Indian finance ministry working on increasing the duty drawback rates

By Vipin Agnihotri

It has come into the notice of The India Street that the contours of a support package for exporters are getting clearer with the Indian finance ministry working on increasing the duty drawback rates to assist textiles exporters cover a part of the damage because of the appreciation of the rupee.

Interestingly, at the same point of time, Indian commerce ministry is also working overtime on a plan to get economical credit for small exporters along with a scheme that can help them to earn interest on the export earners foreign currency (EEFC) account. When The India Street asked about this to one government official he said that the commerce ministry has already written to Reserve Bank of India to ensure that banks make adequate amount of funds available to small exporters but the central bank is yet to respond to the suggestion.

If sources are to be believed, Indian finance ministry has agreed to a package for textiles exporters, but commerce ministry wanted the support to also cover leather and handicrafts and if possible engineering exports too. It is worthwhile remembering that Commerce and industry minister Kamal Nath is scheduled to meet exporters on June 13 to discuss other measures.

Point to be noted here is that exporters need to be compensated for 6-7% loss in competitiveness. The concept is to assist the small and medium enterprises since the big players enjoy sufficient cushion.

"The need for a package is being pushed by a realisation that exporters have started losing orders. Textile companies have been the worst hit since large foreign firms have started shifting to Bangladesh and Sri Lanka since Indian exporters are finding it tough to supply without raising prices,” pointed out Rehmat Ali, noted economist based at India.

No doubt, there is already some impact on employment since powerloom owners have to do with fewer orders as exporters are losing out. In my opinion, if the rupee continues at this level for a while, the effect will be much more pronounced.

Exporters are shying away from orders since they do not know where the currency is headed. Few days back, commerce secretary Gopal K Pillai met exporters to work out a package for the textiles exporters. Suggestions ranged from enhanced drawback and duty entitlement passbook scheme rates credits to turning the clock back to pre-liberalisation days to come up with a system of dual exchange rates that is partly market-determined and partially fixed.

In addition, there was also a recommendation to provide subsidized loans - at 5% interest rate - to exporters, which the government does not seem to be particularly interested in.

Furthermore, another suggestion that seems to have attracted commerce ministry's attention was to treat EEFC account at par with FCNR accounts that earn interest. Initial signs are that the proposal is expected to be forwarded to Reserve Bank of India since it was felt that exporters are receiving payments for orders that were placed when rupee was trading at Rs 43 or so and losing nearly 10% of the value that they would have realised then.