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Cabinet set to clear interest subsidy scheme for exporters

India’s merchandise exports contracted at the quickest rate in the past five months in August, as shipments of petroleum products continued to sink on lower crude oil prices and external demand remained weak amid a tepid global economic recovery. Photo: BloombergPremium
India’s merchandise exports contracted at the quickest rate in the past five months in August, as shipments of petroleum products continued to sink on lower crude oil prices and external demand remained weak amid a tepid global economic recovery. Photo: Bloomberg

The move is expected to provide relief to exporters after shipments contracted for the ninth consecutive month in August

New Delhi: The Union cabinet is set to clear an interest subsidy scheme for exporters for a period of five years, after the finance and commerce ministries resolved their differences over the matter.

The move is expected to provide relief to exporters after shipments contracted for the ninth consecutive month in August.

The interest subvention scheme, through which government makes cheaper rupee credit available to exporters, expired on 31 March 2014, along with the five-yearly foreign trade policy. After the National Democratic Alliance government took over in May 2014, it engaged in extensive consultations with stakeholders and finally announced a new trade policy for 2015-20 on 1 April this year with a gap of one year and promised to quickly relaunch the interest subsidy scheme. However, the commerce and finance ministries could not agree over the tenure of the scheme.

“The scheme will be announced for a period of five years. A review of the scheme will be carried out after initial three years. This is expected to give confidence to the exporters that there will be continuity in policy. A cabinet note for the same has been moved," a government official said, requesting anonymity.

The cabinet will take a final decision on whether to implement it from the beginning of the current financial year (1 April) or from the second half of it (1 September), the official said.

Under the scheme, labour-intensive exporting sectors such as handicrafts, handlooms, small and medium enterprises, readymade garments, processed agriculture goods, sports goods and toys, and many engineering items are likely to be provided a two-three percentage points interest subsidy per annum.

With the Reserve Bank of India also reducing its benchmark lending rate, credit costs for exporters are expected to substantially come down, once banks transmit the rate cuts. However, according to existing rules, interest rates cannot fall below 7% for exporters—the rate applicable to the agriculture sector under priority sector lending.

Independent foreign trade analyst T.N.C. Rajagopalan said that though interest subsidy for exports is overdue and welcome, it is unlikely to prove enough to make India’s exports competitive in the global market in any significant way. “It is not going to be a game-changer for the exporters. High transaction costs and intermediary charges also contribute significantly to the cost of exporters, making them uncompetitive," he added.

India’s merchandise exports also contracted at the quickest rate in the past five months in August, as shipments of petroleum products continued to sink on lower crude oil prices and external demand remained weak amid a tepid global economic recovery.

Data released by the commerce ministry showed exports contracted 20.7% to $21.2 billion and imports shrank 9.95% to $33.7 billion during the month, leaving a trade deficit of $12.5 billion.

Among other major items, shipments of gems and jewellery and drugs and pharmaceuticals grew 2.7% and 6%, respectively, while those of chemicals, engineering goods, electronic goods and readymade garments contracted 5%, 29.1%, 17.4% and 7.3%, respectively.

In all, shipments of 23 out of 30 commodity groups contracted in August. Contraction in exports of engineering goods and readymade garments is particularly worrying as both had shown signs of a recovery in July with positive growth rates.

Citing falling import demand and lower commodity prices, the World Trade Organization (WTO) on 30 September lowered its forecast for world trade growth in 2015 to 2.8%, from the 3.3% forecast in April, and reduced the estimate for 2016 to 3.9% from 4%.

“If current projections are realized, 2015 will mark the fourth consecutive year in which annual trade growth has fallen below 3% and the fourth year where trade has grown at roughly the same rate as world GDP (gross domestic product), rather than twice as fast, as was the case in the 1990s and early 2000s," WTO said in a statement.

The commerce ministry has called a meeting of exporters on 7 October to seek feedback and suggestions about the steady contraction in exports and how transaction costs could be further reduced.

India aims to take exports of goods and services to $900 billion by 2020 and raise the country’s share in world exports to 3.5% from 2% now. Exports during the past four financial years have been hovering at around $300 billion.

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