Bornali Bhandari, Samarth Gupta, Ajay K Sahu and K S Urs
The NCAER Business Expectations Survey (N-BES) tracks firms sentiments in six cities over four regions in India on a quarterly basis. In its latest iteration conducted in June 2020, the N-BES surveyed 550 firms with an average response rate of nearly 130. It overlapped with the first phase of unlocking. In addition to the usual sentiments on demand, supply and labour issues, we used the survey to gauge the experiences and operational issues of firms during Lockdown, first phase of unlocking and mitigation strategies during the April-June 2020. In this article, we provide findings from this latter part.
Experience during Lockdown and Unlocking
The N-BES had asked firms whether they were operational or not and if operational, whether they were working from home, office premises or a combination of both. We find that 40% firms were operational as early as April 2020. Further, only 31.6% of the operational firms fell under the Essential Commodities Act 1955, suggesting that many firms had become operational despite stringent lockdowns. This is perhaps explained by the fact that nearly two-thirds of operational firms were working out of home. The share of operational firms rose up to 58% and 89% in May 2020 and June 2020, respectively. Following are some additional salient findings.
- Across industries, service sector firms were more likely to start operating sooner. The share of operational firms were higher in the services sector at 60% in April and 66% in May 2020 compared to the manufacturing sectors (consumer durables, consumer non-durables, intermediate goods, capital goods). However, by June 2020, manufacturing sector operations had picked up to more than 90% compared to 83% of service sectors.
- Similarly, large firms (firms with annual turnovers of more than or equal to ?100 crore) were more likely to begin operation in April 2020 (55.1%) compared to small firms in April 2020 (34.1%). The gap between large and small firms persisted in May 2020, with only 49.7 per cent of small firms operational compared to 80 per cent of the large firms. However, the gap between small and large firms closed out by June 2020, as the corresponding figures were 88.6 per cent and 92 per cent, respectively.
- Share of operational firms in June 2020 was slightly lower in southern region at 80% compared to other regions. This could be due to the fact that another complete lockdown was announced in Chennai from June 19 till June-end in view of growing novel coronavirus (SARS-CoV-2) cases.
Operational issues for firms
The shares of operational firms that were able to meet their pending sales order were 24.8% in April 2020, 33.2% in May 2020 and 59% in June 2020. The share of operational firms that faced logistic issues during April, May and June 2020 were 41.3%, 47.3% and 53.2% respectively.
The N-BES June 2020 had probed about cost sentiments. The share of firms which had responded that unit cost of raw materials, electricity and labour over the last three months had increased were 47.9%, 49.2% and 51.5% firms respectively. Per-unit costs may have remained elevated due to firms working under-capacity. Only 37% firms had replied positively to the question of whether their present capacity utilisation is close to or above the optimal level (NCAER 2020).
We also find a considerable impact on hiring and labour decisions. 45% of firms had decreased hiring of casual/temporary and 30% of firms had decreased hiring of permanent workers over the first quarter. In June 2020, only 45% and 68% of firms had paid wages to more than half of temporary and permanent workers, respectively. Thus, firms appear to use wage instrument more than hiring instrument to reduce costs.
The share of firms which had incurred costs of sanitising office premises went up from 32.2% in April 2020 to 53 per cent in May 2020 to 85.8% in June 2020. This is in lieu of the SARS-CoV-2 guidelines. Further, 39% and 49% of firms responded to incurring costs to provide food & residential services to workers and providing transport to workers between home and workplace in June 2020. Lastly, 39%, 72% and 57% of firms paid interest on loans, Goods & Services Tax and dues to suppliers in June 2020 respectively.
In sum, operations of larger, service sector firms remained shielded in April 2020, but by June 2020, most other firms were also operating at nearly the same rate. Firms faced elevated costs of production due to both elevated input and new added SARS-CoV-2 related costs. Despite the many challenges, firms were able to meet pending sales order in June 2020.
Adaptation strategy of firms
The pandemic and subsequent decisions posed an unprecedented shock to firms. As such, one expects firms to undertake certain adaptation strategy to mitigate the impact of the shock. Following points suggest some of the adaptation strategies that the firms used.
- Use of e-commerce: The share of firms using e-Commerce platforms increased from 19.8% in April 2020 to 22.3% in May and 38.8% in June 2020. (Figure 1). Usage of e-commerce platforms were mostly driven by Eastern region and consumer non-durable industry (both business-to-business and business-to-consumer). Across firm size, smaller firms were lagging behind the large ones in using e-Commerce platforms to market their products. (Figure 1)
- Sell different goods and services compared to March 2020: The share of firms using this strategy went up from 11.3% in April 2020 to 12.9% in May 2020 per cent to 35.9% in June 2020. The eastern region was ahead of other regions with 60% firms having adopted this strategy. Across firm size, smaller firms were ahead of the large ones in using this strategy. This may be because the smaller firms are less technology and skilled labour oriented than the larger ones and may find easier to switch over to other businesses.
- Credit: The survey finds that only 17% firms had taken loans during the last three months and only 32% were planning to take loans in near future.
Conclusions
In sum, firms had faced operational challenges, elevated costs and muted revenue in Q1: 2020-21. However, some firms met the challenge of SARS-CoV-2 associated Lockdown and Unlockdown by either moving to e-Commerce platforms or selling different goods & services to what they were selling in March 2020. The share of firms take credit was relatively small. The Government should address logistics issues, enable safe & sanitised local public transport, provide support to help firms move to e-Commerce platforms and facilitate move of firms to production of in-demand goods & services.
Bhandari is a Senior Fellow, Gupta and Urs are Associate Fellows and Sahu is a Senior Research Analyst at NCAER. Views are personal.
The N-BES is a survey of firms/industries across six cities to judge business sentiments in the four regions of IndiaDelhi NCR, Mumbai & Pune, Kolkata and Bangalore & Chennai. Industries are adequately represented with regard to ownership type (public sector, private limited, public limited, partnership/individual ownership, and MNCs), industry sector (consumer durables, consumer non-durables, intermediate goods, capital goods, and service sector), and firm size based on their annual turnovers (in the range of less than ?1 crores, ?1 to 10 crores, ?10 to 100 crores, ?100 to 500 crores, and more than ?500 crores).
References
NCAER. 2020. The NCAER Business Expectations Survey for India: First Quarter 2020-21. New Delhi, 110002. August.