ANALYSIS. ‘Providing cheaper credit to exporters for 5 years is a bold move’

In a big relief to exporters, the Centre on Wednesday approved an Interest Equalisation Scheme, allowing exporters, mostly in the labour-intensive and small and medium sectors, to avail themselves of bank loans at a 3 per cent lower rate.

The scheme, applicable from April 1, 2015, would be available to all exports of Micro, Small and Medium Enterprises (MSME) and 416 tariff lines, but will not be available to merchant exporters.

The scheme is an extension of the earlier one which lapsed in March last year. Under the earlier scheme, an interest subvention of 3 per cent was extended to sectors such as handicrafts, carpet, handlooms, small & medium enterprises, readymade garments, processed agriculture goods, sports goods and toys, and included over 200-odd tariff lines of engineering products.

This scheme was not available to exporters in 2014-15.

Exporters have welcomed this move and believe that it will provide the necessary boost to our falling exports.

“In its new avatar, the scheme renamed as Interest Equalisation Scheme, will help exporters compete better in the global markets. They can price their products more attractively,” says A Sakthivel, Chairman of Federation of Indian Export Organisation (FIEO), Southern Region. 

He also believes that the move this time around is a bold one, as it is applicable for five years. Earlier, the scheme for given for one or two years and then reviewed or extended at the end of the period.

“Announcing the scheme for five years, will help exporters plan their financial needs and costing better,” he adds.

According to Rafeeque Ahmed, Chairman of the Council for Leather Exports, the scheme is also a more comprehensive one, encompassing all MSME sectors and about 800 product lines. “The earlier scheme outlined broad categories such as leather, handicrafts etc, that were eligible for interest subvention,” he says.

India’s exports have contracted for 11 straight months now. Allowing exporters from select labour-intensive sectors to access cheap credit, will, according to industry players, help exporters compete better. Currently exporters get loans at 10-11 per cent. Now it will be 3 per cent lower than this rate.

“Bigger exporters can currently borrow money in dollars, which is cheaper than bank loans. But smaller players cannot raise funds from abroad that easily. For them interest subvention is a good scheme,” says Ahmed.

The interest subvention scheme is also well within the WTO norms, according to market players.

“Usually interest subvention given to exporters to compete globally is not a subsidy under the WTO regime. Also, it is not a matter of concern as long as the interest rates are in tune with the global rates,” says Ahmed.

Even after the subvention, the interest rates charged to Indian exporters will be higher than the rates that prevail in other countries. “Interest in China is 6.25 per cent and in Bangladesh it is 6.75 per cent. These rates are still lower than that offered to exporters, even after the 3 per cent subvention,” says Sakthivel.

According to Himanshu Tewari, Partner, BMR & Associates LLP, though such interest subvention schemes are considered to be an element of export credit and are hotly debated on international trade platform, they do not strictly fall in the definition of direct export subsidy within the WTO Agreement on Subsidies and Countervailing measures.

“Final word on the debate — whether export credits on ‘non-commercial’ terms like interest subvention, should be considered as ‘export subsidy’ and hence should be reduced or eliminated as part of WTO commitment, is yet to be said,” he adds.