Reported by: banking|Updated: July 22, 2015
S.C. Ralhan, president, Federation of Indian Export Organisations (FIEO), argues for urgent need to reduce high cost of credit and augment liquidity support for the exporters in the midst of continuously falling trends in exports:
Indian exports decreased by 15% in June 2015. Exports fell for the 7th month in a row, although the rate of contraction came down from 20% in the previous month. The continuous negative double growth in exports since December 2014, is matter of serious concern as most of the sectors which have exhibited a decline in the month of May, 2015 have shown even deeper negative trend in June, 2015. Decline in exports of petroleum products, engineering goods, gems & jewellery, organic & inorganic chemicals, drugs & pharmaceuticals, leather & leather products, electronic goods and plastics & linoleum are of grave concern as these sectors have either shown further decline or have further moved into negative territory. Emerging economies particularly of Asia are also contracting due to slowing down of China.
Factoring for Exporters
Factoring is the sale of accounts receivable of a company to a financing company. Factoring was once used mostly by large corporations. Now factoring has become more widely used. Factoring has now become ‘without recourse’ and without any subsequent liabilities but the immediate collateral export.
Factoring is resorted to by major exporters as a way of reducing exchange rate risk. While the factoring was introduced way back in 2001 but made little headway subsequent to the Factoring Act of 2011, which did away with stamp duty allowing banks to undertake factoring business without any requirement for registration.
RBI’s master circular on loans and advances had earlier restricted factoring prohibiting banks from purchase of bills drawn otherwise than under a letter of credit on a ‘without recourse’ and not treating it as ‘a true sale for assignor’.
S.C. Ralhan, president, Federation of Indian Export Organisations (FIEO), says: “Factoring will now be a viable post-shipment finance alternative. Factoring will open up more avenues of finance for exporters over and above traditional financing from banks. Similarly, IRDA‘s notification demanding differential treatment being given to the same preventing all general insurance companies to sell credit insurance to the banks and NBFCs would also be inconsequential now.”
FIEO urges the government to quickly notify the interest subvention for imparting some competitiveness to Indian exports. This notification, which is long overdue, may help to resurrect declining export numbers.Rs1475crore, Rs1435 crore and Rs 1625 crore (estimated) were given as interest subvention in 2012-13, 2013-14 and 2014-15 respectively. Ralhan says: “Government should reintroduce interest subvention. The interest subvention for exports should be released immediately as the inordinate delay is dampening the spirit of exporters which is otherwise low also due to global conditions support export marketing to steer exports.”
FIEO urges the government to incentivizing the sector with certain schemes. The incentives being given to exports sector is less than 1% of the total exports. Incentives as a percentage of exports were 0.63% in 2012-13, 0.75% in 2013-14 and 0.95% in 2014-15. Ralhan says: “Export incentives given to the sector during the last 3 financial years, in which India’s exports have been hovering at around $300-310 billion, are a miniscule amount and therefore FIEO is of the view that there is an urgent need to review the benefits announced in the new Foreign Trade Policy to sustain the exports growth in a situation when global economies are reeling under intense pressure, except for a few. The percentage of benefits being given should be increased and if not possible, at least the same may be restored at the same level as earlier.
MSME’s Credit Off-take
The high cost of credit has impacted adversely the credit off-take which has declined to 8.9% for industry in April 2015 (from 14.2% in the corresponding period last year) and alarmingly low to 10% for MSMEs (from 21%). Ralhan states: “Given the decline in credit off-take re-working credit costs by reducing base rates, cutting down the spread or margins over the base rate, and repackaging credit products to offer better value both to exporters and industry maybe a pre-requisite. MSME sector should be encouraged to adopt new technology by extension of Technology Up-gradation Fund. The threshold limit of Credit Linked Capital Subsidy Scheme (CLCSS) may be increased from Rs1 crore to Rs5 crore, consequent on proposed increase in threshold limit for SMEs.”
In an effort to reduce interest costs and make exports more competitive, exporters are getting bills discounted from foreign banks which have a tie-up with the importer’s bank where the rate of interest is less than 2% per annum. Ralhan adds: “This facility is, however, available to only large export houses, based on their counterpart importer’s credit record with their respective foreign lender, which leaves out a large number of exporters who have to deal with a higher cost of credit.”
Competitiveness to Exports
Even excluding petroleum exports, the overall exports exhibited a decline of 8.9% in the first 2 months of the current fiscal while non-oil imports showed a growth of 4.3%. The order booking position of the Indian companies is not encouraging which reflect the challenges to be faced by the export sector in the following months and its impact on the employment in the sector.
The important issues recently discussed by President, FIEO with union finance minister included availability of Pre Shipment Credit in Foreign Currency (PCFC) for MSME and the high cost of credit which needs to be addressed immediately. For augmenting liquidity of the export sector, FIEO has suggested for refund of Duty Drawback, CENVAT refund and Service Tax Refund within 10 days time.
FIEO has also suggested time bound implementation of EDI (Electronic Data Interface) amongst all community partners by 31st of March, 2016 and reduction of transaction cost by permitting single MEIS application for all EDI ports, acceptance of tracking report at least in respect of status holders, dispensing with verification of scripts, etc.
The liquidity crunch of the exporters in the form of refunds may be addressed with timely release of the exports benefits. Also need of the hour is the immediate Introduction of Export Development Fund for aggressive marketing. Government should focus on aggressive marketing to showcase Indian products. Ralhan says: “Aggressive marketing is done by China and the fiscal support will go a long way in increasing exports particularly of MSME whose share remained around 40% for last few decades. There is an urgent need for market development support either through a planned scheme with sizable corpus or through tax deduction under income tax for overseas expenditure relating to marketing.”
Ralhan is apprehensive that exports may significantly decline in volume terms in months to come which will result in layoff of workers. Ralhan cautions: “If exports continue to move in negative territory, it will sooner or later put pressure on CAD also and may derail the rebuilding of economy. Government should, therefore, immediately revisit its strategy.”
Ralhan updates: “Finance Minister Arun Jaitley has agreed to provide competitiveness to Indian exports in view of falling trends in exports. For agriculture exports, finance minister has agreed to look into the issue of providing support in respect of commodities in which MSP is much above the international prices so as to provide an avenue for their exports.”
While soft external demand is the main cause but the slowdown in manufacturing, strengthening of Indian Rupee against USD at a time when other currencies have weakened substantially, high cost of credit and increasing logistics cost have contributed in no less measure. Ralhan says: “External conditions may improve from September, yet the domestic constraints have to be addressed to bring exports back on track. The base effect will turn out to be in our favour from September, 2015.”