Higher interest rate subvention for exporters

The government, in order to reduce the current account deficit (CAD), is considering the expansion of interest subvention to exporters.

After import duties were hiked on Wednesday, the commerce ministry is mulling the expansion of the Interest Equalisation Scheme, both in depth and range.

The scheme allows small and medium exporters in labour-intensive sectors to take loans from banks at a lower rate of 3 per cent. The ministry wants the scope of interest subvention to be expanded so that people taking loans at 5 per cent can be included, according to a senior official.

It is also weighing the option of expanding its coverage to include merchant exporters, who form a huge chunk of exporters and are not covered under it, he added.

The cost of credit to exporters will be reduced and shipments will become competitive if this happens, Director General of Foreign Trade

Alok Vardhan Chaturvedi recently told reporters.

However, he had said a higher rate of subvention might be difficult to implement.

This is because earlier efforts to do this had been shot down by the Department of Economic Affairs, which is under the Finance Ministry. In February, the department had argued against this, citing widened government expenditure. As a result, the issue will come up for discussion when Commerce and Industry Minister Suresh Prabhu meets exporters on October 1.

Originally announced as a measure to boost exports for five years, the existing scheme on pre- and post-shipment rupee export credit was revived in 2015 at 3 per cent for 416 tariff lines.

The sectors covered are mostly labour-intensive and include agriculture or food items, auto components, handicraft, electrical engineering items, and telecom equipment. The last Budget had allocated ~25 billion for this purpose.

“This is a welcome move and should be done on condition that the interest rate after subvention does not fall below 7 per cent is removed. Until the condition is in place, benefits of 5 per cent will not materialise for exporters,” Ajay Sahai, director-general of the Federation of Indian Export Organisations said.

No addition to MEIS

On the other hand, the government is not in favour of expanding the largest export incentive scheme, the Merchandise Export from Indian Scheme (MEIS). While exporters want the scheme to be widened and prescribed rates increased, the US has attacked India on this at the World Trade Organization.

“The WTO dispute is going on and no new addition to the scheme is expected,” a senior finance ministry official said. The last expansion to the scheme had come in July, when rates were increased from 7 per cent to 10 per cent for a number of agri commodities, including dairy products and soybean meal.

The government on Wednesday raised import duties on 19 items, including consumer electronics, diamonds, jewellery, jet fuel and leather footwear, to curtail the widening current account deficit.

Coming into effect on Thursday, the items cumulatively cost ~860 billion in 2017-18, according to the finance ministry.