On the 12th of May 2020 the Prime Minister of India announced a Rs 20,00,000 crore economic package as a push to kick start the Indian economy that is battered and bruised as a result of a series of lockdowns. The relief package which was approx. 10% of India’s GDP was hailed as a much-needed Big Bang Initiative. To draw a cricket analogy, the event became like a T-20 match with the entire business community being glued on the exact details on how it all unfolds. After all the devil is always in the details much like the last over in a match that can swing the outcome. On Sunday, the 17th of May 2020, when the last ball was bowled and the 5th tranch was announced by the Finance Minister, the 5-day anticipated wait by the travel, tourism, hospitality and aviation industry stakeholders yielded nothing that was sector specific. The immediate assessment by the industry, as the announcements entered the slog overs, was that instead of a super slog over it has all ended in a dud and we have lost the match.
Just because there is nothing that is announced specifically for the sector does it mean there is nothing at all? In this article the attempt is to demystify the long stretch of policy announcements and evaluate if there is any silver lining at all for the hospitality industry.
It is clear now that with the exception of the most marginalised strata of society, the Indian government’s relief measures have avoided the temptation of overindulgence with populist measures such as direct benefit transfers, cash assistance and interest subversion tools. The message and direction on the policy front for the Indian industry is loud and clear; the future is to “Reform, Transform and Perform”. It’s long term competitiveness as against short term survival. It’s enduring short term pain for potential long term gains. The jury is out on if the steps are high on intent and low on actual delivery for tourism industry in general and for the hospitality industry in particular.
Stimulus packages and relief measures of upto 10.0% of GDP cannot be funded through monetisation (printing more money and giving direct cash benefits, loan waivers etc.) because that will have wide ranging negative impact on the macroeconomic fundamentals of the country. Considering the sovereign rating category that India belong to, it was very evident that there was always going to be very limited direct stimulus and a lot of liquidity measures to enable businesses to tide over the crisis periods. The fact is that India is a ‘poor’ country with limited fiscal and monetary elbow room. To tide over a period of crisis the policy direction seems to suggest that it will be imprudent to deliver short term gains leading to long term pains. Unfortunately, the old cliché “In economics there are no free lunches” is now a reality.
Tourism as a sector is not specifically listed in any of the three lists (Union List, State List, Concurrent List). Although domestic pilgrimage is listed in the state list and pilgrimage to places outside India is listed in the Union list, there is absence of the sector in any of lists. In the past, there was a proposal to include tourism on the Concurrent list whereby the central government as well as the State has legislature over subjects related to tourism. However, it was declined by some states which saw this move as unwanted erosion of the states' powers. Historical evidence suggests that tourism is looked after by the state government. Developing tourist-friendly infrastructure, transportation linkages to tourist places, maintaining law and order, promoting tourism through state specific tourism policy are some of the tasks done by the state government in India. The Central government has limited its role in promoting tourism at national as well as international level. Maybe making representation at a state government level will be a more prudent strategy. Each state can also play a proactive role in announcing relief measures for tourism and hospitality.
On the 1stof February, in the Union Budget 2020, new income tax slabs with reduced rates for those foregoing tax exemptions and deductions was announced. Under the new regime, Individuals with a net taxable income of up to Rs5 lakh can now avail tax rebate of Rs12,500 under section 87A which would mean that individual taxpayers with net taxable income of up to Rs5 lakh will pay zero tax. This covers all rank and file staff with gross monthly CTC of Rs41,666. Further, tax slabs have been reduced across all other brackets as well (with the exception of the highest slab of above Rs15 lakhs). Further, the government slashed effective corporate tax from approx. 34.0% to 25.17%, inclusive of all cess and surcharges, for domestic companies. The new tax rate is already applicable from the current fiscal and is now comparable with the lowest tax rates in South Asian region. Also, the liability of Dividend Distribution Tax (DDT) is transferred from the company to the beneficiary. Both these measures are aimed at enhancing liquidity in the hands of individuals and profitability for companies.
In two tranches, on March 27, 2020 and on April 17, 2020 there was a monetary package announced by the RBI targeted towards liquidity injection in the system. In the first phase on March 27ththe Targeted Long-Term Repo Operations (TLTRO) was announced for Rs1,00,000 crore and in the second phase on April 17than additional Rs50,000 crore was announced. The TLTRO is a targeted tool to enhance liquidity in the corporate bond market, in the wake of the COVID-19 crisis. Hotel companies should evaluate the possibility to explore the corporate bond market. TLTROs allow banks access to cheaper capital from the RBI for further lending. This step theoretically encourages bank to lend more and spur economic activity. There exists a real risk of wide speak delinquencies, sell-offs in the domestic equity, bond and forex markets that would result in increased redemption pressures for companies. Increased redemption pressures would lead to premium surges on the corporate bonds, commercial paper and company debentures markets resulting in access to working capital through bank credit all the more difficult.
The revised definition of MSME based on investment and annual turnover is a huge step in the right direction. Also, sectoral discrimination and non-inclusion of service sector within MSME is now removed. The step allows access to small independent hotel owners and service providers to collateral free automatic loans from the combined pool of Rs300,000 crore. This emergency credit line can be effectively used to bridge short-term working capital requirements such as paying of staff salaries till resumption of cash flows from routine business operations. It is important to note that this is specifically aimed at small businesses as it is capped at 20.0% of the entire credit outstanding only upto Rs25 crore for business entities having a gross annual turnover of upto Rs100 crore. There is also a cap on the interest rate that can be charged and a one-year moratorium on principle repayment.
For upto a period of 12 months the government has suspended initiation of new insolvency proceedings to shield companies most impacted by the pandemic. The operative word is “upto” which allows room for further extension of timelines if required depending on the situation. A new insolvency resolution framework for MSME is also being worked out and will soon be notified by the government. Further, the minimum threshold limits to initiate insolvency proceedings has been raised from Rs1lakh to Rs1 crore. There was also an indication that there will be amendment in the IBC to exclude debt relating to COVID-19 period from the definition of “default”. An ordinance detailing all the changes will be notified shortly.
The Income Tax Department on 09th April 2020 has announced that it will issue all pending income tax refunds up to Rs5 lakh immediately to individuals and small business entities. This should come as relief as it eases cash crunch for small businesses and employees facing pay cuts or experiencing delayed salary pay-outs by their employers.
On the 04th of April 2020, the EPF Advance Scheme was announced. Under the scheme, employees can get non-refundable withdrawal to the extent of the basic wages and dearness allowances for three months or up to 75% of the amount standing in their EPF account, whichever is less. The amount standing to credit in EPF includes both the employee’s share as well as the employer’s share and also the interest earned thereupon. Since the withdrawal is non-refundable, there is no requirement to refund the amount withdrawn. Again on 12th of May 2020, the government announced extension till August 2020 of scheme under which the government would pay the EPF contribution of employees and employers. Till August 2020, employee provident fund contribution will be 10% each for employees and employers as compared to the statutory obligation of 12%. Both these measures are targeted to increase take-home salary for employees and to give relief to employers in payment of provident fund.
At Prognosis Global Consulting we fully acknowledge that there is an urgent need to address the cashflow, liquidity and working capital finance related problems for hotels. We agree that all efforts need to be made to ensure that liquidity problem does not snow ball into a solvency problem. Jobs need to be protected. When I shared my views with Manav Thadani - Founder Chairman at Hotelivate and Co-Founder & Director at SAMHI what he shared with me, I am reproducing with his permission “Let’s further use the analogy of cricket. We lost the cricket match and you (Finance Minister) are telling me the technical stuff. That the ball was wrapped and should have been polished better. The ground pitch was uneven and even the bat used by the batsman had a problem because the paint used on the bat was taking away the impact when the bat hit the ball. You see we have gone to watch a match and the players did not even show up”. We agree with his views and share the sentiment that it’s not enough. But then, nothing that can be done would ever be enough. Yes, there exists a clear and present danger that banks will refuse to extend the benefits to hotels. Yes, there is risk that the we are considered an ‘elitist’ industry that does not need help and can handle its own problems. What lies ahead is an enigma that is wrapped is mystery. I would close by quoting what Barak Obama said just a few days ago “Change will not come if we wait for some other person or some other time. We are the one’s we are waiting for. We are the change that we seek”