December 3, 2021

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Centre’s dilemma: Rescue pandemic-hit sectors or boost sectors that beat the virus?

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No epidemiologist can predict at this moment when India will face another wave of Covid-19. Nor can they tell us for certain whether it will be as devastating as the second wave or relatively mild. Its contours may be fuzzy but the possibility of an impending surge cannot be brushed away.

It is now as inextricably linked to the health of the people as to the health of the economy. An incoming Covid wave is factored in while redesigning short-term healthcare priorities. The question is, could this also be holding back Government of India (GoI) from announcing an incentive package to shore up demand and rescue certain sectors that are hit the hardest by the pandemic like transportation, hospitality, textiles, retail and construction? It is a possibility.

The government might be concerned that a direct incentive package, comprising tax waivers, tax holidays and other modules of demand creation, may not fully yield results if another Covid wave comes upon us, forcing authorities to reverse unlocking.

While Finance Minister Nirmala Sitharaman announced a Rs 6.28 lakh crore package focusing on loan guarantees and concessional credit for pandemic-hit sectors, economists say it is a formula that will work only in the medium term.

So should GoI wait for the third wave to pass before doling out a direct incentive package targeting select pandemic hit sectors? Or, should it, as some economists argue, focus more on Covid-resilient winning sectors such as mobile manufacturing, electronics, pharmaceuticals, telecom and networking products, and food products to get the economic wheels turning? That would strengthen the economy which, in turn, will help buoy up sectors that are being ravaged by the pandemic.

Soumya Kanti Ghosh, group chief economic advisor of State Bank of India, says a sector-specific fiscal incentive package targeting hospitality, tourism, aviation etc., should be rolled out immediately. “We can’t wait indefinitely for the third wave to come and go before a fiscal package is announced. It should be done right now. It should be sector specific, also comprising an element of income support. Incentives should include tax waiver, tax holiday, etc.,” he says, adding that fiscal numbers right now are good enough for the government to extend big incentives.

According to Arvind Virmani, India’s former chief economic adviser, the worst affected sectors that need immediate attention include hotels and restaurants, retail trade, air and road transport, education and personal services such as catering, beauty parlours, movie theatres and tailoring.

Virmani advocates two things: one, continuation of credit guarantees, something which the government has already announced; two, rolling out some micro yet very specific incentives. “There is a need to give incentives or subsidies for improvement of ventilation in all indoor public areas such as factories, offices, apartment buildings —installation of HEPA (high efficiency particulate air) filters in central air conditioning systems, installation of UV ceiling lights in small, closed spaces such as bathrooms, kitchens, bars, restaurants, shops and beauty parlours,” he says.

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Arguing that economy and healthcare need to go hand in hand, he says state governments should make it compulsory for employees of all services, involving the presence of more than five customers indoors, to have vaccination certificates. Those who don’t have certificates should be fined along with the owners of those premises or the organisers of such events.

According to data compiled by ET Intelligence Group (ETIG), five major sectors that witnessed massive income erosion during the Covid-hit FY 2020-21 as against FY 2019-20 were hospitality (-66%), education (-44%), transport (-32%), real estate (-30%) and retail (-24%), followed by several others, including entertainment and media, paper, leather products, construction, textiles and forging — all in negative territory. Q1 figures of the current fiscal have yet to be released.

For some sectors such as hospitality, transport, construction, retail and textiles, the impact in the last fiscal was uniform across parameters, for example, registering losses in income and profit. Meanwhile, in sectors such as education and real estate, there was massive revenue loss, yet they could hold on to profit and maintain a robust PAT (profit after tax) mainly due to the deployment of costeffective digital interfaces as well as a tighter grip on operating costs.

Sample this: for 153 listed construction companies for which data is available, there was a combined 17% revenue loss in FY 2020-21 year-on-year, as well as a negative PAT of Rs 8,784 crore. During the same period, there was a combined negative PAT of Rs 6,057 crore and Rs 3,528 crore respectively for transport (data is available for 45 companies) and hospitality (60 companies).

Real estate, another sector that got devastated by successive waves of the pandemic, has been resilient at least on profits. For 72 real estate companies for which data is compiled, there was a massive 30% fall in combined revenue last fiscal year-on-year, as well as a sharp 69% drop in total taxes paid. But the companies in total registered a healthy Rs 2,056 crore PAT.

Anuj Puri, chairman of ANAROCK Property Consultants, says the measures announced by GoI and Reserve Bank of India, especially last year, were largely aimed at tackling supply and liquidity concerns. “What the real estate sector needs today are measures that will bolster demand. Rising input costs of steel, cement, etc., are a pressing concern for developers and the sector at large,” says Puri, as he lists the sector’s many expectations from the government — waiver of Goods and Services Tax (GST) on homes for a certain period; reduction in stamp duty like it was done in Maharashtra and more tax benefits to homebuyers.

Every pandemic-hit sector has a similar list of expectations from the government— all boiling down to tax incentives and additional demand creation. But during the entire Covid period since April 2020, GoI has largely refrained from doling out special incentives only to pandemic-hit sectors.

Instead it has banked on the production-linked incentive (PLI) scheme, under which companies in select sectors are eligible to receive incentives on incremental sales from products manufactured only in India. In the Union budget presented on February 1, Sitharaman announced an outlay of Rs 1.97 lakh crore for PLI schemes in 13 key sectors, including electronics, pharma, telecom, food products, white goods, textile, automobiles et al. It was a mixed bag — some were hit hard by the pandemic, others had largely escaped the crisis.

The latter are considered to be winning or champion sectors, which could boost domestic manufacturing in sunrise and strategic sectors, curb cheaper imports, improve cost competitiveness of madein-India products and enhance domestic capacity as well as exports. These sectors were chosen for multiple reasons, with no special focus on those that had been pummelled hard.

Former Union industry secretary Ajay Dua says there should be an all-out attempt to boost macroeconomic numbers rather than cherry-pick pandemic-hit sectors. “Let’s leave the services sector to its future. We must not forget that sectors such as aviation, transportation, hospitality etc., grew the most when India was growing at a pace of 7-8% per annum. Once the economy grows, real wages will rise. And once prosperity sets in, their growth will automatically be reflected in overall buoyancy,” he says.

Dua lists a few sectors — defence, automobile and its ancillary industries, renewables, textiles and food processing — where the government must focus, with a single agenda of benefiting small- and medium-size companies.

With limited resources at hand, the government will have to walk a tightrope between some of the fragile sectors desperately looking for a bailout and those already on a good wicket and have the potential to win in this pandemic. GoI has clearly favoured the latter so far. It has an excuse.

Creating artificial demand for sectors that encourage crowding will help the virus to spread quickly. Against this backdrop, sectors such as hospitality, tourism and transportation will have to pin their hopes on a rising graph of vaccination and a steeply falling curve of Covid cases.

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