In News:

• The government has decided to provide 3% interest subsidy to merchant exporters to enhance flow of funds for them with a view to boosting outbound shipments.

Explained:

• The decision was taken by the Cabinet Committee on Economic Affairs.
• “The proposal will entail benefits of around Rs. 600 crores to exporters on interest equalization for the remaining period of the scheme
• These products are largely in MSME/labour-intensive sectors such as agriculture, textiles, leather, handicraft and machinery.
• The proposal will entail benefits of around Rs 600 crore to exporters on interest equalisation, for the remaining period of the scheme, set to end in April 2020.
• The IES allows small and medium exporters in labour-intensive sectors to avail of loans from banks at a lower rate of 3 per cent.

Interest Equalisation Scheme:

• The Cabinet Committee on Economic Affairs, has given its approval for Interest Equalization Scheme (earlier called Interest Subvention Scheme) on Pre-& Post Shipment Rupee Export Credit with effect from 1st April, 2015 for five years. The scheme will be evaluated after three years.
• Originally announced as a measure to boost exports for five years, the IES on pre- and post-shipment rupee export credit was revived in 2015 at a rate of 3 per cent for 416 specific goods categories (four-digit tariff).
• The sectors covered are mostly labour-intensive and include agriculture or food items, auto components, handicraft, electrical engineering items, and telecom equipment. The scheme is, however, not available for merchant exporters. The last Budget had allocated Rs 2,500 crore for the IES.
  

  The following are the features of the Interest Equalization Scheme:

  • The rate of interest equalisation would be 3 percent. The scheme would be available to all exports of MSME and 416 tariff lines. Scheme would not be available to merchant exporters earlier which is now modified to allow them to boost the exports
  • The duration of the scheme would be five years with effect from 1.4.2015.
  • The scheme would be funded from the funds available with Department of Commerce under non-plan during 2015-16 and the restructured scheme would be funded from plan side from 2016-17 onwards.
  • Ministry of Commerce & Industry may place funds in advance with RBI for requirement of one month and reimbursement can be made on a monthly basis through a revolving fund system.
  • On completion of three years of operation of the scheme, Department of Commerce may initiate a study on impact of the scheme on export promotion and its further continuation. The study may be done through one of the IIMs.

Significance of This Move:

• Merchant exporters also play a pivotal role in exports of MSME manufacturers as they export a significant quantity of products through merchant exporters
• Merchant exporters play an important role in finding overseas markets, getting export orders, communicating to MSME manufacturers the current preferences, trends and demand for products in international export markets.
• The benefit will push manufacturing in micro, small and medium enterprises (MSMEs), creating job opportunities as well
• Merchant exporters account for over 35 per cent of the country’s exports.
• The high cost of credit equally impacts their competitiveness as they factor in the high interest costs in their export costing.