Export firms face credit constraints, including access, volume, cost, and maturity mismatch. As India’s integration into the global economy rises, the lack of trade finance aggravates business fluctuations and global shocks. While currency depreciation theoretically boosts exports, a lack of trade finance prevents export firms from capitalising on such opportunities.
A high-cost structure, the dormant corporate bond market, and overburdened scheduled banks characterise the domestic credit market. A pragmatic policy needs low-cost and easy access to credit that reduces the total cost of exports, providing comparative advantage to Indian firms. India aims for a $2 trillion export target by 2030 and $10 trillion by 2047, necessitating easy and low-cost access to trade finance.
Domestic credit constraints necessitate the increase of foreign currency borrowing (FCB). Such low-cost global borrowings ease domestic credit constraints by bringing in the required capital. The FCB in India has substantially increased since the liberalisation of norms. Medium, small, and micro enterprises (MSMEs) are increasingly borrowing through this channel. The domestic credit markets are almost inaccessible due to cost structure and giant firms’ elite capture of bank credit. Hence, FCBs act as low-cost sources of capital for the Indian corporate sector.
Improved performance
The evidence shows that export firms in India, especially the MSMEs, with access to the FCB substantially improved their export sales performance compared to those without access to such trade finance. Export firms are suitable candidates to utilise the FCB channel as they have a natural hedge (export earnings) against exchange rate shocks. Our research also shows that the export firms with FCB have not reduced their investment following currency depreciation. Instead, thanks to access to FCB, such firms could expand production and sales, taking advantage of rupee depreciation in recent years.
The Central and State governments provide grants and subsidies to export firms. Often, such grants are not sufficient and cannot replace or fill the gap due to a lack of access to low-cost credit. Export firms with access to FCB utilise these grants more effectively than those without such low-cost borrowings.
While the Foreign Exchange Management Act (FEMA) reforms and relaxed norms for external borrowing immensely helped Indian firms access low-cost FCBs, on-shoring these borrowings is essential to ensure easy access and further reduce the cost. The role of the International Finance Securities Center (IFSC) at Gujarat International Finance and Tech (GIFT) city is vital in on-shoring the FCB and overcoming trade finance challenges.
IFSC is progressively facilitating the on-shoring of FCB. IFSC authority (IFSCA) developed a framework that enables on-shoring FCB, offering similar benefits of offshore credit to firms. The light regulation and simplified taxation regime combined with tax incentives at IFSC are far more advantageous for banks and corporates than from global centres. Creditors, including banks and financial institutions, are additionally benefiting from the lower operational costs, affordable real estate, and human resources at GIFT City compared to other global finance centres.
The 69 per cent exposure of International Banking Units (IBUs) to Indian entities indicates that GIFT City is fast growing as a preferred destination for Indian companies to avail trade finance. The IBUs have extended $52 billion of loans as of December 2023, more than double the previous year’s volume.
Large Indian companies are availing themselves of trade finance from the GIFT City, including masala bonds. The Central/State governments must provide expert support to export-oriented MSMEs to access the FCB from GIFT City. IFSC Gift is emerging as a leading global centre for trade finance and contributing to achieving the goals of trade by 2047.
The writer teaches finance at IIT Kharagpur. Views are personal