The Covidian Monetary Theory – An SMB perspective!

Written by Anil Kumar

April 7, 2020

The Gist: An insight into the plight of SMB entrepreneurs during the ongoing COVID-19 lockdown. Please read completely, or I recommend not to waste your time. As we pass time in the lockdown to fight the Novel Corona threat, the Indian Government has taken a plethora of steps to ensure that people are not hit drastically by streamlining the demand-supply chain for essential commodities, ensuring that the lockdown is imposed properly and isolating cases in addition to announcing some great economic measures to ensure stability and peace. The Indian lockdown scenario: Official (as announced) – 21 days. Disturbance before announcement – 3 days Assuming monthly weekends – 8 days Other holidays in the period of lockdown – 9 days Total41 days of lost productivity. We support the government in its entirety and understand teh magnanamity of the task. That announcing and executing the same in so short a time, is a great challenge. The government has kept its word on every commitment made and we are sure that we will successfully thwart the Corona threat. Kudos. We thank every front-line health worker, from doctors, nurses, and paramedics to those involved in sanitary services who are risking the infection to ensure that we, the common people live in relative safety. While everything looks hunky-dory at this stage, let us look at the economic ramifications from an SMB [small and medium businesses] point of view that could surface once the lockdown is over [the possibility of the lockdown being extended is not ruled out]. Most SMB owners in India do not come from affluent or rich families. Compared to the salaried counterparts, most SMB owners would have about 2-month revenues as liquid savings. The intelligent salaried normally would have 4 to 6 months of salary as liquid savings. And a good entrepreneur takes about 10% of the turnover home, as salary or drawings. The Indian SMB entrepreneurs can be classified as:
  1. The Upper Middle Class:
A family of 4 which can buy and maintain a car in the C2 segment such as a Honda city, or maybe 2 hatchbacks such as i10. Can think of buying a 2 bedroom apartment on loan in an average location in a city such as Bangalore. Or stay on rent in posh areas. Can send kids to good private schools and private engineering colleges. Can afford to watch movies in multiplex and eat in good restaurants on weekends. Go for holidays to Goa, Jaipur, Kerala once a year. And Thailand, Malaysia, etc once in 3 years. They save enough for a comfortable retirement and lavish weddings of kids. This needs an in-hand income of a minimum 1.5 lakhs a month. That is approximately 24 lakhs a year salary before tax. 1% Indians [about 1.5 crores] are in and above this class.* How the lockdown pans out for an upper middle class entrepreneur: He/She makes 24 lakhs a year. Liquid savings prior to lockdown = 24/12 * 2 = INR 4 lakhs. Assuming a take-home margin of 10% (which is ridiculous in today’s market), he will make a turnover of INR 2.4 Crores. A lost period of 30 days (assuming a month) converts to a loss of INR 20 lakhs in turnover. The general ratio of gross turnover to salary is about 35%>. Therefore the salaries paid in the period of no productivity is about INR 7.0 lakhs. For any entrepreneur, the cost of living would be about 60% of the take-home including EMI’s. Therefore for the lockdown period where he is making no money, he would be spending: On salaries – INR 700,000.00 Home expenses – INR 120,000.00 Gross Spend – INR 820,000.00 EMI Moratorium offset – INR 30,000 Net Spend – INR 790,000.00 Remember, the liquidity is only INR 400,000.00, so liquidity and credit cards will be stretched. Liabilities in the next 60 days: Opportunity loss (20% of lost turnover) – INR 800,000.00 50% opportunity loss for the next 60 days – INR 400,000.00 Business Income Tax payable (approx.) – INR 700,000.00 Personal Income tax payable (approx.) – INR 700,000.00 With business suddenly in recession and cash flow constricted, his open liabilities are INR 26,00,000.00, more than his yearly earnings. 2. Middle class: A family of 4 which can rent a 2 bedroom apartment in an average area of the city. Buy and maintain a car such as the Hyundai i10. Watch a movie in multiplex once a month and eat out at average restaurants. Dream to own an apartment but cannot. Go for vacation once a year to Goa etc. Can buy branded clothes but not expensive electronics such as big tv or expensive cellphones. Can send kids to private schools but Cannot afford private engineering colleges in India. They manage to save for a decent retirement and kids wedding. They have an in-hand income of roughly INR 75,000 a month. That is a minimum salary of INR 12 lakhs CTC before taxes.* For a middle-class entrepreneur, doing the same math as the upper-middle class, with business suddenly in recession and cash flow constricted, his open liabilities are INR 15,00,000.00, more than his yearly earnings. 3. Lower middle class: A family of 4 which can afford to rent a 1 bedroom house in low-class areas of the city, buy and maintain a two-wheeler or entry-level hatchback on loan. Car such as alto and keep it for 15 to 20 years. Provide food and education to kids in a government college and cheap private schools. Any other expenses such as watching movies in a multiplex etc are unaffordable. They buy entry-level cellphones such as Moto E and go on a vacation to places like Khandala once a year. This lifestyle is possible with an in-hand income of about 40,000 a month in Indian cities such as Bangalore. An annual in-hand income of 4.8 lakhs. Hence lower-middle-class status starts at approx 6 lakhs annual income before taxes and savings.* For a lower-middle-class entrepreneur, doing the same math like the rest, with business suddenly in recession and cash flow constricted, his open liabilities are INR 750,000.00, more than his yearly earnings.

How’s the cash flow in the lockdown period:

The Rich and Affluent: Big businesses that manufacture or distribute essential products are making good money for now, but the demand will diminish and balance out in a quarter following the lifting of the lockdown. But, for now, they are accumulating the cash and riding the cash flow due to panic buying and rolling back the same into business, so a boost for them is inevitable. Big businesses are run by the affluent or the government, therefore they are going cash-rich, albeit temporarily. This is more so since we are all paying or getting paid salaries on time irrespective of the lockdown. The Salaried: The salaried are not much affected by the lockdown financially since the salaries are mandatorily payable and they get to spend more and buy more due to savings on eating out, clubbing and all those expendable income activities. The Below Poverty Line: The most affected by this crisis are the people below the poverty line and the government has done well by ensuring the PDS [Public Distribution System] remains well-oiled and distributing free food, ration, and money. This is irrespective of the fact that their income has not taken a dent and they are being paid salaries on time.

The essential lockdown crisis:

As small business entrepreneurs, we are all between a rock and a hard place.
  1. We are paying salaries irrespective of work done or not.
  2. We have to run our homes, in a crisis.
  3. No income comes our way, at least for the 41 days.
  4. We are not being supported in any manner by the government.
We suffer with all the above, irrespective of the following facts**: # Number of SMB’s in India – 42.5 million – 95% of industrial units in India. # Employment by. SMB’s – 106 million – 40% of country’s workforce. # Deals in over 6000 products. # Contribution to GDP – 6.11% of products & 24.63% of services. # Output – 45% of manufacturing. # Exports – 40% of overall exports. # Asset base – Approx, INR 150 trillion [USD 2 trillion]. # YonY Growth rate – 10%. So, if SMB’s are the backbone of the Indian economy, what is its future? How is the government looking at it? The government has announced moratoriums on all loans and come up with a few sops. These sops are temporary, it is not that we do not have to pay taxes or interest, it is just that we need to pay later. That is all right, however, these 30/40 days of lost opportunity is not coming back. Please keep in mind that as entrepreneurs, we are not looking for doles from the government, we are only looking forward to making the most of our opportunities. And, in my part of the country, the lockdown seems ripe for an extension. As always, the SMB owners are staring down the barrel. On a more personal note, I would rather risk the Corona than die of disgrace or hunger. What do you say?

While reading this, please note:

  1. This is my point of view only and I do not expect anyone to subscribe to it.
  2. The above points are purely apolitical and pragmatist and do not cater to any manifestos.
I am sure all the SMB owners and entrepreneurs are thinking on similar lines and it is time we came up with a solution before the business turns into a financial disaster. Prevention is better than cure and the government will not wake up to this. And, what a perfect way to spend your isolation time. Sources: > https://smallbusiness.chron.com/percent-business-budget-salary-14254.html * – https://myindiamake.com/2017/07/26/what-incomes-define-upper-middle-and-rich-classes-in-india/ ** – Evoma

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