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Budget 2012: Government may withdraw Interest subsidy for exporters to rein in fiscal deficit

The government is preparing to withdraw the interest subsidy offered to select exporters as it tries to rein in its burgeoning fiscal deficit.

, ET Bureau|
Updated: Feb 28, 2012, 12.19 PM IST
NEW DELHI: The government is preparing to withdraw the interest subsidy offered to select exporters as it tries to rein in its burgeoning fiscal deficit. “It seems very unlikely that the interest subvention scheme for exporters will be extended (in the next fiscal) as the government’s finances are in a bad shape,” commerce secretary Rahul Khullar told ET.

Under the scheme, state-run banks offer loans to exporters of handicrafts, handloom, carpets and micro, small and medium enterprises at 2% discount to the prevailing rate of interest. The government then reimburses the difference to these banks.

The government had introduced the interest subvention scheme for exporters of eight labour-intensive sectors in 2009-10 to help the industry cope with the effects of global downturn. But the number of sectors eligible for the scheme was reduced to half in the following year.

Interest subvention was discontinued in the 2011-12 budget. The government, however, reintroduced the scheme when it announced a Rs 1,700-crore package for exporters in October.

“The subvention scheme for just the four identified sectors would cost the exchequer over Rs 1,000 crore,” another government official said, adding that the bill might bloat further as exports were continuing to grow.

With the fiscal deficit likely to overshoot the budgeted target of 4.6%, reining it in has become a big challenge for the government. Finance minister Pranab Mukherjee recently said that the deficit was giving him “sleepless nights”.

Although Mukherjee recently talked about the growing current account deficit and expressed confidence that it would be tackled by rising exports, he did not mention the need to incentivise exports. He instead said that the new manufacturing policy announced earlier this fiscal would give a boost to exports.

Officials said the government is not expected to announce any new scheme for exporters this year. Exporters, however, are lobbying not just for an extension of the subvention scheme, but also its scope.

“The 13 successive increases in policy rates have made interest rates uncompetitive internationally and hit at capital formation and investment,” said M Rafeeque Ahmed, president, Federation of Indian Export Organisations (Fieo). “Subvention should be provided to all sectors of exports at least till March 31, 2013.”

Fieo says the increase in interest rates for exporters from 7% to over 12% in less than two years was a matter of concern and had to be addressed to help retain global competitiveness.

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