Interest Subvention Scheme, 2019 – What is it and How Can Merchant Exporters Benefit from it?

Last Updated at: November 04, 2019
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Interest-Subvention-Scheme-2019

Earlier this week, the government announced its plan to extend the benefit of its Interest Subvention Scheme to merchant exporters. During April-November 2018-19, the India’s merchandise exports grew by 11.58% to $217.5 billion. However, merchant exporters were largely left out of the ambit of export credit schemes. It was also found that these exporters faced difficulty in meeting financial obligations as banks have grown increasingly skeptical due to the volatile nature of the export business.

This article addresses the dynamics of this scheme in the backdrop of exports and is also aimed at highlighting the specific advantages that merchant exporters can benefit from, under the newly introduced scheme.

What is the Interest Subvention Scheme for Exporters?

In 2015, the then Commerce and Industry Minister Smt. Nirmala Sitharaman announced the government’s plan of promoting exports by manufacturers, especially those manufactured by Micro, Small and Medium enterprises of goods across all categories. One of the ways of doing this is to provide easy financing at a concessional rate. In any export business, there is a requirement of both pre-shipment and post-shipment credit, for meeting a host of expenses besides manufacturing, that include packaging, transportation, insurance, port charges, taxes etc. Since the time period involved in a typical export transaction may be longer, and payment may be processed by importer only when goods are actually received, the manufacturer of export oriented goods may find it difficult to meet operating and fixed costs especially during the lean season. Thus, many of them have to rely on short-term loans from banks to meet their working capital needs. To ease this burden and make manufacturing of exports more competitive and economical, the government introduced the Interest Subvention Scheme that allows manufacturers to obtain loans from banks at concessional rates, the difference being borne by the Central government.

Get Your Business Registered

The Change in 2019 – The Extension to Merchant Exporters

While the scheme has been successfully implemented for more than three years, this January, it has been extended to cover merchant exporters. The erstwhile scheme was only available to manufacturers of all exports and MSMEs. It however excluded the advantages of the pre and post shipment credit from being availed by a merchant exporter. A merchant exporter differs from a manufacturer, as is involved in trading rather than actual manufacturing. A merchant exporter procures goods from a manufacturer and usually affixes his brand name before preparing goods for shipment. Since the ultimate effect on exports is the same, with both intermediaries adding to the value of goods exported, it was only justified that the same credit scheme be extended to cover merchant exporters. Banks now offer credit to exporters under priority lending.

Impact of the Interest Subvention Scheme

  • As the word subvention suggests, it is a form of a grant offered to merchant exporters. In the last few budgets, the taxes that an exporter has to pay have not reduced. However, an interest subvention scheme does add to making the merchandise cheaper by economizing the financial costs, thereby imitating the same effect as a tax rate cut. Under the current scheme, a 3 per cent subsidy is being granted to merchant exporters.
  • Merchant exporters in the apparel business service more than 50 per cent of export contracts. By including merchant exporters as well as manufacturers, the government has covered a large chunk of exporters who are in need of regular credit. It incentivises the producers because it eases the cash crunch and ensures easy availability of funds to meet working cycle needs. This in turn enables Indian exporters to meet their obligations under contractual agreements with foreign importers.
  • Since the scheme covers labour and employment intensive segments of exports such as jewellery, apparel, handicrafts, indigenous technology and all goods manufactured by MSMEs, it boosts economic returns while providing sustained employment.  

While the additional burden to switch-over to the Goods and Service Tax regime, volatility in the international market, devaluation of rupee and the possibility of a trade war between USA and China impacting almost all international trade, an Interest Subvention Scheme seems to offer a happy relief to those in the export business.

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Interest Subvention Scheme, 2019 – What is it and How Can Merchant Exporters Benefit from it?

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Earlier this week, the government announced its plan to extend the benefit of its Interest Subvention Scheme to merchant exporters. During April-November 2018-19, the India’s merchandise exports grew by 11.58% to $217.5 billion. However, merchant exporters were largely left out of the ambit of export credit schemes. It was also found that these exporters faced difficulty in meeting financial obligations as banks have grown increasingly skeptical due to the volatile nature of the export business.

This article addresses the dynamics of this scheme in the backdrop of exports and is also aimed at highlighting the specific advantages that merchant exporters can benefit from, under the newly introduced scheme.

What is the Interest Subvention Scheme for Exporters?

In 2015, the then Commerce and Industry Minister Smt. Nirmala Sitharaman announced the government’s plan of promoting exports by manufacturers, especially those manufactured by Micro, Small and Medium enterprises of goods across all categories. One of the ways of doing this is to provide easy financing at a concessional rate. In any export business, there is a requirement of both pre-shipment and post-shipment credit, for meeting a host of expenses besides manufacturing, that include packaging, transportation, insurance, port charges, taxes etc. Since the time period involved in a typical export transaction may be longer, and payment may be processed by importer only when goods are actually received, the manufacturer of export oriented goods may find it difficult to meet operating and fixed costs especially during the lean season. Thus, many of them have to rely on short-term loans from banks to meet their working capital needs. To ease this burden and make manufacturing of exports more competitive and economical, the government introduced the Interest Subvention Scheme that allows manufacturers to obtain loans from banks at concessional rates, the difference being borne by the Central government.

Get Your Business Registered

The Change in 2019 – The Extension to Merchant Exporters

While the scheme has been successfully implemented for more than three years, this January, it has been extended to cover merchant exporters. The erstwhile scheme was only available to manufacturers of all exports and MSMEs. It however excluded the advantages of the pre and post shipment credit from being availed by a merchant exporter. A merchant exporter differs from a manufacturer, as is involved in trading rather than actual manufacturing. A merchant exporter procures goods from a manufacturer and usually affixes his brand name before preparing goods for shipment. Since the ultimate effect on exports is the same, with both intermediaries adding to the value of goods exported, it was only justified that the same credit scheme be extended to cover merchant exporters. Banks now offer credit to exporters under priority lending.

Impact of the Interest Subvention Scheme

  • As the word subvention suggests, it is a form of a grant offered to merchant exporters. In the last few budgets, the taxes that an exporter has to pay have not reduced. However, an interest subvention scheme does add to making the merchandise cheaper by economizing the financial costs, thereby imitating the same effect as a tax rate cut. Under the current scheme, a 3 per cent subsidy is being granted to merchant exporters.
  • Merchant exporters in the apparel business service more than 50 per cent of export contracts. By including merchant exporters as well as manufacturers, the government has covered a large chunk of exporters who are in need of regular credit. It incentivises the producers because it eases the cash crunch and ensures easy availability of funds to meet working cycle needs. This in turn enables Indian exporters to meet their obligations under contractual agreements with foreign importers.
  • Since the scheme covers labour and employment intensive segments of exports such as jewellery, apparel, handicrafts, indigenous technology and all goods manufactured by MSMEs, it boosts economic returns while providing sustained employment.  

While the additional burden to switch-over to the Goods and Service Tax regime, volatility in the international market, devaluation of rupee and the possibility of a trade war between USA and China impacting almost all international trade, an Interest Subvention Scheme seems to offer a happy relief to those in the export business.

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Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.