Take a decision on whether corona is a force majeure

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Published: April 20, 2020 2:00:41 AM

If govt doesn’t do this, courts will be cluttered with cases on this; also need global debt standstills as Soros argues

Insurance scheme for health workers, ‘Pradhan Mantri Garib Kalyan Package, insurance cover of Rs. 50 lakh, health insurance, covid-19 news, coronavirusMost suppliers/vendors are naturally resentful, in a situation where there are no revenues.

Many well-reputed firms, it appears, have been sending letters to their suppliers, landlords, etc, asking for more time to make payments; in the case of landlords, some players have even been asking for rent-free months to cover the lockdown period. While most suppliers/vendors are naturally resentful, in a situation where there are no revenues, this is only to be expected. How many companies, after all, have such huge surpluses that they can finance their normal business expenses while there are zero—or close to zero—revenues coming in? Indeed, even some state electricity boards (SEBs) were trying to stop payments to renewable power generations arguing force majeure. In such a situation, depending on the size of the firm asking for the zero-rental or for more time to make payments, vendors may not have much of a choice since refusing to comply may mean losing a top client.

But, the question that needs answering is how the firm/person at the lower end of the food chain is going to manage. A big auto firm can tell suppliers it won’t pay them for another three months, but what do the small suppliers tell their workers, or the owners of the premises they operate out of? Indeed, while the government is also reportedly keeping tabs on businesses to ensure that firms aren’t sacking employees—this was something prime minister Narendra Modi requested firms to try not to do when he announced the first lockdown—how are firms to finance themselves when there are no revenues during the lockdown, and low growth even after that? It would be quite different if, however, the government told banks/NBFCs to ensure that all firms got working capital loans, and that these would be guaranteed by a fund set up for this purpose.

In an interview to CNBC, the chief economic advisor seemed to indicate that the government was examining this possibility, though he didn’t specify either the contours of such an arrangement—should the government agree to it—or even how large it would be. In such a situation, the government would do well to examine the issue in detail, and issue a notification on whether force majeure should be declared. If individual firms are to try to invoke force majeure as is happening now, matters will just land up in various courts, and since there is no certainty on how they will rule, this will only add to the confusion.

Indeed, even at a global level, billionaire investor George Soros has penned an article (https://bloom.bg/2z9YeaT) arguing that the corona pandemic ‘requires comprehensive debt standstills’. He quotes a JPMorgan Chase & Co estimate to say that one in five emerging market countries will default on their debt obligations. While the G-20 argued for debt relief, he says, this is only for the poorer countries and for debt from official lenders, and “does not go far enough”. If this is not done, Soros talks of how countries will be forced to impose such harsh restrictions that we could well have a lost decade, and lead to a wave of sovereign defaults. At the local level too, this is going to be a reality, so the sooner the Modi government addresses the issue of force majeure and looks at sources of funding firms, the better.

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