DGFT Pushes for Continuation of Interest Equalisation Scheme for Exporters

DGFT Pushes for Continuation of Interest Equalisation Scheme for Exporters

Sub: Economy

Sec: External Sector

Overview:

• Current Status: The Directorate General of Foreign Trade (DGFT) is advocating for the extension of the interest equalisation scheme for exporters, which is due to expire on June 30.
• Objective: The scheme allows exporters to access bank credit at subsidised interest rates to enhance their competitiveness.

Key Points:

• Interest Equalisation Scheme:
  • Subsidy Details: The scheme provides a 2% interest subvention for loans to exporters in 410 identified sectors and a 3% subvention for MSME exporters.
  • Implementation History: Introduced in April 2015 for five years, it has been extended multiple times.
• Benefits to Exporters:
  • Cost of Credit: Exporters use the scheme to reduce their credit costs, enhancing their competitiveness.
  • Export Bodies’ Support: Bodies like the Federation of Indian Export Organisations (FIEO) argue the scheme is crucial for maintaining export competitiveness.
• Current Discussions:
  • Consultations: DGFT has consulted with export bodies and banks, finding strong support for the scheme’s continuation.
  • Finance Ministry’s Role: While the DGFT supports extending the scheme, the Finance Ministry is cautious about increasing subvention rates, a major demand from exporters.
• Exporters’ Demands:
  • Extension Period: Exporters are requesting an extension of 3-5 years to ensure stability and predictability.
  • Increased Subvention Rates: They argue for a 2% increase in subvention rates due to higher interest rates in India compared to competitor countries.
• Government Response:
  • DGFT’s Position: The DGFT is pushing for the scheme’s continuation based on its benefits in reducing credit costs for exporters.
  • Finance Ministry’s Concerns: The Finance Ministry is evaluating the scheme’s extension duration but is hesitant to raise subvention rates.
• Economic Impact:
  • Export Competitiveness: The scheme is seen as a critical tool for making Indian exports competitive in the global market.
  • Interest Rates: The demand for higher subvention rates is linked to the increase in the repo rate from 4.4% to 6.5%.

Conclusion: The continuation of the interest equalisation scheme is vital for maintaining the competitiveness of Indian exports. While the DGFT is in favor of extending the scheme, the Finance Ministry’s stance on the subvention rates remains a point of contention. The decision on the extension period and possible rate adjustments is awaited as the scheme approaches its expiration date.

Interest Equalisation Scheme (IES)

The Interest Equalisation Scheme (IES) is a key financial initiative launched by the Indian government to support exporters by providing subsidized interest rates on export credit.

The Interest Equalisation Scheme was first implemented on April 1, 2015, to provide financial relief and promote competitiveness among Indian exporters.

The scheme offers interest subsidies on pre- and post-shipment export credit in Indian Rupees.

Implementation and Duration

• Initial Validity: The scheme was initially valid for five years, up to March 31, 2020.
• Extensions: It has been extended multiple times, including a one-year extension during the COVID-19 pandemic, with further extensions and additional fund allocations continuing to support exporters.
• Administration: The scheme is implemented by the Reserve Bank of India (RBI) through various public and non-public sector banks that provide pre- and post-shipment credit to exporters.

Monitoring and Oversight

• The scheme is jointly monitored by the Directorate General of Foreign Trade (DGFT) and the RBI through a consultative mechanism.
• This collaboration ensures that the scheme’s objectives are met efficiently and any issues are promptly addressed.

Objectives

• Competitiveness: Helps identified export sectors to be internationally competitive by reducing their financing costs.
• Export Performance: Aims to achieve a high level of export performance by providing financial incentives.
• Focus on Labour-Intensive Sectors: Primarily targets labour-intensive sectors to boost employment and production.

Features of the Scheme

• Certification Requirement: Eligible exporters must submit a certification from an external auditor to the concerned bank to claim the benefit.
• Reimbursement Process: Banks provide the IES benefits to eligible exporters and then claim reimbursement from the RBI based on the external auditor certification furnished by the exporter.
• Interest Equalisation Rates:
  • 2% Benefit: Provided on pre- and post-shipment rupee export credit to merchant and manufacturer exporters of 410 identified tariff lines at the 4-digit level.
  • 3% Benefit: Provided to all MSME (Micro, Small, and Medium Enterprises) manufacturer exporters.

Recent Modifications

• Fund-Limited Scheme: The scheme has now been made fund-limited, meaning the benefits are capped based on the availability of funds.
• Benefit Cap: The benefit to individual exporters is capped at Rs 10 Crore per annum per IEC (Import Export Code).
• Lending Rate Restriction: Banks that lend to exporters at an average rate of more than Repo + 4% are debarred under the scheme. This ensures that the benefits are passed on to the exporters without excessive lending costs.

Impact

The IES has played a significant role in supporting Indian exporters by reducing their interest costs, making them more competitive in the global market. By focusing on labour-intensive sectors, it also promotes employment and contributes to the overall economic growth of the country.