Thrust on exports will pay dividends
With green shoots in the economy, availability of duty drawback, flow of priority sector credit and interest subsidy, the export sector can look forward to a faster revival to meet the country’s aspirations of reaching a target of exports
With green shoots in the economy, availability of duty drawback, flow of priority sector credit and interest subsidy, the export sector can look forward to a faster revival to meet the country’s aspirations of reaching a target of exports of $900 billion by 2020 as enunciated in the Exim Policy. The sops have been well calibrated to put the exports in a faster growth mode
Exports have been declining during FY16 due to fall in global commodity prices and general slowdown in global economy. Consequently, India’s merchandise exports are expected to decline to $265-268 billion, significantly lower than $310.5 billion recorded in the previous fiscal. Earlier, Indian exports had achieved a landmark of breaching the $300 billion mark in FY12 for the first time, making the country a sizeable player in global exports. Bulk of India’s export basket comprises commodities, be it engineering goods (mostly iron ore/steel and other metals), or petroleum products, which have been hit in value terms due to drop in global commodity prices including crude oil. Cumulative value of exports for the period April-October 2015-16 could reach $154 billion as against $187 billion recording a negative growth of 17.62 per cent in dollar terms and 12.21 per cent in rupee terms over the same period last year.
In the backdrop of such tardy exports, the cumulative value of imports for the period April-October 2015-16 has been $232 billion as against $273 billion in corresponding period last year, posting a negative growth of 15.17 per cent in dollar terms. Consequently, the trade deficit for April-October this fiscal works out to $78 billion which is lower than the deficit of $86 billion during the corresponding period of FY15. The gold monetization scheme, particularly the gold bonds are expected to bring down gold imports over a period of time further reducing the trade deficit.
According to the World Trade Report 2015 of World Trade Organisation (WTO), the exports of developing and emerging economies grew faster than those of developed countries in 2014, 3.1 per cent in the former and 2.0 per cent per cent in the latter. Meanwhile, imports of developing countries grew more slowly than those of developed economies, 1.8 per cent compared to 2.9 per cent. Seasonally adjusted quarterly trade volume indices for the first quarter of 2015 showed import demand accelerating in developed economies but slowing in developing countries. Flow of global trade is promising with rising interconnectedness between the economies. But according to Organization for Economic Co-operation and Development (OECD), right now due to world economic crisis, global trade is set to grow at 2 per cent in 2015 and is poised to increase to 3.6 per cent in next year.
But Asia still continues to be at the centre stage of global trade despite exports of China and India dipping. China’s imports fall by 18.8 per cent from a year earlier and their exports shrink 6.9 per cent. The share of intra emerging markets will increase to one third of global trade by 2020 rising from a marginal level of 10 per cent witnessed in 1995. Hence, once the appetite of the global import hubs revives, emerging countries can look for greater pie in world trade.
Export sops in India
Under the revised pan-industry Rates of Duty drawback, effective November 23, 2015, refunds of duties on items imported to be used as inputs for eventual exports have been enhanced on a range of items, including iron, steel, garments and marine products with higher duty incidence. The old interest subvention scheme which expired on March 31 last year has been replaced with ‘Interest equalization scheme’ under which exporters can get cheaper credit. This interest subvention scheme announced now for five years was not available to exporters in FY15. Due to its stretched duration, it can help exporters plan their exports better. Under the scheme, pre- and post-shipment rupee export credit will be equalized.
Exports under as many as 416 tariff lines by small and medium sized enterprises, particularly labour intensive sectors such as processed food and handicrafts will get interest subsidy of 3 per cent which can go a long way in placing Indian exporters on a level footing with competitors. Even after the new regime of interest subvention, the interest rates charged to Indian exporters will be higher than the rates prevailing in other countries. Interest rate in China is 6.25 per cent and In Bangladesh it is 6.75 per cent whereas in India it still works out to 7-8 per cent. Still it can help exporters to price the products in the overseas markets more appropriately.
Export credit norms
Though it was suggested that 12 per cent of bank credit should flow to export sector, it was not mandatory and as a result, not much incentive was available to banks to lend to export sector. However, with effect from April 23, 2015, banks have to lend a minimum of two per cent of Adjusted Net Bank Credit (ANBC) to export sector. The ANBC is the outstanding bank credit added to investments made by banks in non-SLR bonds (in held-to-maturity (HTM)) or it is the credit equivalent of off-balance-sheet exposures, whichever is higher. Such export credit will qualify as a priority sector lending and hence can become a priority business for banks to lend to export sector. With interest rates coming down and banks’ lending under priority sector, the flow of export finance in the next few years is expected to increase substantially. Moreover, banks can cover the export credit against the schemes of Export Credit Guarantee Corporation of India Ltd (ECGC). ECGC provides export credit insurance facilities to exporters and banks in India. It functions under the administrative control of Ministry of Commerce & Industry.
Looking to the reviving trends of the economy, availability of duty drawback, flow of priority sector credit and interest subvention, the export sector can look forward for a faster revival of export performance to meet the aspirations of reaching a target of exports of $900 billion by 2020 as enunciated in the Exim Policy. The sops have been well calibrated to put the exports on a faster mode.
(The author teaches at the National Institute of Bank Management (NIBM), Pune. The views are his own)
Dr K Srinivasa Rao