Interest subsidy for exporters may be extended

The government is likely to extend the 2 per cent interest subsidy given to exporters on rupee export credit from March 31 to December 2010. The announcement is expected in the upcoming Budget.

Although India’s exports have started growing again after several months of decline, commerce ministry sources told Business Standard that the extension is being considered to sustain growth and stabilise it at 15 to 20 per cent.

The commerce ministry has asked the finance ministry to extend the scheme mainly for labour-intensive industries and some additional sectors like engineering and chemicals.

“We are considering the demand. But it is going to be a difficult call considering the fiscal situation. The sector needs support but the high fiscal deficit cannot be ignored,” a finance ministry official said. The government is running a fiscal deficit of 8 per cent of gross domestic product significantly above the statutory mandate.

Last year, the Reserve Bank of India had extended the incentive till March 31, 2010 from September 30, 2009 for such labour-intensive sectors as handicrafts, textiles, carpets, leather, gems and jewellery, marine products and small and medium enterprises that were badly hit by falling demand from the US, the EU and Japan.

Interest subvention on export-related credit enables exporters to get loans two percentage points cheaper than the prime lending rate. The scheme was first offered in mid-2007 as a rapidly appreciating rupee against the dollar shrank exporter margins. It was subsequently withdrawn and reintroduced in December 2008 as part of the government’s first stimulus package when the global economy started slowing.

This time, however, the government may pare the number of eligible sectors since some of them, like gems and jewellery and textiles, are showing signs of growth and stability, a senior commerce ministry official said.

With the global slowdown, the decline in the country’s exports peaked to almost 40 per cent in May 2009 after it entered negative territory in October 2008.

“Recovery has started in most sectors barring exports. Exporters are still facing the heat of recession because there is no demand from the US and Europe which are primary markets for India. There is some improvement in the textiles industry but that is primarily due to a focus on the domestic market. Exporters in mining and steel still face problems,” said the head of a Delhi-based bank.