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Coronavirus: 3 Things The Govt Must Do Right Now To Save India’s Small Businesses

Saving India's 42 million small and medium businesses through a bailout is the only way to prevent catastrophic job losses in the aftermath of the 21-day coronavirus lockdown.
A man wearing a facemask sits outside closed shops during a government-imposed nationwide lockdown as a preventative measure against the COVID-19 novel coronavirus in the old quarters of New Delhi on March 30, 2020.
MONEY SHARMA via Getty Images
A man wearing a facemask sits outside closed shops during a government-imposed nationwide lockdown as a preventative measure against the COVID-19 novel coronavirus in the old quarters of New Delhi on March 30, 2020.

A month-long shutdown of India’s $2.6 trillion economy implies about $217 billion, or about 16 lakh crore rupees, in destroyed economic value. Given much of the country has been under lockdown since late March, and will continue to remain so till middle April, our challenge will be to recoup this economic value lost, and bring the country back on its feet.

Once the lock-down is lifted, the economy will take another three to four months to return to its previous levels of activity. Some sectors, such as tourism, hospitality and airlines, will be scarred for much longer.

Countries across the world are handling the COVID fallout by immediately offering direct cash handouts to impoverished people and struggling businesses; and a package of incentives to help companies avert catastrophic and widespread job losses.

Canada is offering a 10% wage subsidy to businesses, while Singapore is offering between 25% and 75% wage reimbursement to its businesses depending upon sector. Germany and the United Kingdom are offering sovereign guaranteed loans for businesses to tide them over immediate requirements. The United Kingdom is offering tax cuts worth 20 billion pounds in this financial year (the European financial year ends in December).

India’s approximately 42 million small and medium businesses, or SMEs in government parlance, employ over 40% of the workforce. But there has been no move to provide economic support so that these businesses can limp back to normalcy. Governments have been generally oblivious to business’ plight so far.

States like Delhi and Uttar Pradesh have warned businesses that all employees and contractors should be paid irrespective despite not coming to work during the lockdown.

Where are businesses supposed to get the money to pay salaries, if factories and workshops are not operational?

The Reserve Bank of India has given a strange three-month moratorium for businesses, where neither principal nor interest is being waived, and the repayment is just being deferred. This does not help since this interest needs to be paid anyway, just after three months. Meanwhile, all our business loans are on auto-debit mode, and every bank has debited our monthly repayments from our accounts already without even asking.

The Task Force set up under the Finance Minister Nirmala Sitaraman needs to act now and provide small businesses a revival roadmap right away. It is not enough for the government to “direct” or “mandate” businesses to retain the same headcount. If there is no business, the entrepreneur will be forced to lay-off. Any measure to restrict this will amount to harassment.

The package required for small businesses can be looked at in the following broad categories:

1. Wage reimbursement for Small and Medium Businesses:

The government should make 300% of salary payments eligible for tax deduction for one year for small businesses. This means businesses can offset salary payments against taxes, making the wage bill effectively free. It would not even affect the exchequer since it is a prospective benefit.

2. Access to Loans for Small Business

Providing credit for businesses can greatly help in restoring business normalcy. On existing loans, a clear 6-month standstill period needs to be mandated to banks and Non-Banking Financial Companies (NBFCs), so that businesses need not pay interest for the next six months. It should be clarified that interest shall also not accrue in this period. Government needs to reimburse the interest to banks, or compensate them through relaxation in other compliance norms and parameters.

The government already has a credit guarantee trust scheme to provide government-guaranteed loans for small and micro business. Yet despite the sovereign guarantee, banks are presently charging interest rates of between 16% to 19% for loans under this scheme. This usurious practice has evolved because the terms of the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) are so convoluted and complicated, and reimbursement by the government is riddled with conditionalities, that banks load their risk premium on each loan.

The CGTMSE scheme needs to be amended and the underlying government guarantee needs to be clear and unambiguous, so that banks can lend with a small spread at around 10-11% to businesses. Again, no cost to the exchequer since the CGTMSE is only a guarantee.

The Government already has a 2% interest subvention scheme for small and medium businesses. A subvention scheme is one in which the government pays part of the interest. However, it is under-publicized and most businesses don’t know about it. Also, 2% is too little since SMEs borrow at much higher rates of interest. The subvention can be scaled up and made around 6% so that rates of borrowings of small businesses and large corporates become comparable.

3. GST deferment

The Goods and Services Tax rates have been arrived at with substantial tweaking. Reducing GST does not always help, if the inputs have a higher GST than the outputs. It could result in credit accumulation. However, it would greatly help if GST payables over next 6 months can be structured into a 3-year interest-free loan. This will mean business will be able to use the GST collected for their business requirements, and gradually pay these dues. Again, this won’t cost the exchequer directly, except in foregone revenue. However, a special package needs to be evolved for the hospitality, tourism and aviation sector, where GST is halved or removed for a period of time.

Business has already been stressed for the last few years, due to various global and domestic factors. At this time, economic value destruction at this scale can be catastrophic and could result in massive job losses. Such job losses would only increase the stress on government welfare schemes in the medium term, causing further strain on government finances.

And as a small business, our last prayer – please do not extend this lockdown beyond twenty-one days. The economy will collapse beyond redemption, sending businesses into lockdown mode forever.

Shravan Sampath runs a solar solutions company Oakridge Energy and can be reached for comments at shravan.sampath@oakridge.co.in

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This article exists as part of the online archive for HuffPost India, which closed in 2020. Some features are no longer enabled. If you have questions or concerns about this article, please contact indiasupport@huffpost.com.