Budgetary Boost to India’s MSME Exporters through Interest Equalization Scheme

The Indian government has announced expanded budgetary support for the Interest Equalisation Scheme (IES) to boost finance availability for MSME exporters. An additional corpus of Rs 2,500 crore has been allocated towards subsidizing the interest rates on export credit available from commercial banks under this scheme. Industry experts have lauded the move as timely relief for over 3 lakh MSME exporters impacted by global headwinds over the last few years.

The Interest Equalisation Scheme was first introduced in 2015 under the Ministry of MSME to incentivize exports by small enterprises. It aims to provide subsidies between 3% and 5% on existing interest rates applicable to export credit in Indian rupees. The benefit directly enables MSME players to access export financing from RBI registered banks at competitive interest rates closer to the LIBOR benchmarks prevailing internationally.

Over the years Government contribution through annual budgetary allocations and cabinet approvals have gradually enhanced the corpus and coverage of IES entailing micro, small and medium exporters across 416 tariff lines spread over 12 Champion Services Sectors.

The latest approval for fiscal year 2023 is a booster shot following the 2022 budgetary doubling from 1,700 crore to almost 3,400 crore given the visible impact on MSME trade volumes both within India and abroad.

Stakeholders have highlighted the multiplier effect of this approval on overcoming three key challenges holding back export potential of MSME segments from India - timely access to affordable finance, elevated input costs and lagging competitiveness in global markets.

The working capital and cash flow relief empowers viable MSME ecosystems exporting goods/services to push larger trade volumes without financial constraints or high interest burden. Secondly, it cushions vulnerable small businesses facing margin pressures due to rupee depreciation or global inflationary headwinds. Lastly, reduced input costs aid indigenous manufacturers to compete better with cheaper finished goods imported from other Asian counterparts through channels like Alibaba.com and barrier-free trade agreements.

As per estimates by India Exim Bank, over 90% of the around 33.7 lakh entities that export products/services from India belong to the MSME category highlighting the outsized yet under-optimized impact of this sector on India’s trade fortunes.

Past deployment trends reveal that pharmaceutical, engineering goods, leather products, readymade garments and processed agriculture goods attract almost 80% of the allocated interest equalization funds annually. With the latest top-up in budgets, the estimated cumulative disbursals towards export credit interest burden since 2015 exceeds Rs 7000 crore highlighting the prudence of this recurring spend for the exchequer based on proven trade benefits.

The optimized credit access at reduced interest costs is allowing lakhs of artisans, handloom cooperatives, agritech startups, marine product companies to turn micro or small suppliers integrated into the cross-border supply chains of large corporates and SME trading houses emerging as holistic Indian export houses for global partners.

While underscoring operational aspects around optimal fund allocation between pre and post shipment credit cycles, industry associations have provided constructive feedback for further enhancing the Interest Equalisation Scheme over the long term. These include expanding coverage to more service sectors and tariff lines beyond 416 currently earmarked for benefits to enable wider access across MSME cohorts.

There are also early discussions around covering foreign currency denominated credit to MSME exporting entities that have demonstrated consistent year-on-year growth and acceptable risk profiles in the last 3-5 years. Such enhancements requiring calibrated modifications can help broadbase reach across the entire spectrum spanning micro, small and medium players constituting the MSME export community in India.

Sector experts summarize that such strategic incentives reflected consistently over the years irrespective of regime changes solidify India’s structural agenda for empowering MSME entrepreneurs to flourish globally while fortifying indigenous supply chains domestically. With the visible assimilation of MSME beneficiaries into the export value chain, there is growing optimism that interest equalization as an enabler has the potential to emerge as the flagship intervention steering India’s ambitious trade targets over the decade crossing $2 trillion in merchandise and services exports combined.