Are the current Indian policies with regard to export financing sufficient to beat inflation?
Global trade, which operates on the principles of comparative advantage, plays a crucial role in propelling nations’ rapid economic growth. Particularly for a developing country such as India, exports remain an important engine of economic growth. In order to combat inflation, countries have been using various methods and one of the most popular methods used by them is export financing. As India’s economy continues to grow, the country is increasingly becoming a major player in the global marketplace. In order to maintain this growth, it is essential that the country’s export financing policies are up to par.
While the Indian government has introduced a number of new export financing policies in an attempt to fight inflation, the current export financing policies stand a bit inefficient in today’s scenario. The main reason for this is that the government has not been able to keep up with the rising costs of exports. As a result, many export businesses have had to cut back on their operations or even close down altogether. This has led to a decrease in the number of foreign exchange reserves, which has in turn led to an increase in the cost of imported goods.
Another problem that we face is that the government export policies are not well coordinated. Different ministries and departments often have conflicting goals and objectives, making it difficult to implement effective policy measures. As we march ahead it is worth remembering that export financing policy measures are likely to be most effective when they are part of a coordinated and integrated approach to tackling inflation. This means that it needs to be coordinated with other macroeconomic policies, such as monetary and fiscal policies. For example, banning sugar and wheat exports in May 2022 to beat food inflation was targeted to control the demand side, but can not be a long-term solution.
The current system of export financing in India is opaque and often results in delays and other issues for exporters. There is a need for more transparency in the system so that exporters can be sure of getting their financing on time and without any problems. There is a lack of communication between the government and the private sector which makes it difficult for businesses to know what steps they need to take in order to take advantage of the various export financing schemes. Moreover, there is no clear information available about the different schemes that are offered by the government. This makes it difficult for exporters to know which scheme would be most beneficial for them. Exporters should be able to easily find information about the different schemes and how they can benefit from them. The Commerce ministry in one of its documents stated that various districts and states need to take initiative to get engaged in export promotional activities for exponential growth.
Some of the positive steps taken by the Indian Government are for example in the year 2019 the RBI agreed to relax the minimum turnover criteria (of 100 Crores) for export financing. Also, increased the limit on export credit under the priority sector lending from 25 Cr per borrower to 40 Cr per borrower the same year. However, more steps need to be taken by the RBI and government toward collateral requirements and unsecured borrowing. To add on, while there is ample liquidity in our banking system, however, we are still facing the brunt of erratic and frequent unplanned hikes in financing rates which eventually fall on the plates of end consumers. While the government needs to put a system in place to streamline the lending rates and absorb these erratic waves.
Although the government is negotiating free trade agreements with various countries to promote outbound shipment trying its best, the shipping companies have obnoxious amounts of freight which in turn increases the final price for the consumers earlier at the break of the pandemic and later due to the Ukraine-Russia war. India’s logistics costs are as high as 14-15% of the GDP against 7-8% in developed nations like the US & Singapore. According to an article in the June issue of the RBI Monthly Bulletin, a 10% increase in import freight costs will result in an increase of 21 basis points in annual consumer price inflation. National Logistics Policy launched on Sep 17th, 2022 could be a big step towards bringing export costs down. To make documentation faster, a single window platform, Unified Logistics Interface Platform- ULIP is to be developed to bring all service providers like warehousing, shipping, transporters, customs brokers, and different govt agencies under one roof. NLP’s success could significantly bring down the cost of export financing, which in turn would help check inflation
The Commerce Ministry is going to present a new 5-year foreign trade policy and districts as export hubs scheme. Under the proposed scheme there will be many incentives to keep the cost of exports down and it will centrally govern policy but will be managed at the states and districts level. Export financing policies need to be designed in a way that they do not create unintended negative consequences. In India, the average inflation rate has been 6.5% over the past decade. In order to beat inflation, the government would need to raise export and its financing significantly. This will help to reduce inflationary pressures in the economy and allow businesses to compete more effectively in global markets.
(The author is Ms. Swati Babel, A Cross Border Trade Finance Business Specialist, and the views expressed in this article are her own)