Low credit to MSMEs led to fall in exports

Credit off-take has declined to 8.9% from 14.2%

 External factors such as a slowdown in global demand are not the only reasons for India’s exports falling for six consecutive months.

A steep decline in credit offtake to the micro, small and medium enterprises (MSME) sector and other domestic problems such as high interest rates, infrastructure and power sector woes are equally to be blamed.

While economists are unanimous in suggesting that the Narendra Modi government at the Centre has made efforts through speeding up project clearances and reducing a number of approvals to just two-to-three from a dozen earlier, things have moved at a snail’s pace in the past year.

FIEO President S C Ralhan, while commenting on the latest release of the Reserve Bank of India on deployment of gross bank credit, said that the high cost of credit has impacted adversely the credit off-take which has declined to 8.9 per cent for industry from 14.2 per cent in the corresponding period last year.

The MSME sector contributes 8 per cent to India’s Gross Domestic Product ( GDP) and 45 per cent to the manufactured output. The sector provides employment to over 8 crore people engaged in over 3.6 crore units. Its contribution to India’s exports is close to 40 per cent.

The FIEO chief accepted that due to a reduce in interest costs, making exports more competitive pending re-introduction of interest subvention, exporters were getting bills discounted from foreign banks which have a tie-up with the importers’ bank where the rate of interest is less than 2 per cent per annum.

However, this facility was available only to large export houses, based on their counterpart importers’ credit record with their respective foreign lender, which leaves out a large number of exporters who have to deal with a higher cost of credit in the face of diminishing export orders due to a demand contraction.

“What makes things worse is the lack of competitiveness which edges out the MSME exporter from the global marketplace,” Ralhan said .

Anupam Shah, Chairman of the EEPC India, the apex body of engineering exporters, said that exporters can be offered stimulus in the form of interest subvention, technology upgradation fund and refund of local taxes.

Other domestic problems such as electricity shortage too continue to hinder manufacturing and exports. Over two-thirds of Indian exporters are small producers who cannot afford facilities such as captive power plants to support manufacturing.

An HSBC research note had said last month that issues such as rail, road and port connectivity did not  keep pace with the present day demand.

In agriculture sector too, exports have registered negative growth but the government is now working on a strategy to boost value-added exports in the sector. During 2014-15, exports of tea declined by about 16 per cent, while export of spices, cereals and tobacco also met with decline.

Export Exigency

A range of factors such as credit offtake to the MSME 
sector and high interest rates have hit exports
Despite government policies, things haven’t changed at a rapid pace
Exporters rue the lack of competitiveness of the MSME 
sector
Even agro sector exports see considerable decline