With the rupee continuing to appreciate against the dollar, the government has announced a Rs1,400 crore relief package for exporters, who welcomed the move, although they thought it was inadequate. The money is to be spent in 2007-08.
The relief package includes an interest subsidy on bank credit, which will cost the government around Rs600 crore; an increase in duty drawback on inputs used in the manufacture of export goods that will cost Rs800 crore; and an administrative measure to hasten certain reimbursement claims from exporters eligible for incentives.
While the interest subsidy is meant only for small and medium-sized exporters, all other measures apply to all exporters. Export firms with revenues less than Rs10 crore are classified small and medium-sized. The number of such firms in the country isn’t known.
“These (the relief measures) are not sufficient, but whatever has been given is welcome because the government has acknowledged there is a problem,” said Ganesh Kumar Gupta, president, Federation of Indian Export Organizations (FIEO).
The relief measures have been announced in the wake of the rupee’s sharp appreciation against the dollar. The local currency has appreciated against the greenback, the preferred currency for global trade, by 6.8% in the three months to June 30. The rupee closed at 40.50 to the dollar on Thursday.
In the year to May 2007, the rupee has risen 12.6% against the dollar, said D. Subbarao, finance secretary at the ministry of finance, who announced the package at a conference where Vinod Rai, secretary, financial services, and P.V. Bhide, revenue secretary, were also present.
The rise of the rupee would not affect India’s prospects of meeting its target of $160 billion of exports in 2007-08, said Subbarao.
“Exchange rate has an impact on exports, but it is not the sole determinant. The measures are temporary in nature with a sunset clause,” he added. Bhide said that the Rs800 crore cost to government on the duty drawbacks had been calculated using the country’s 2006-07 exports of $124.6 billion as the benchmark.
The increase in duty drawback rates essentially involves a refund of the customs and excise duties on inputs that go into exports. The rates have been increased in the case of categories such as garments, finished leather, stainless steel utensils and writing instruments. The new rates, which were recommended by a committee that submitted its report on 6 July, have factored in service tax paid on services that are used as inputs by exporters, said a release from the finance ministry. The increase in duty drawback rates is effective retrospectively, from 1 April.
Rai said the interest subsidy will be introduced by the central bank, the Reserve Bank of India (RBI). This too will be with retrospective effect from 1 April. Rai added that the subsidy would end on 31 December. The subsidy involves a reduction in the rate on export shipment credit. This rate is currently 2.5% less than the key lending rate. It is being reduced to 4.5% less than the lending rate. In absolute terms, that works out to around 8%. Banks lending to exporters can recover the cost differential from RBI which in turn will recover it from the government.
The representative of an export body admitted that the measures would help—to an extent. “We’re not fully satisfied by the relief measures, but this will arrest the decline in apparel exports which was seen since April,” said Vijay Aggarwal, chairman, Apparel Export Promotion Council.
While drawback rates on most items were increased, the finance ministry announced a decrease in drawback rates on primary steel, dyes and chemicals, as the duty levied on inputs used in these cases has already been reduced.
Unlike the increase in drawback rates, the interest subsidy on export credit is only for small and medium enterprises and all exporters, regardless of size, in nine sectors, including leather products, sports goods, engineering products and toys.