The Indian economy will see a complete recalibration as a fallout of the Covid-19 pandemic. GDP growth in 2020 in the short-term is unlikely to rise beyond 2.5%; the benchmark for aspects like employees’ salaries and rent for commercial premises will have to re-drawn; and business models like captive back offices of global multinationals in India will come under pressure, says Dinesh Kanabar, chief executive officer of a tax and regulatory consulting firm, Dhruva Advisors.

While the government has rightly focussed on addressing the plight of the vulnerable section of society through a relief package first, it needs to step up its efforts to support local businesses through measures like moratorium on tax payments, tax relief on the import and manufacturing of essential healthcare equipment and amendment to the insolvency and bankruptcy regulations, says Kanabar.

In an interview with Fortune India, Kanabar said that Indian companies will be forced to re-look at their supply chain and start building domestic capacity for essential products to reduce dependence on China.

Edited excerpts:

Do you think the Coronavirus pandemic is the biggest Black Swan event that India has ever faced?

As early as on March 10, I had written an email to clients asking them to brace for a much bigger disruption that was seen at that time. I was confident that the Indian and global markets hadn’t fathomed the full extent of the disruption.

I think the world and India are going to be in a completely different place altogether. It will be a completely different economy. We are so interconnected with the global economy that any adverse impact on companies far away, like in the US, will have an impact on us.

For instance, we need to see what happens to the entire outsourcing model wherein many global companies have captive back offices in India. If these captive centres are unable to provide seamless connectivity and continuity of service due to the Covid-19 related disruptions, the entire value proposition of these centres will be challenged. Many companies around the world—in aviation, hospitality and retail—have started furloughing employees in developed countries. Some of them have captive centres in India. There may well be a case where the global parent says it cannot support running a centre in India as a pure captive due to low capacity utilisation and asks it go independent and find business elsewhere.

Similarly, in steel and cement, our clients are telling us that they aren’t continuing with operations as they have run out of working capital and storage space to hold existing inventory. Restarting such heavy manufacturing installations will be a major issue since they cannot be powered up or down at the flick of a switch.

What can the government do to keep businesses on their feet in such trying times?

Right now, the government has rightly addressed the needs of the poor. But there is precious little that has been done to keep the economy going. Through FICCI (Federation of Indian Chambers of Commerce and Industry) we have represented to the government that the liquidity needs of companies need to be addressed to help them remain solvent.

The government has said that companies with a turnover of less than ₹5 crore can pay GST (Goods and Services Tax) by June 2020. Why can't this be extended for all companies? Corporate India doesn’t need a dole or a grant. It just needs more time to make statutory tax payments. For instance, for the quarter ended March 31, companies usually need to deposit taxes with the government by April 10. Now, companies’ working capital is stuck in making recurring payments such as rent and salary; and receivables from customers are trickling in with a lag. So extending the deadline for paying taxes like GST till June, without any interest or penalty can go a long way in helping companies manage their liquidity and giving them time to reorganise.

Is it time for Indian companies to re-look their business operations and supply chain framework to ensure business continuity in the future? Overdependence on Chinese manufacturing has led to issues for sectors like pharma at present.

Yes. And the government has taken some steps in that direction. The new policy to offer a reduced corporate tax rate of 15% to new manufacturing facilities set up after October 1, 2019, should attract people to set up manufacturing in India. Countries like the U.S. have been over dependent on Chinese manufacturing and with a trade war between the two countries and the subsequent Covid-19 pandemic, India needs to see if it can go the US and persuade companies to source from here. Chinese companies have enjoyed a cost benefit for long but in the post-Coronavirus world, business costs will be looked at from a very different lens.

Countries, including India, will be forced to think of business from a nationalistic point of view post the Covid-19 crisis because it is clear that you can't rely on China alone and need to have local manufacturing capabilities for some essential products like intermediate pharma products within the country. We have been speaking about setting up manufacturing parks where the land, surrounding infrastructure, labour and logistics is taken care of. These efforts need to be stepped up.

This will also help India attract foreign capital at a time when the flow of foreign institutional money into India could possibly get choked with an imminent global recession.

What are the other relief measures that India can offer companies?

There are a variety of measures being taken by countries around the world. While we cannot possibly do what some of the developed countries—like the $2 trillion package being offered in the US—we are still not doing enough when compared to some other smaller countries like Portugal and Brazil. The government took a good step by agreeing to bear the employers’ and employees’ contribution to provident fund for three months. But why only for companies employing less than 100 people, with 90% of them earning less than ₹15,000 per month. This will restrict the benefit to only a small section of those need such measures.

Can we request the government to make corporate contributions—either to the Prime Minister’s relief fund or to a registered charity—for fighting the pandemic tax deductible? Can we waive of GST on the domestic manufacturing of essential items like masks and sanitisers? Can we waive of import duty on the import of such items?

With economic activity coming to a standstill and many companies facing cash flow issues, how will companies’ fundraising ability suffer? We have seen a number of credit ratings downgrades in the last few days.

One of the suggestions that we had made, which doesn’t seem to have found favour with the government, was to extend the closing of the financial year (2019-2020) to June 30. And consequently have only nine months in the next fiscal (2020-21). A company’s fundraising ability and consequent credit ratings are a function of its financial ratios available from its full year’s financials. Pushing the financial year to June may have given some cushion to companies to improve on these ratios. The government could also consider allowing companies to carry backward losses (wherein potential losses in the April-June 2020 period could be set off against profits made in the preceding 12 months) and compute tax on that basis.

Also, due to tax collection falling below target, the government had virtually stopped the processing of all tax-related refunds from December 2019. A large amount of capital is locked up in this and these funds should be released immediately as this will offer some relief to companies.

When it comes to fundraising, companies will need to recalibrate. There will be a repricing of all aspects of the economy. From salaries to rent, everything will be up for re-benchmarking. Even if the government wants the banks to lend to companies, they wouldn’t do so if the companies are in default. So, the insolvency and bankruptcy regulations need to be amended to offer a full moratorium to companies till September. This means that if a company has been compliant with debt servicing obligations in the past and cannot make payments at present, banks are refrained from referring it for bankruptcy proceedings till September.

Do you think 5-6% GDP growth is the new normal for India?

You must have seen that Moody’s has cut India’s economic growth forecast to 2.5% for calendar year 2020. I am an eternal optimist but even I don’t believe GDP will growth will rise beyond 2.5% in the short-term. We are a deeply interconnected economy and with joblessness in the US on the rise and many sectors completely shut down, it will have an impact on us as well.

The next couple of years will be all about stabilising the economy. Local consumption and growth will come back after that.

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