 26.5 million American workers have filed unemployment claims. Hence, for India, the need of the hour is to identify these small critical businesses which can influence the economy and livelihoods.
For instance, the Government can seek involvement of Fintech companies which can help identify the health of businesses through a stack of customer data and ensure stimulus is rapidly distributed. The US and UK have roped in Fintech companies to disburse small businesses stimulus packages as they are the closest to them and have visibility on their cash flows. As shadow banks shy away from lending, the RBI should also think of a model where the extra liquidity in the system can be passed to small businesses via Fintech companies. If it works, small businesses could be exclusively served by these new breed of companies in the future while the big ticket corporate houses can be served by commercial banks thereby renewing their focus and ensuring non-performing assets can be tracked early.
Due to limited resources, there will be many businesses which will not receive any help. Even if the lockdown is completely lifted, certain businesses will not be functioning at full capacity for at least another 6 months as the international supply chains may still be broken, labour may not return immediately or the end consumer of exports may still be under lockdown. This calls for large scale asset sharing between these businesses, think ‘airbnb’ for small businesses.
A garment exporter may lend factory to another business unable to meet the high demand for personal protection gear or a chemical factory owner may sublet to a specialised bleach manufacturer. Government should proactively enable this exchange and thereby ensure businesses not just endlessly wait for a ‘big’ package but start-thinking-survival-101. Even if the bailout is small in size, the Government can fast track the implementation of the invoice-discounting-platform as it was announced in the budget.
A low-cost platform can enable businesses to get advance payment for outstanding invoices at a discount from third parties willing to undertake the risk. In a normal scenario, the businesses have to wait for 30-45 days for payments but due to the extended lockdown the wait has doubled. To give a sense of how effective this low-cost platform can be, picture this: the government and big business together owe these small businesses nearly Rs 6 trillion.
While we should do more with less, the miseries of small businesses should also be fixed structurally. These businesses are ostracized from the credit market and the equity market is out of reach and less desirable as it entails giving up ownership of the company. It has been said ad infinitum but the Government should consider creating a special bond platform for these businesses so they can borrow with dignity. With exposure to bond markets, businesses will aspire for a better financial standing as it improves their bond ratings and has implications on the interest payout from the business owner to the bondholder. To enable better financial standing, businesses will aim to upskill their workers, follow labour codes, enable digitization and importantly come under the ambit of tax base.
Fighting a crisis can be a dirty business and more so a one which has no precedent. Apart from resilience, it requires compromise and flexibility. Let's be scrappy, let’s do more with less and let’s try to save as many businesses as possible.
(The author is a management graduate from IIM-Calcutta and a freelance writer. Views expressed are personal.)
