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No Exemption From Pain

Why even sectors permitted to function find it tough to operate given their linkages with the closed segments of the economy
twitter-logo Joe C Mathew   New Delhi     Print Edition: May 17, 2020
No Exemption From Pain
Illustration by Raj Verma

Ever wondered why your neighbourhood chicken shop does not have your favourite meat, or even if it does, is pricing it too high? Amit Saraogi, Managing Director of Kolkata-based Rs 550 crore Anmol Feeds Pvt Ltd, a feed supplier to the poultry industry, says it is the complete breakdown of India's chicken economy - hatcheries to feed suppliers to commercial farms to bulk suppliers to retailers - that has caused this crisis. The exemption it enjoys as part of the agriculture and allied sector has not helped either. The problem started with a rumour in February that the bird may spread cor0navirus. This hit demand during the month.

By the time the lockdown was announced in March, "the Indian poultry industry had suffered a Rs 15,000 crore loss as bulk suppliers abandoned the birds and farmers sold them for almost free," says Saraogi. The demand is limping back but there is another problem. There are few birds, which means less demand for poultry feed, but Saraogi is struggling to meet even this demand as operations of his raw material suppliers - solvent companies that produce maize gluten, rice bran oil, etc - have been hit. The reason: they are not getting their raw material as soybean harvest, operations of rice millers, etc, have been hit due to labour shortage, administrative restrictions and shortage of trucks and truck drivers. The cash flow situation in the poultry industry is so bad that Saraogi says "it will take at least three months, after the lockdown gets over completely, for it to normalise".

Not all industries that have been allowed to function during the lockdown are facing such a catastrophic situation, but on April 4, Pawan Kumar Agarwal, Secretary of the Consumer Affairs Department of the government of India, shared a suggestive list of 71 companies that deal in essential goods with chief secretaries of all states and Union Territories. The idea was to ensure that none of these companies faced any difficulty in resuming production and moving goods across the country. The list included 48 food and grocery companies like Adani Wilmar Ltd, Britannia India Ltd and Pepsico India, 17 organised retail chains like Reliance Fresh and Mother Dairy, and seven e-commerce firms, including Amazon, Flipkart and Swiggy. Despite the clear instructions, none of these players can claim seamless, full-fledged operations across India. For instance, PepsiCo could make its food plants in Punjab and Maharashtra operational, but the one in West Bengal is awaiting clearance to restart operations even as Business Today goes to press. With central advisories themselves being revised often, and implementation patchy across states, even the agri-food sector which, along with pharmaceutical, healthcare and logistics, was the first to be exempted from the lockdown, has hardly resumed full-fledged operations.

Technically, over 30 per cent of India's $2.7 trillion economy was allowed to function from April 20 onwards after the government included more activities in the exempted list, including manufacturing in non-municipal areas and access control areas like SEZs, EOUs and industrial townships, apart from IT and IT enabled services and real estate. However, despite three dozen directives from the home ministry for smooth running of essential services since the lockdown was announced on March 24, the problem persists. "Several companies have reported difficulties in getting labour. Local administrations should be advised to facilitate availability of labour in factories, warehouses and transportation and distribution operations," notes Consumer Affairs Secretary Agarwal.

The root causes of most problems are restrictions on movement of people, and their unwillingness to do work that involves moving across the country, both because of genuine health concerns. Shortage of truck drivers, farm labourers and warehouse workers is resulting in disruption of supply chains, non-availability of raw materials and less production. "Health is a state subject. So, whatever be the intent and content of the central directives, one cannot stop state governments from asking truck drivers who travel inter-state to quarantine themselves for 14 days after they return. You cannot stop workers returning home from factories in nearby states from being asked to isolate themselves for weeks. The result is that drivers are not willing to go inter-state and workers are unwilling to go to factories," says a representative of a food company. . As it is, healthcare workers are getting ostracised in their residential colonies, some even manhandled, making working even in health facilities like hospitals risky, impacting the performance of the sector. Fear rules.

Ill Health

Nipun Jain, partner of Pharmchem, a small scale pharmaceutical company that makes antibiotics such as erythromycin and clarithromycin in Bahadurgarh, Haryana, has gone slow on production despite operational freedom to the pharmaceutical sector. He has a pass that allows him to cross the Delhi-Haryana border to go to his factory from Delhi. But this cannot help him get the required raw material at a competitive price and export finished goods. First, prices of key raw materials, imported from China, have increased. "Erythromycin has gone up from less than $100 a kilo to $130 a kilo. Clarithromycin is costing $170 a kilo, up from $130 a kilo in the pre-lockdown period," says Jain. Even if he is willing to pay, he cannot buy the quantity he requires, as truck operators are refusing to carry less than full load. "Earlier, booking offices of transport firms used to consolidate 10 small orders and fill the truck. Now, their offices are closed. If I have to buy some material from Mumbai, say 500 kilos, no one will deliver it. The truck owners say they have less drivers and trucks, hence can only take orders for full load (at least nine tonnes). If I have less than that, what do I do?," he asks. Jain has also decided against exporting as cargo flights are charging exorbitant rates. "Unless they offer the same price as before the lockdown, we will be left with no margin. If you are charging us three times more, how will we send our goods? I am waiting for the freight rate to become normal."

The bigger pharmaceutical companies in India are slightly better off than the smaller ones. Sudarshan Jain, Secretary General of the Indian Pharmaceutical Alliance (IPA), says the industry has managed to sustain production amid all challenges. The alliance is a group of 24 leading Indian pharmaceutical companies that account for over 80 per cent of the country's exports of drugs and pharmaceuticals and 57 per cent of the domestic market. "At this moment, 55-56 per cent production is happening, which is big, as inter-state movement is not all that smooth in (manufacturing hubs like) Baddi (Himachal Pradesh) and Daman (Union Territory). There are other centres where production has gone up to 70- 80 per cent," says Jain. He says Indian export-oriented units are also running well in Hyderabad and Vizag. "Mumbai has a problem of employees. But still, we are improving, and hopefully we should be better soon," he says. IPA's Jain also says that no shortage of medicines has been reported, both from within the country and from global customers. "We have good inventory, and though there is a slight delay in delivery, we are better than many other markets. The credit goes to the good coordination between the government and the industry as the government has been coming out with notifications making sure that the production happens." The IPA functionary, however, says that the smaller and ancillary companies are facing issues like shortage of liquidity and people. "Wherever possible, we are working with them."

However, in the hospital sector, even the big corporate hospitals are pleading for government help. Gurgaon-based Paras Healthcare manages seven hospitals in four states. Its hospital bed occupancy rate has shrunk to 25 per cent. The outpatient department is also getting fewer patients. "We are going to incur humongous losses. Despite that we have transformed our Ranchi (Jharkhand) facility into a COVID hospital," says Dr. Dharminder Nagar, Managing Director, Paras. The disease outbreak and the subsequent lockdown have kept people away from hospitals for small ailments and non-critical surgical procedures. Hospitals, however, need to maintain staff and infrastructure as they may be roped in by governments to contain coronavirus. As part of the National Healthcare Committee of industry chamber CII, Nagar estimates about Rs 7,300 crore monthly loss to the Indian private healthcare sector for at least three months in a row since March. "Even larger players like us can, maybe, survive for a month or two, but a longer period will be challenging even for us," he says. In a letter to the central government, the United Nurses Association of India, a body that represents over five lakh nurses in the country, has alleged that small nursing homes are trimming operations or shutting down and asking staff to leave or work for less pay.

Broken Supply Chain

The logistics industry cuts across sectors. Realising its critical role, the government had allowed inter-state movement of trucks carrying goods, both essential and non-essential, in the initial days of the lockdown itself. However, ground realities are different. "Movement of trucks is only 5-10 per cent," says Vineet Agarwal, Managing Director of Transport Corporation of India Ltd. "We still have 800-1,000 trucks on the road which had not reached their destinations pre-lockdown. There could be some movement in and out of big cities but inter-state movements are negligible," says Agarwal, adding that the drivers are afraid of moving. "If he goes to a manufacturing zone, he has to unload the truck, but there is no labour. Even if he is able to do that, he is not sure where he will get the next load from, or where he will get his food from. Some more manufacturing will happen (after the April 20 relaxation) but it will take at least three weeks for things to get back to a semblance of normalcy once the lockdown is completely over," he adds.

The silver lining is rail container movement. Since loading and unloading happens locally, and goods are essentially foodgrains and pulses for COVID-19 relief supplies, it is operating at 50 per cent. But that can hardly replace the millions of trucks that are off the road at the moment.

The April 20 relaxation has definitely allowed several core manufacturers to restart plants. But business is not just about manufacturing. "We are going supplier by supplier to see what their constraints are. A car is a sum total of thousands of parts and we have over 75 suppliers over the country. A significant number is in Pune and nearby industrial area which, as you know, is a hotspot. So, we have to see if factories there are allowed to reopen, because even if one part is not being supplied to us, it doesn't matter if all other factories can operate. It is only after we restart operations and things stabilise in the next two-three months that we will need to look at the problem on the demand side," says Rajeev Chaba, President and Managing Director of MG Motor. Unlike other automobile makers, MG is sitting on a backlog of 15,500 bookings for its SUV Hector alone.

Of all the segments that have been allowed to function, IT and IT enabled services, major earners of foreign exchange revenues, are the most promising. The government has allowed up to 50 per cent of their employees to work from offices. However, it may take some time before companies would want their employees - who are primarily working from home at the moment - to return to offices. "Ninety three per cent of our employees are approved to work from home by our customers and 90 per cent are engaged in delivering projects and services globally to our customers in a work from home mode," says Abidali Neemuchwala, CEO and MD of Wipro Ltd, giving a clear indication of the priorities of the IT industry. The business uncertainty despite permission to work and ability to manage much of their business remotely is clearly visible among India's IT majors. Infosys CEO Salil Parekh says: "Given the uncertain environment due to the global pandemic and client businesses marred by volatility, we do not feel it would be appropriate for us to provide an annual guidance at this stage." While Congnizant has withdrawn its full-year guidance for 2020, Wipro has skipped revenue guidance for the first quarter of the current financial year.

One roadblock to resuming full-fledged operations is the frequent changes in government directives. A day after e-commerce companies like Amazon announced that they will start delivering non-essential goods (read mobile phones, accessories and other electronic devices for personal use), the government reversed its stand by stating that only essential commodities will be allowed. E-tail of essential goods is exempt but, here too, delivery is a major problem. Any person attempting to order groceries from Bigbasket.com during the lockdown will not miss the scroll that moves at the top. "Dear customer, slots may not be available currently. We are working hard to ensure customers find slots." In a recent tweet, Albinder Dhindsa, co-founder, Grofers, said the online grocer, with a huge backlog of pending orders, is looking for more manpower. "If your company has idling semi-skilled workforce that can do with more income and work in a safe environment, please reach out to @Grofers. We are hiring in our warehouses to increase throughout in all cities," he tweeted. In fact, a report by LocalCircles, a community social media platform, suggests that the percentage of consumers who were able to find essentials on e-commerce platforms was less than half, 41 per cent, on March 30, though marginally up from 39 per cent on March 25.

The second issue is the very nature of the disease outbreak. Today's hotspot (an area where you have COVID-19 patients) may tomorrow be a green zone (where you dont have positive patients), and vice versa. In other words, no company can restart operations thinking it can continue from that moment onwards. The movement may be restricted any time. It's the virus that takes the call.

Rajesh Srivastava, MD, Rabo Equity Advisors, has a suggestion that is perhaps sound during these uncertain times. And it is not linked to the partial, conditional and reversible freedom the government offers to companies today. "Let's assume things (the viral outbreak) get back to normalcy from July onwards, and then it will take two more quarters for businesses to normalise. In other words, you start rebooting your business from the second quarter of FY21, and start normal business operations from January 1, 2021," he says. Srivastava, a veteran in food processing business advisory, is talking about the sector that he knows well. But it could very well be an analogy that works for many other sectors too.

Srivastava has some good news, at least for the food processing business. "The silver lining is that when it opens up, there will be pent-up demand as today, the demand is not extinguished, it's only suppressed. I expect a demand explosion for secondary processed food, the ready to eat, ready to cook, frozen food. My guess is growth will be huge," he adds.

Its hope alone that will drive businesses and consumers, at least for now.

(With inputs from Rukmini Rao, Sumant Banerji and Ajita Shashidhar)

@joecmathew

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