NEW DELHI: Two months ago, with fiscal consolidation on his mind, Finance Minister Pranab Mukherjee scratched out export subsidies from his budget. Today, worried by a widening gap between imports and exports, the government is thinking of bringing back sops for exporters.
These subsidies are likely to include discounted interest rates, and product- and market-linked incentives. The government believes these could boost exports and help narrow a trade deficit which has expanded to 9% of GDP.
“Recently, we had a debate in Parliament on the export situation while discussing the demand for grants. We are seriously looking at giving fresh incentives to exporters,” Commerce and Industry Minister Anand Sharma told ET.
Incentives, worth about Rs 1,700 crore, were announced in October last year. These included sops for exporting products such as textiles, engineering goods, chemicals and electronics to new and traditional markets, and the interest subvention scheme that gave loans to exporters from select sectors at subsidised rates. Both expired on March 31.
The budget was a disappointment for exporters, who were expecting handouts, as the finance minister refused to acknowledge tough times in overseas markets, including jitters caused by uncertainty in the EU.
“The budget left 150,000 micro, small, medium and large exporters highly disappointed,” said SP Agarwal, president of the Delhi Exporters’ Association.
“Due to the global slowdown, we were expecting a lot from the government,” said Agarwal added.
Since then the situation has worsened, with exports actually shrinking in March 2012, the first time this happened since 2009, at the peak of the Great Recession.
This is probably what has changed the government’s thinking.
India’s trade deficit rose to an all-time high of $185 billion in 2011-12 from $130 billion in the year before despite hitting targeted exports of $300 billion. Imports surged to $488.6 billion, driven primarily by oil and gold. The current account deficit for 2011-12 was likely to be 4% of the GDP, not a comfortable number for policymakers.
It should ideally come down to 3% to 3.5% in the current fiscal, commerce secretary Rahul Khullar had said. For that to happen, the country needs to increase exports.
“The finance ministry seems more responsive to our demand now, and the commerce minister may be in a position to deliver a few incentives for exporters when he announces the foreign trade policy later this month,” a commerce department official told ET.
The government is looking at re-introducing the interest subvention scheme for small and medium size exporters, as well as some vulnerable sectors, such as handicraft and handloom, that expired last fiscal. Banks give loans to eligible exporters at a 2% discounted rate under the scheme and are later reimbursed by the government.
Cheap credit is a key concern for exporters as the RBI’s decision to deregulate foreign currency denominated loans was expected to result in a sharp increase in interest rates, said Ajay Sahai, director general, Federation of Indian Export Organisations.
“We have already seen 40-45% increase in interest rates charged by banks for credit to exporters in the last two years after the RBI allowed interest rates to be brought above base rates,” Sahai said.
Other incentives that are being discussed are direct sops for sectors which are struggling to retain their foothold in traditional markets as well as trying to make in-roads into new ones. These incentives will be in the form of scrips that can be either used to import products at discounted import duties equivalent to the value of the scrips or sold in the market.
Although India’s exports crossed the goal of $300-billion in 2011-12 growing 21%, exports grew only 10% in the second half of the fiscal.
The government’s plan to bring back subsidies such as cheap loans to prop up exports makes no sense. Instead, the government should open up trade in farm products, which are severely restricted now.
A record 75 million tonnes of grain will pile up by next month and much will be lost in the monsoons that will follow. Instead of allowing grain to rot, the government should allow exports. Beefing up storage, marketing and transport infrastructure will also increase the competitiveness of manufactured exports.
A weak rupee, which inflates import costs, actually improves export competitiveness. Competitiveness is the answer, not sops.