Kochi: The central bank’s decision to withdraw the 2% interest rate relief on export credit has come as a double blow to plantation and textile exporters in a tighter fiscal regime.
The withdrawal of the subsidy, announced this month. comes at a time when a sharp increase in raw material costs, freight and transportation charges has pushed inflation to above 12%, the highest in more than 13 years, and prompted banks to raise interest rates.
Double blow: A worker at a textile mill in Tirupur. High fuel and raw material cost have pushed up production costs of textile companies.
“It’s a double whammy,” said Ramesh Raja, president of the Coffee Exporters Association. “The benefit of subvention goes when banks have increased their lending rates, leaving India outpriced by its competitors.”
The rate of interest for export credit is in the range of 7.75% to 8%. The 2% interest relief provided a distinct advantage as the rupee started appreciating last year to reach a peak of 39.265 against the dollar as on 15 January, denting export earnings.
But, the rupee has since weakened to about 42.11 as on Friday in a boost to exporters, prompting the withdrawal of the interest-rate relief on export credit effective next month-end.
The Reserve Bank of India (RBI) may be justified in withdrawing the facility, but the central bank and the finance and commerce ministries should consider the rising costs of production as well, said Sushma Srikandath, head of the All-India Spice Exporters Forum, or Aisef.
The spice industry, for instance, now pays about Rs70,000 to transport a truckload of coriander from Rajasthan to Kochi, about Rs45,000 more than it was paying last year, she said.
The Reserve Bank of India has taken several measures to curb inflation, the latest being a 50 basis point hike in its policy rate and a 25 basis point raise in the cash reserve ratio — the amount of money banks need to hold with the central bank as a portion of their deposits — on 29 July. One basis point is one-hundredth of a percentage point.
Higher fuel and cotton prices, increased power costs and other tariff increases have pushed up production costs. For instance, the cost of making a T-shirt in Tirupur increased to Rs186.53 by the end of July from Rs144.50 as on 30 May, said A. Sakthivel, president of Tirupur Textile Exporters, an association of garment and knitwear exporters in the textile town of Tirupur in Tamil Nadu.
“With escalating costs, it is impossible to stay in the competitive market since our competing countries are getting credit at lesser rates,” he said. “Besides, garment exporting units are not in a position to increase rates as the prices are decided in advance.”
With inflationary pressures and high credit rates, Indian tea will also find it difficult to compete in global markets, said Sashi Shah, senior vice-president of the All-India Merchant Tea Exporters Forum.