Interest Equalisation Scheme Extension for Exporters

The Indian Commerce Ministry is poised to request an extension of the Interest Equalisation Scheme in the upcoming Budget. This scheme offers pre- and post-shipment rupee export credit to boost the country’s export performance. Originally set to expire on December 31, 2024, it is crucial for exporters facing global economic challenges.

Overview of the Interest Equalisation Scheme

The Interest Equalisation Scheme was launched on April 1, 2015. It aimed to provide exporters access to competitive interest rates on rupee export credit. This initiative specifically targets certain sectors and all Micro, Small and Medium Enterprises (MSMEs). The scheme has undergone multiple extensions since its inception.

Financial Support for Exporters

Under this scheme, exporters receive subsidies on interest rates. Merchant and manufacturer exporters benefit from a 2% interest equalisation on pre- and post-shipment credit. MSME manufacturer exporters receive a higher benefit of 3%. The scheme covers approximately 410 identified tariff lines, including handicrafts, leather, and textiles.

Implementation and Monitoring

The Reserve Bank of India (RBI) manages the scheme’s implementation through various banks. The Directorate General of Foreign Trade (DGFT) and RBI jointly monitor the scheme. This consultative mechanism ensures that the benefits reach the intended exporters effectively.

Budget Allocations and Disbursements

From April 2023 to November 2024, the government allocated ₹2,932 crore for the scheme. As of November 30, 2024, ₹2,641.28 crore had been disbursed. This indicates a steady utilisation of funds. In previous years, disbursements were ₹3,118 crore in 2022-23 and ₹3,488 crore in 2021-22.

Exporters’ Perspectives

Exporters have voiced strong support for the extension of the scheme. They argue that it enhances their competitiveness globally. The Federation of Indian Export Organisation (FIEO) emphasises that similar interest rates in countries like Chinly benefit their exporters. Indian exporters seek similar advantages to thrive in international markets.

Future Considerations

The Finance Minister is expected to address the extension in the Union Budget scheduled for February 1. The outcome will impact the export landscape and the financial health of many Indian exporters.

Importance in Current Economic Climate

The scheme plays a vital role in the current economic scenario. As global markets face uncertainties, Indian exporters rely on this support to maintain their foothold. The extension could provide much-needed relief and stability.

Conclusion on Export Dynamics

The Interest Equalisation Scheme remains a key driver for India’s export growth. Its potential extension could further boost the sector, ensuring that Indian products remain competitive on the world stage.

Questions for UPSC:

1. Estimate the impact of the Interest Equalisation Scheme on India’s export growth since its inception.
2. Critically discuss the role of MSMEs in the Indian economy and their significance in the export sector.
3. Examine the challenges faced by Indian exporters in the global market and how government policies can address these issues.
4. Analyse the implications of interest rate differences between India and other countries on export competitiveness.

Answer Hints:

1. Estimate the impact of the Interest Equalisation Scheme on India’s export growth since its inception.

1. Introduced in April 2015, the scheme has provided crucial financial support to exporters, enabling access to competitive interest rates.
2. It has contributed to increase in exports from targeted sectors, including handicrafts, leather, and textiles.
3. Data shows disbursements of ₹3,488 crore in 2021-22, indicating strong utilization and support for exporters.
4. The scheme has undergone multiple extensions, reflecting its importance in sustaining export growth amid global economic challenges.
5. Exporters report enhanced competitiveness in international markets, attributing this to the financial relief provided by the scheme.

2. Critically discuss the role of MSMEs in the Indian economy and their significance in the export sector.

1. MSMEs contribute around 30% to India’s GDP and are crucial for job creation, employing over 110 million people.
2. They represent portion of India’s export base, particularly in sectors like textiles, handicrafts, and engineering goods.
3. Government schemes, including the Interest Equalisation Scheme, specifically benefit MSMEs by providing easier access to credit.
4. MSMEs encourage innovation and competitiveness, driving economic growth and diversification in the export sector.
5. Challenges such as limited access to finance and technology hinder their potential, necessitating continued policy support.

3. Examine the challenges faced by Indian exporters in the global market and how government policies can address these issues.

1. Indian exporters face high logistics costs, regulatory hurdles, and complex compliance requirements that affect competitiveness.
2. Fluctuating currency exchange rates can impact profitability, making stable financial support essential.
3. Global market uncertainties, such as trade wars and economic slowdowns, pose additional risks to export performance.
4. Government policies like the Interest Equalisation Scheme and export incentives can mitigate these challenges by providing financial stability.
5. Strengthening trade agreements and improving infrastructure can further enhance the global competitiveness of Indian exporters.

4. Analyse the implications of interest rate differences between India and other countries on export competitiveness.

1. Lower interest rates in countries like China (2-3%) provide their exporters with a cost advantage, enabling competitive pricing.
2. Higher borrowing costs in India can reduce profit margins for exporters, making it harder to compete internationally.
3. The Interest Equalisation Scheme aims to bridge this gap by offering subsidies to Indian exporters on interest rates.
4. Interest rate disparities can influence investment decisions and the overall business environment for exporters.
5. Addressing these disparities through policy measures is crucial for enhancing the competitiveness of Indian goods in global markets.