NEW DELHI: Director General & CEO, Federation of Indian Export Organisations (FIEO) Ajai Sahai shares with The Sunday Guardian his hope to see the interest subvention scheme find its place in the Government’s 100-day agenda and the relevance of the scheme amidst global disruptions here are some excerpts.
Nivedita Mukherjee
Q: Why is the interest subvention scheme that FIEO has raised, so critical now as the Govt looks at a third term in office?
A: As of now, the interest subvention scheme is valid till 30 June. Exporters who are now negotiating contracts, have to look into the supplies of the contract they have to deliver in the July to September period. There is some doubt in their minds as to what happens to the scheme post-June because if I have to take a position now for my shipments between July and September, I would want a little certainty about that. Hence from that perspective, we are asking the Government to look into the extension of the scheme.
We are also seeking steeper intervention from Government because when the interest subvention was announced, the rate was five per cent for MSMEs in manufacturing sector and 3 per cent for some of the 410 HS lines which the government thought was important to protect the sectors. The subvention rates were reduced from 5 per cent to 3 per cent, and from 3 per cent to 2 per cent respectively, in March 2022, due to drop in interest rates.
It is worthwhile to note that the Repo Rate in March 2022 was 4.4 per cent, which currently is 6.5 per cent. So general increase in the credit rate is 3 per cent plus. That is why we are saying that the interest subvention may be restored to 3 per cent for 410 tariff lines and 5 per cent for MSME manufacturers as export competitiveness as compared to that time has come down. The short point is that I am making a reasonable request and I want it to be addressed as early as possible.
Q: Is this important for you as part of Modi 3.0’s 100-day agenda?
A: Definitely. The Government has discussions with us on a number of issues and I am not sure which ones will go as part of the 100 day agenda but for augmenting the flow of credit to the export sectors we are also saying that within priority sector lending (PSL) there should be a sub-target for export credit.
As we know that the RBI, to augment flow of credit to exports, brought Export Credit under PSL. Given the importance accorded to finance in driving export growth, a suggestion was made during the Chintan Shivir organised at Vanijya Bhawan on 16 April. 2024, that the RBI may consider prescribing a sub-target for export credit within the existing 40 per cent target for priority sector lending (PSL). Alteady 7.5 per cent is earmarked for MSMEs. So why not earmark 5 per cent for export sector so that banks also maintain their flow to export credit.
To make it more workable, 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.
Q: Why is export credit in India so challenging?
A: The share of export credit in the net bank credit is extremely low and not commensurate with the share of India’s exports in the GDP which is over 20 per cent. Moreover, the percentage of export transactions covered by export credit guarantee/insurance is much smaller in India compared to the international average of 10-12 per cent. The availability, as well as utilisation of export finance in terms of lines of credit, in particular,, is low.
The demand-side constraints are the low-risk and static export structure of the country.
India’s export finance sector suffers from two types of information asymmetries, particularly for SMEs; first is a lack of market information and second is a lack of awareness among exporters about Export Finance instruments and their benefits.
Q: How do you respond to the scheme’s usefulness?
A: Some reports have appeared about the relevance of the scheme. We are saying that the scheme is extremely relevant and extremely helpful as the cost of credit in India is generally 5 per cent plus as compared to our competitor. If you compare with the base rate of most of the countries vis a vis India, there is a difference of around 3 to 3.5 per cent and the spread by the banks in India is little higher, because assuming the bank rate in US is 3.5 per cent you get accredited 4.5 per cent. In India, if the base rate is 6.5 you don’t get it below 9.5 or 10. That is why we are saying that if we have a five per cent differential, this (scheme) justifies because the cost of credit is an important component of the overall competitiveness of exports. We want a quick decision on the extension of the scheme beyond June because a lot of exporters have to take a call and we are justifying why we want a higher interest subvention also.
Q: How has the current geopolitical situation impacted trade and business?
A: As of now it is only adding to the uncertainty. Nobody is aware how the situation will evolve. We are hoping that diplomacy prevails and we are able to defuse the tension. If that happens, there won’t be much of a challenge. If some other countries directly or indirectly join the conflict, it may escalate further. That is our worry for now. Moreover, most of the shipments from the Red Sea are taking the longer route of the Cape of Good Hope. However many of the buyers are insisting on quick dispatch. So there we are moving to air shipment because of which the air freight has gone up drastically. For instance India to Europe, it was Rs 35 a kg six months back. Now it has gone up to Rs 40 per kg. A 300 per cent increase.
Q: Are you looking for further support from the Government?
A: One issue is whether we will have excess air freight capacity. The problem with air freight is that it is not an issue that airports are not in a position to handle. The number of airlines that are required. We have very few specific cargo planes. Most of the consignment goes into the belly of the aircraft. If we have more aircraft and some specific cargo planes, we can look into addressing these issues quickly.
The exporters also want Government to address issues relating to Interest Equalisation Scheme. Each bank has framed its own rule and appliers its own logic to exercise discretion in giving interest equalisation benefits. While RBI requires banks not to insist on security for export finance, most banks insist on the same. When such security is provided by means of fixed deposit, banks turn around and deny interest subvention on the grounds that exporters are enjoying dual income — by means of interest income on FD, as well income by means of subvention due to reduced rate of export finance.
The purpose of interest subvention as envisaged by Government is to reduce cost of interest on Rupee borrowing for export finance, thus to encourage exports. Banks are interpreting the policies as convenient to them without export promotion being the vision.
Besides, banks are allowing interest subvention on eligible outstanding export credit from the date of disbursement till the date of liquidation or the date it becomes overdue, whichever is earlier.
Due to global liquidity challenges and logistics disruptions, many exporters are unable to receive payment on the due date. They suffer a double blow as banks deny them interest subvention and charge penal rates of interest. Since the subvention can be given up to a tenure of 270 days, exporters may be allowed interest subvention, if the payment is received within 270 days though after the due date. This will also remove the anomaly in which an exporter having a due date as 270th day gets interest subvention but another having a due date as 90th day and realising on 120th day is denied the interest equalisation.