Domestic credit flow must be raised to revive the exports from India.
What is the status of Indian exports?
After a prolonged period of decline and stagnation, there has been a pick-up in Indian exports in recent times due to a resurgence in global growth.
Exports of non-petroleum, oil and lubricants witnessed a year-on-year (y-o-y) growth of 15.6% during April-September 2018-19.
In order to sustain this resurgence in exports, a holistic framework is required which enhances –
Trade competitiveness
Promotes innovation
Alleviates structural bottlenecks
Bolsters availability of export finance
Strengthens the institutional capacity for exports.
Among them, the most important element to sustain growth is a robust ecosystem for export financing.
What are the bottlenecks?
Traditionally, the Indian economy has been bank-dominated, and banks continue to be the primary source of credit.
However, the growth in bank credit to the exports sector has been declining in recent times.
The share of outstanding credit extended by scheduled commercial banks to exporters in total non-food credit has almost halved from 6.1% in 2007 to 3.6% in 2017.
Further, outstanding export credit extended under the priority sector by foreign banks is witnessing the year-on-year decline of 46.8%.
The challenge is even more severe in the case of MSMEs.
Though it accounts for about 45% of manufacturing output and around 40% of total exports of the country, the sector is surrounded by financing bottlenecks.
The current credit supply for MSME is lower than its potential demand, which has resulted in a finance Gap equivalent to 11% of GDP.
Thus, bolstering the availability of export finance is critical to improving the competitiveness of India’s exports.
What should be done?
Modifying PSL norms - Priority sector lending (PSL) norms could be tweaked so as to augment lending to the exports sector.
Export credit is currently eligible for inclusion in the priority sector lending targets of banks.
However, there is no mandatory sub-target for export credit.
Thus, the RBI could consider prescribing a sub-target for export credit within the existing 40% target for priority sector lending.
Flexibility in PSL norms can also help commercial banks perform potentially better in terms of meeting their PSL targets.
Export Promotion Fund (EPF) - This could be established by the government to ensure medium and long-term financing of exports, and also for financing export capacity creation.
Domestic commercial banks could contribute to the fund to the extent of their shortfall in stipulated priority sector lending to the exports sector.
This structure could be similar to the structure of the Rural Infrastructure Development Fund currently maintained by NABARD.
The eligible activities that could be supported by the EPF should focus on capacity-building, product development, R&D promotion, the creation of export infrastructure and other export support services.
The projects, made under it, should improve the competitiveness of Indian exporters while being consistent with the export growth strategy of the government.
