Indian exports have witnessed a prolonged period of decline and stagnation, but there has been a pick-up in recent times on the back of a resurgence in global growth. Exports of non-petroleum, oil and lubricants witnessed a year-on-year (y-o-y) growth of 15.6 per cent during April-September 2018-19.

In order to sustain this resurgence in exports, a holistic framework is required which enhances trade competitiveness, promotes innovation, alleviates structural bottlenecks, bolsters availability of export finance, and strengthens the institutional capacity for exports. An important cog in the wheel of the growth continuum is a robust ecosystem for export financing.

Declining share

Traditionally, the Indian economy has been bank-dominated, and banks continue to be the primary source of credit. It is therefore a matter of concern that the growth in bank credit to the exports sector has been declining, and has been much lower than the growth in overall bank credit.

Resultantly, the share of outstanding credit extended by scheduled commercial banks to exporters in total non-food credit has almost halved — from 6.1 per cent as on end-June 2007 to 3.6 per cent as on end-June 2017.

Further, as on July 20, 2018, outstanding export credit extended under the priority sector by foreign banks amounted to ₹219 billion, witnessing a precipitous y-o-y decline of (-) 46.8 per cent.

The challenge is even more severe in the case of MSMEs, which account for about 45 per cent of manufacturing output and around 40 per cent of total exports of the country, and are now beset with financing bottlenecks.

The potential demand for India’s MSME finance is estimated at $370 billion as against the current credit supply of $140 billion, resulting in a finance gap of $230 billion (equivalent to 11 per cent of GDP). Bolstering the availability of export finance, especially in key sectors such as MSMEs and agriculture, will therefore be critical for improving the competitiveness of India’s exports and propelling exports on a higher growth trajectory. As commercial banks form the major source for export finance in India, an essential first step would be enhancing the quantum of finance being extended through the banking channels.

The fastest ,and perhaps the most effective mechanism to do so could be tweaking the priority sector lending norms so as to augment lending to the exports sector.

Export credit is currently eligible for inclusion in the priority sector lending targets of banks. However, there is no mandatory sub-target for export credit. Given a consistent decline in credit to exporters during recent times, as also the importance accorded to finance in driving export growth, the RBI could consider prescribing a sub-target for export credit within the existing 40 per cent target for priority sector lending (PSL).

As access to export credit might especially be a constraint in the agriculture and allied activities and MSME segments, a sub-target can be defined for export credit to these sectors within the existing PSL targets for these sectors.

Export credit is generally a more lucrative business proposition than other priority sector lending areas, and a flexibility in PSL norms can help commercial banks perform potentially better in terms of meeting their PSL targets.

While directed lending may solve the short term requirement for export finance, there is also a need for medium and long term financing of exports, as also for financing export capacity creation.

An Export Promotion Fund (EPF) could be established by the government to meet this need. Domestic commercial banks could contribute to the fund to the extent of their shortfall in stipulated priority sector lending to the exports sector.

As a disincentive for non-achievement of the target for priority sector lending to exports, the rate of interest for the contribution made by banks could be in inverse proportion to the extent of shortfall in the lending vis-à-vis the target. This structure could be similar to the structure of the Rural Infrastructure Development Fund currently maintained by NABARD.

The eligible activities that could be supported by the EPF should focus on capacity-building, product development, R&D promotion, creation of export infrastructure and other export support services. The projects typically should improve the competitiveness of Indian exporters while being consistent with the export growth strategy of the government.

The authors are economists with the Export-Import Bank of India. The views are personal.