The spread of COVID-19 has impacted every industry and sector. No industry, however, exists in isolation; it has linkages to other industries. Consequently, disruptions in one industry tend to have a ripple effect on others. Take retail, for instance. Retail is intrinsically linked to manufacturing and logistics. It is the final consumer-facing touchpoint for industries such as entertainment, food, textiles, FMCG, consumer electronics and durables; the point where the consumption of manufactured goods happens. The crippling effect that the pandemic has had on retail has grave implications for manufacturing too. There is no point in resuming manufacturing unless retail opens first.
Originally intended for three weeks, the duration of the lockdown has already been extended twice. Meanwhile, the retail industry, especially for non-essentials, is burdened with an inventory pile-up. And, with the major consumer markets closed, no manufacturer wants to create stockpiles they can’t sell. Until the stress that’s afflicting the retail industry is addressed, manufacturing cannot truly get going. And the two sectors, between them, are the major contributors to employment and economic activity in India.
The multiplier effect of manufacturing and retail on employment and revenue generation.
Manufacturing creates strong positive backward and forward linkages in the economy, and creates what’s known as a “multiplier effect”. Growth in manufacturing output necessitates more inputs from sectors such as mining, utilities and services, and creates more jobs and investments in sectors such as logistics, construction and retail.
Till the pandemic befell us, manufacturing accounted for around 16 percent of India’s GDP. The government’s “Make In India” programme aimed to increase this share to 25 percent by the year 2022, while also creating 100 million new jobs in the sector. Today, we are facing grim, altogether different prospects. According to an estimate by the Adecco Group, manufacturing, which employs around 56.4 million people in India, could see as many as nine million job losses across textiles, capital goods, cement, food products, metals, plastics, rubber and electronics, as a fallout of the COVID-19 outbreak.
So, what is to be done? I believe that the first essential step is to restart retail.
The retail industry contributes ten percent of India’s GDP and employs between 40-50 million people – nearly eight percent of India’s workforce. Moreover, retail, like manufacturing, has a significant multiplier effect – direct, indirect, and induced. It is estimated that every rupee of retail revenue generates additional revenue of between 50 paise to one rupee in the economy. Before the pandemic struck, the $790-billion Indian retail sector was expected to double in size over the next five years. And, while that projection might need to be revised now, there is no doubt that India needs to get retail back on the growth track.
In absence of strong, decisive support, both manufacturing and retail could see a significant impact on their P&L and balance sheets, and, consequently, the livelihoods of millions of people engaged in these sectors.
Financial and policy support for the retail industry.
Banks have been reluctant to extend major financial assistance to the industry, especially due to uncertainty on near-term economic prospects. The longer it takes for some of these actions, the greater is the chance of increased bad loans. The critical question for banks to answer is whether the likelihood of recovery of their capital is better if they were to extend support, or do nothing. The answer seems quite clear in most cases.
The banks could (a) restructure the loans; (b) provide longer moratoriums; or (c) do a combination of both.
There is a similar issue with loans to shopping centres under the Lease Rental Discounting scheme. With business closed, many retailers are unable to pay rent to the shopping centres, which could lead to non-payment of interest. The litmus test, again, must be whether restructuring or moratorium increases or decreases the likelihood of capital recovery. In China, during the crisis, many government-owned malls waived off rentals and encouraged private malls to do the same.
The one area where the government could help millions of employees is wage support. Governments in many parts of the world have provided partial wage support to employees. Understandably, there is concern around transmission loss. One of the ways to avoid misappropriation would be for the government to do a direct transfer to the bank accounts of employees with a PF/ESI account, with the balance being borne by the industry. This will help protect jobs, inspire confidence, and make India ready for the restart.
The retail sector must be opened as rapidly as possible, and with robust safeguards to ensure the safety of consumers, employees, and workers at every point. The IMF World Economic Outlook projects India’s economic growth at 1.9 percent in 2020 and 7.4 percent in 2021. This might not look like much, but it is bright as compared to the projections for the global economy. For revival and rejuvenation, India will need three things in tandem – confidence, credit, and consumption. I say this because I believe that getting the economy back on its feet will be a consumption-driven process, and we will have to lean confidently on both retail and manufacturing to do it, while being supported by credit.
(The author of the article is Senior Partner and Managing Director, BCG)