Opinion Credit squeeze shackles exports
The rupee depreciated against the US dollar by over 10 per cent in the last 12 months
The rupee depreciated against the US dollar by over 10 per cent in the last 12 months. The sharp erosion in the value of the domestic currency notwithstanding,Indias exports continue to stagnate,partially explained by the relative loss of the countrys manufacturing sector competitiveness vis-a-vis the favourable currency equation on the external front offered by the depreciating rupee. The problem areas include cost of raw material and overheads such as power,low labour productivity,infrastructure constraints and legal hassles.
Added to that is the high cost of credit. Even after taking the 2 per cent interest subvention available to small and medium enterprises,the cost of credit in India is estimated to be about 10.5 per cent,as against less than 2 per cent in the US and Europe and below 5 per cent in much of the ASEAN bloc. The availability of credit to exporters is another constraint. Even though the RBI norms stipulate that 12 per cent of net credit should flow to the exports sector,the actual flows are only about 3.7 per cent.
In this context,a RBI panel on Monday offered some short-to-medium term fixes. The apex banks Technical Committee on Services/Facilities for the Exporters has proposed raising the ceiling for foreign currency credit from $20 million for exporters,among a bevy of other policy incentives. The panel has suggested widening the scope for interest subvention,or a lower rate of interest on rupee export credits,to a larger segment of exporters including electronics,engineering goods and particularly the automotive sector,rather than only employment-oriented sectors such as textiles. The scrapping of the withholding tax on funds raised overseas has also been proposed.
Much of this does makes sense,coming at a time when Indias exports for 2012-13 dipped to $300 billion,well below the $350 billion target. The trade gap has aggravated the pressure on the rupee,fueling inflation further. Besides,subdued exports have contributed to Indias current account deficit,which widened to an all-time high of 6.7 per cent of the GDP during the third quarter.
Anil is a senior editor based in New Delhi.
anil.s@expressindia.com
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