Future of risks

ARE WE PREPARED FOR THE THIRD WAVE? – PART 2

Now, I will address the second question, which deals with the COVID risk management initiatives taken by the government to face the third wave.

It is a very crucial question, in context to the third wave arriving in India. India has a big global market and to survive in it, it has to work on mitigating risks in all big or small businesses. The government and many companies are working together in the process of COVID risk mitigation. At present, the risk management process is the priority of most companies. During Covid, many businesses have deteriorated or got closed. However, many companies have also made a profit out of it, especially the medicines and retail.

Covid – 19 will be remembered as the biggest financial crisis the world ever went through. It is considered worse than that of the 2008-09 Global Financial Crisis and perhaps might even beat the Great Depression of the 1930s. It has let each industry suffer and one of the big factors could be the supply chain market getting affected due to lockdown restrictions and strict government policies to regulate it.

On 13th May 2020, Hon’ble Prime Minister Narendra Modi has addressed the nation on making India self-reliant (Aatma Nirbhar Bharat), laid down a robust framework for working on immediate reforms along with its planning for long-term development.

As part of Aatma Nirbhar Bharat, a special economic impetus package of about US$ 268 billion (INR 20 trillion), equivalent to 10% of India’s GDP, will be used to mitigate the destructive social and economic impact of COVID-19 lockdown. Furthermore, Finance Minister Nirmala Sitharaman has also proclaimed a set of aid related to MSMEs[ Ministry of Micro, Small and Medium Enterprises], migrant workers, street vendors, small farmers, NBFCs[ Non-Banking Financial Company] and the real estate sector, among others. These steps will provide support to the businesses and migrant workers. This is a challenging time and we must understand the current outbreak to work towards a “New Normal.”

EY’s Government & Public Sector community has been working closely with governments from across the world to prepare strategies along with that preparing them to become familiar with digital technology to create new ways of working.

In India, EY has been working with more than 15 central ministries, more than 18 states and 210 districts on several instant initiatives, such as Invest India’s business immunisation platform, to resolve problems concerning to acquisition of raw materials, logistics, regulatory permissions as well as planning strategies to ease the lockdown in stages.

During the COVID-19 pandemic, as a priority, it is undertaking programs such as the ‘Business Immunity Platform’

We will be covering here specifically the Automobile industries supply chain possible intervention and its impact on the short, medium and long term:

Automobile industries

COVID-19 outbreak intensified the already uncertain situation of the Indian auto industry, from the beginning of the first quarter of FY19, the industry is suffering from the rapid degrowth in auto sales. The automotive component sector is expected to log around 16% yo-y degrowth in revenue in FY21 as the pandemic disrupts the supply chain and reduces underlying vehicle demand in both the markets domestically and overseas. Adding on to CRISIL said that March 2020 was one of the worst months for the Indian auto industry due to uncertainty and COVID-19 closures. SIAM [  Society of Indian Automobile Manufacturers] estimates a revenue loss of over US$ 304 million (INR 23 billion) per day to OEMs [ Original Equipment Manufacturer] due to the shutdown of plants, with over US$ 2.60 billion (INR 200 billion) of unsold inventory piled up with the channel partners.

The complete lockdown has brought many smaller component manufacturers to the brink of bankruptcy, along with around 15,000 car dealerships and 25,000 car dealerships in India operating on thin margins.

Some of the possible interventions by the Government categories for the short, medium and long terms are:

 For the short terms :

  1. Innovative modes for easing logistics woes :

The area of intervention is to dedicate passages for auto-parts suppliers for material movement and customs clearance for provinces cleared to function in Covid-19. Also to provide plug and play infrastructure on such corridors. To enforce it, the intermodel coordination between ports, rails and road, the clearance should be accorded by state/central port authorities, rails and road authorities. In this way, it will relieve logistics bottlenecks and help maintain adequate supplies in this critical time. It may face some possible risk measures that would be the coordination and cooperation among multiple states and central authorities as it is a complex process and thus, senior-level interventions will be needed to smoothen the process.

  1. Fiscal measures and other policy interventions:

Over here the area of intervention would be to consider the auto industry in the “critical sector” and make it eligible for a dedicated fiscal impetus package to sustain the crisis. Also, vehicle deals must be included in this package as they operate on sheer margins

Furthermore, to bring it back to stability some offer in subsidy or waiving- off GST for short-term leasing of cars would be very effective.

Along with the waiving of regulatory testing costs. To make this happen, it requires an immediate action plan for regulatory agencies headed by the Ministry of Finance including CBIC [Central Board of Indirect Taxes & Customs] and MoRTH [Ministry of Road Transport & Highways], in consultation with auto industry bodies and associations, considering the financial implications. The impact  created by interventions was to ensure liquidity in the sector across the value chain with a special focus to decrease the impact on MSMEs and mitigate NPAs [Non-Performing Assets]

Here, the solution itself comes with some loopholes or risks such as if the fiscal stimulus is injected by applying subsidies and effecting waivers, it will adversely impact sovereign credit rating and financial parameters of the country. In addition, such fund or SPV could be created, sowed by partial government fund (about 10%) and rest by financial institutions such as LIC, PFC [ Power Finance Corporation Ltd.], EPF[Employees Provident Fund], NIIF[  National Infrastructure and Investment Fund], IIFCL [  India Infrastructure Finance Company Limited] and others and it could subscribe to bonds/NCDs of highly-rated corporates.

 For the medium-term:

  1. Boost demand

The area of intervention is the lower GST (18%)  which enables a higher reduction on the purchase of new vehicles for buyers and extend the additional reduction of 15% (over and above the existing 15%) applicable until 31 March 2020 for 24 months. Another is the introduction of the Vehicle Disposal Policy, which offers an annual business opportunity of $ 6 billion (INR 450 billion) with the introduction of incentives similar to the subsidy program “Cash for Clunkers”16 scheme.

The possible outcome can be that savings through lower GST, tax deductions and lower interest, as well as incentives for scrapping old vehicles in lieu of new vehicle purchase, will catalyze demand. To make it a reality, it requires some serious efforts from the Ministry of Finance and other regulatory bodies and vehicle scrappage policy by MoRTH

In this process, some possible risk measures to be faced can be as Cash for Clunkers’ scheme proved out to be a failure in the US owing to poor implementation. Moreover, the derivation of incentives/subsidies for the scheme should consider the economic and environmental factors.

  1. Fiscal boost to the EV segment:

The area of intervention for lower GST on EV charging service,  to reduce GST on purchase of Lithium-ion batteries in the battery replacement market battery and swapping service to 5% from 18%. Lastly, to approve and facilitate implementation of a US$ 5.30 billion (INR 400 billion) grant scheme for EV battery manufacturing. The efforts should be taken by the cabinet to approve the necessary interventions following the NITI Aayog’s plan. Furthermore, the impact which can be caused is to achieve economies of scale in EV battery manufacturing and reduce EV cost.

For the long term:

  1. Boost exports:

An area of intervention can be the introduction of a special export promotion scheme for developing markets such as SAFTA, Africa, the Middle East, South America and CIS countries. The effort required is by the Ministry of Commerce to formulate export promotion schemes

And another one is to execute focused investment promotion events with outbound delegation by  Invest India and state-level investment facilitation agencies.

  1. Incentivize R&D

The area of intervention over here is it will offer incentives to invest in future technologies like mechatronics, telematics, robotics, autotronics, power electronics, data analytics, lean manufacturing, process knowledge, quality core tools training, computer-aided engineering, robotics, programmable logic control, three-dimensional modelling software and machine handling skills. The effort required here is for the government to offer incentives to companies, especially MSMEs, through special fund programs such as the TDAF. Moreover, the impact it can have is to build a resilient supply chain and accelerate the industry toward the “New Normal” that would rely more on “smart” assembly lines.

Conclusion:

To conclude, although there is speculation about the third wave arrival to be inevitable. If the process of vaccination drive is fastened up along with some good reforms and changes in the strategies used in the business,  the “New Normal” will be well-equipped with providing stability and security in the business world. Thus, we can say that we can fight back Covid-19 effectively.

References:

https://economictimes.indiatimes.com/news/india/covid-third-wave-could-peak-between-oct-nov-intensity-expected-to-be-1/4-of-second-wave/articleshow/85766983.cms

https://economictimes.indiatimes.com/news/india/majority-of-citizens-feel-confident-of-indias-preparedness-for-third-wave-says-survey/articleshow/85270827.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

https://www.bbc.com/news/world-asia-india-56345591

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwiCtq6L58HzAhVA8HMBHcrDB_IQFnoECAMQAQ&url=https%3A%2F%2Fassets.ey.com%2Fcontent%2Fdam%2Fey-sites%2Fey-com%2Fen_in%2Ftopics%2Fgovernment-and-public-sector%2F2020%2F09%2Fmanaging-the-impact-of-covid-19-on-india-supply-chains.pdf&usg=AOvVaw04uyvA5irKyIlJ4VrTb6aZ

Blog Published By: Ms.Kanchan Rathore, Student Risk Committee Member

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