India has begun to discover the power of state support for project exports. With neighbour China walking away with mega contracts in emerging economies,the Indian government is planning some robust measures to take on this challenge.
There are two arms that China deploys. The state-supported mega mineral companies operate as sovereign wealth funds to invest in projects abroad while the China Exim Bank uses its deep pocket (it does not provide details of its overseas portfolio) to finance companies from China that supply to those projects.
In a first of sorts for a long time,about Rs 3,000 crore will be pumped into the Exim Bank to strengthen its lending ability and help finance exports of heavy industry goods. In a year when capital inflows from abroad is the top priority for the governments economic management,this officials feel can be a game changer for the economy.
The move follows a distress call from BHEL telling the government last month,that it is losing business abroad to competitors despite being price competitive because of lack of Exim cover.
Exim Bank has mostly been worked as a support system for small and medium enterprises since its inception. It has hardly ever financed any large scale project imports. Projects of the sort BHEL wants to finance in is way beyond its ticket size. To do that it will need to borrow abroad,but its small capital base makes its loans costly. This means the cost of credit it will offer BHEL and others will price them out of the international markets dominated by the Chinese and US Exim Banks.
For instance as of now a top official of BHEL told The Indian Express that 70 per cent of its project exports are executed on cash with only 30 per cent from the Exim Bank. The PSU has lost many orders due to lack of finances,although opportunities worth Rs 50,000 crore were available.
BHEL was often very competitive in pricing and quality but has lost out only due to lack of competitive financing, the state-run companys executive director PK Uppal told the meeting. He cited that European countries are also entering Africa through soft financing seeing the success of China and the growing market size.
As a way out,the finance ministry officials have told National Manufacturing Competitiveness Council (NMCC) member-secretary Ajay Shankar that a cash infusion of about Rs 2,000-3,000 crore would help in boosting the banks lending capacity. This can be done either by the government increasing its equity base of the bank by Rs 2,000 crore or PSUs like BHEL put in their equity of Rs 2,000 crore in the bank.
In case there are legal hurdles,the government can take additional dividend from these enterprises instead of treating it as a normal revenue and then use the money to inject the requisite equity into Exim Bank, they pointed out.
To encourage a foreign government to source projects from India,Exim Bank is supposed to offer lines of credit to them and their agencies that will in turn enable them to finance imports of goods and services from India on deferred credit terms.
This can make offer like those from BHEL seem attractive abroad but as Exim Bank has limited lines of credit the advantage never gets translated into business.
In a recent meeting between finance,commerce,external affairs ministries and NMCC officials it was a unanimous view that the interest rates of the Exim Bank needs to be contained to make loans more competitive. Executive director of the Exim Bank David Rasqinha made the same point at the meeting.
Our borrowings are capped by the Reserve Bank of India to Rs 70,000 crore and this constrained us in case of large-scale export financing, Rasquinha said. The meeting reasoned that if the banks lending rates remain unchanged,even offering a 2 per cent interest intervention for exports of engineering goods would not help in improving the global competitiveness of the PSU.
Similarly,IRCON (engineering and construction company) is said to be exploring at railway and allied infrastructure projects worth $1 billion in Sri Lanka,but it is also facing similar problem in garnering resources for executing them.
The meeting was told that a 10-year cost of capital from Exim Bank works out to Libor 2.5 per cent while its margin is 2.4 per cent. Against the interest rate rates of 2 per cent offered by China and about 3-3.5 per cent offered by European nations,Exim Bank is able to provide funds at a much higher interest rate of Libor plus 4.5 per cent.
Shankar also suggested that the Reserve Bank of India should be persuaded to provide a credit line of about $10 billion from its reserves to the Exim Bank at the same rate at which the central bank deploys its reserves.
Though this is an unorthodox approach,but the NMCC member secretary recalled that as a short-term,one-time special dispensation,the RBI did provide one-time money in this manner to the Exim Bank at the time of global crisis in 2008.
But a senior finance ministry official countered by arguing that a corpus of $5 billion is available with the Indian Infrastructure Finance Company Limiteds (IIFCL) UK division to support import for public private partnership (PPP) projects through a soft line of credit,which can be extended to project exports.
The meeting was unanimous on this being an easier route should be discussed and deliberated upon further to help in evolving a conscious policy measure. As another immediate measure,the government appears to be willing to enlist the ministry of external affairs (MEA) in extending its line of credit for project exports also apart from executing overseas development projects.
The finance ministry official suggested that certain Latin American and African nations have raised the issue of providing sovereign credit under the National Export Insurance Account (NEIA) mechanism. This is a unique financing mechanism that provides a safe mode of non-recourse financing option to Indian exporters and serves as an effective market entry tool to traditional as well as new markets in developing countries,which need deferred credit on medium- or long-term basis.
Buyers Credit NEIA is extended by Exim Bank to recipient countries or to the parastatal project authorities backed by sovereign guarantees. NEIA,through Export Credit Guarantee Corporation of India (ECGC),which provides cover up to 100 per cent for the facility and also cover for exchange rate fluctuation till repayment of the credit,as the insurance cover is denominated in Indian rupee at the start of the cover.
At present,a positive list of 40 countries have been identified by ECGC for which Indian exporters can avail Buyers Credit under NEIA.
Under this mechanism. sovereign governments can use credit facility for financing imports of projects from India on deferred payment terms, a senior finance ministry official told The Indian Express. This is a viable proposal as feasibility studies conducted in this connection have yielded positive results.
But BHEL,currently struggling to retain its numero uno position in the country in exports of power plant equipment is also keen that the government should restore the original requirement of 51 per cent Indian ownership to qualify as an Indian entity to bid for participation in foreign projects funded by the government,otherwise firms registered in the country but having majority foreign holding are availing subsidised funding at the cost of the Indian exchequer. Several exporters want projects co-financed so that they can bid more aggressively than the Chinese.
* Exim Bank was set up in 1982 and fully owned by the Union government. The bank has an authorised capital of R10,000 crore and a paid-up capital of R2,300 crore
* The bank has mostly been worked as a support system for small and medium enterprises since its inception. It has hardly ever financed any large scale projects. In 2011-12 its total loan disbursal was R37,045 crore
* Large projects such as what BHEL bids for,are way beyond its ticket size. To finance them,it would need to borrow abroad,but its low capital base makes its loans costly. China offers loans at 2% for a 10-year tenure,while Exim Bank loans carry interest of Libor plus 4.5%
* Its borrowing limit too,has been capped at R70,000 crore by the RBI,which has constrained its expansion