No.

11(01)/PF-11/2015
Govt. of India
Ministry of Finance
Department of Expenditure
Public Finance Central -H

North Block, New Delhi

Date: 26'h October, 2018
OFFICE MEMORANDUM

Subject: Minutes of EFC meeting for enhancement of rate of interest equalization from
3% to 5% for MSME exporters for Pre & Post Shipment Rupee Credit-reg.

The undersigned is directed to refer to the EFC meeting held on 24' h October.
2018 on the subject cited above and to forward herewith a copy of approved minutes of
EFC meeting along with list of participants for information and necessary action.

Encl: as above.

(Chetan Doctor)
Assistant Director(PFC-II)
Tel: 2309 5701
Email: chetan.doctor@nic.in
To,
Secretary,
Department of Commerce,
Udyog Bhawan, New Delhi.
 EFC on Modification of the Interest Equalization Scheme on Pre-Post Shipment Rupee Export Credit :
Proposal for enhancement of Interest equalisation from 3 % to 5% for MSME sector :
Minutes of Meeting on 24.10.2018

A meeting of the Expenditure Finance Committee (EFC) chaired by Secretary,

Department of Expenditure was held on 24.10.2018 at 12.00 noon in the Department
of Expenditure, North Block, New Delhi to discuss proposal for enhancement of
Interest Equalisation rate from 3% to 5% for MSME sector and inclusion of merchant
exporters in the scheme.

2. The List of participants is enclosed at Annexure - I.

3. Commerce Secretary in his opening remarks explained that the proposal for
consideration of EFC is to increase Interest Equalisation Rate from existing 3 per cent
to 5 per cent for MSME exports and to include Merchant exporters under the scheme
for export of products made by MSMEs. He also indicated that additional annual
outgo is in the range of Rs 800 cr to Rs 1200 cr on account of increased Interest
Equalisation Rate from existing 3 per cent to 5 per cent for MSME exporters and in
the range of an additional amount Rs 900 to 1100 cr if inclusion of MSME product
merchant exporters were also included.

4. Thereafter, a detailed presentation on the proposal was made by DGFT,

wherein detailed background and justification for both the proposals i.e. to increase
the existing Equalisation rate from 3% to 5 % for MSME exports and inclusion of
Merchant Exporters were provided. It was informed that export performance of key
labour intensive MSME sectors has been far below the average export growth rates
during 2017-18 and during Apr-Sept 2018, as can be seen below:
Si Sector Export growth Export growth during
No during 2017-18 Apr-Sept 2018

1 Overall Merchandise exports 9.98% 12.54%

2 Ready Made Garments of all Textiles 3.81% -15.90%

3 Cotton yarn/Fabrics/ Made Ups and 4.01% 2.18%

Handloom products

4 Leather and Leather products 2.39% -2.96%

5 Handicrafts -5.41% -1.10%

6 Carpets -4.06% -3.10%

Ministry of Finance. Department of Expenditure F. Noll(01)/PF-11/2015

11q14 cixiicivf/RAMV WADHAWAN
124-/Director
1.47 It4MR/Ministry of Finance
wzr ItifiluDeptt. o f Expenditure
viTIV ti i/Government of India
4 Rccif /New Delhi
EFC on Modification of the Interest Equalization Scheme on Pre-Post Shipment Rupee Export Credit :
Proposal for enhancement of Interest equalisation from 3 % to 5% for MSME sector :
Minutes of Meeting on 24.10.2018
7 Fruits and vegetable -0.19% -3.56°/o

It was explained that the main purpose of the Scheme is to provide a level playing
field to exporters by (partly) equalizing the rate of interest on rupee export credit at
par with international rate of interest to ensure that our exports remain competitive.
Internationally the interest rates are ranging from 6% to 7% and are based on LIBOR
rates (2.5%). In India, the interest rates charged for the credit given to exporters
ranges between 9.5% to 12%. Further, actual rate of interest charged by banks from
MSMEs is generally higher in view of the associated risk, making the cost of capital
for MSME exporters very high. Therefore, interest equalization is an important tool
for reducing the cost of the credit offered by banks to exporters and serves as a
complementary tool for enhancing India's exports. Therefore, the labor
intensive/MSME sectors, which are lagging behind, are required to be given extra
push by way of enhancing interest equalisation rate from 3% to 5%.
5. DGFT further stated that the current scheme has not included merchant
exporters while there was no exclusion of Merchant Exporters in the earlier scheme
and all such MSME merchant exporters were also covered. It is felt that exclusion of
merchant exporters should be done away with on the pattern of previous schemes. All
MSME merchant exporters should be included in the scheme. The reasons are as
follows:

i. There was no exclusion in earlier schemes since 2007

ii. There is no distinction in MSME definition for manufacturer vs merchant
exporters
iii. In large no of cases, merchant exporters only exports goods manufactured by
MSMEs as large exporters do on their own
iv. Merchant exporters play a pivotal role in exports of MSME manufacturers
v. Merchant exporters contribute about 30% of country's exports
vi. More exports by merchant exporters will lead to more MSME exports

6. It was explained that additional outgo on account of increase in equalisation

rate from 3% to 5% is in the range of Rs.800-1200 cr per annum and due to inclusion of
MSME Merchant Exporters, it is Rs.900-1100 cr per annum. Thus, total additional financial
implicatio
ns due to
the two
proposals
is in the range of Rs 1700 — 2300 cr per annum.
Ministry of Finance. Department of Expenditure F. Noll(O1)/PF I1/2015
- icr cltilq-TIRAJIV WADI—IA/VAN
PRM/Director
lisicv4IMinistry of Finance
fZITIPT/Deptt. of Expenditure
Tir(ff I it cb it /Gov ern ment of I nd ia
9 - 4 it - 41/ New D elh i
EFC on Modification of the Interest Equalization Scheme on Pre-Post Shipment Rupee Export Credit :
Proposal for enhancement of Interest equalisation from 3 % to 5% for MSME sector :
Minutes of Meeting on 24.10.2018

7. After the detailed presentation on the proposal, Secretary, Expenditure sought

views of the participating Departments.

8. Representatives of the MSME and Department of Financial Services (DFS)

supported the proposal. Representative of Department of Industrial Policy &
Promotion (DIPP) also supported the proposal in principle, however, they raised
certain apprehensions on account of current depreciation of rupee. Representative of
D/o Economic Affairs stated that they have not supported a similar proposal submitted
earlier by the D/o Commerce. Representative of NITI Aayog stated that
reimbursements by banks have been less compared to the estimates in the last 3 years
and also observed that process of reimbursement to the beneficiary exporters is
complicated and cumbersome. In his viewf the benefits of the scheme were not
percolating down to the exporters. He also expressed that rupee depreciating aspects
also needs to be taken into account.

9. SS&FA, DoC mentioned that data backing the proposals is not very strong.
He also raised the issue of increasing CAD and raised the larger issue of whether the
incentives under Foreign Trade Policy (FTP) are going to the exporters who really
needed it. He also indicated that incentives need to be regulated in such a way that
subsidised credit does not fall below MCLR of the bank. The incentive should not be
available to MSME units making reasonable profits. Thus, entities having post-tax
profit of Rs.50 lakhs or more may be disentitled under this scheme.

10. Joint Secretary, Department of Expenditure mentioned that as per the

international reports, world economy is not under recession but quite robust now. He
stated that exports in the current year have increased by 12.5% on top of 10% increase
during 2017-18. He also mentioned that Merchant Exporters may not be included in
the scheme because the budget constraints still remain. He also referred to some of the
observations of the study by National Institute of Banking Management (NIBM) that
the sensitivity of exports to a reduction in interest rates is generally very low. The
Study, he pointed out had also found that export performance of sectors like
agriculture and chemicals had not improved after the subvention scheme and the
biggest beneficiaries, inter alia were the gems and jewellery and petro and crude
sectors. Interest rates had decreased over the years as was evident from the yields of
the 10 year bond paper. This indicated that credit had become cheaper. He referred to
Annex III of the EFC Memo to demonstrate that the reimbursements under the current
scheme had increased over 47% from 2015-16 to 2017-18. This could be p

qvu-49-/RAJIV Ai ...NI
Ministry of Finance. Department of Expenditure F. Noll(O1)/PF I1/2015
-
r4vg/Direc t oi
rTzi Trr4r64/Ministry of Finance
VZI-4 141,1P1/Deptt. of Expenditure
1:111-d TRW/Government of India
ft-A/New Delhi
EFC on Modification of the Interest Equalization Scheme on Pre-Post Shipment Rupee Export Credit :
Proposal for enhancement of Interest equalisation from 3 % to 5% for MSME sector :
Minutes of Meeting on 24.10.2018

indicator to demonstrate that the exports under the current scheme, for the 416-line
items were robust.

11. DGFT clarified that one of the main reasons of double digit exports growth in
the current financial year is due to increase in international prices of crude oil and
other commodities. However, the export performance of MSME sector is
unsatisfactory. That's why there is need for supporting MSME exporters. Under the
present mechanism, Banks pass on the benefits to the exporters upfront and then claim
the reimbursement from RBI. It was also clarified that NIBM study has brought out
that growth of exports in response to exchange rate depreciation was quite muted over
last decade. Hence, there is a felt need to another tool like interest subvention to boost
exports. Further, the report has concluded that the interest subvention is beneficial to
exports. It has not only reduced domestic interest rates, but also made exports more
responsive to fall in interest rates. It was also pointed out that the IMF in its World
Economic Outlook, October 2018, has revised its April, 2018 projections downwards
reflecting surprises that suppressed activity in early 2018 in some major advanced
economies, the negative effects of the trade measures implemented or approved
between April and mid-September, as well as a weaker outlook for some key
emerging market and developing economies arising from country-specific factors,
tighter financial conditions, geopolitical tensions, and higher oil import bills. It was
also explained that NIBM study was done in July 2015. As decided earlier, IIM
Kashipur has been entrusted the Impact Assessment Study of the Scheme. The report
is likely to be submitted within three months.

12. Commerce Secretary responded that Indian exporters are facing high interest
cost and there are enough check and balances in the scheme to ensure that there is no
misuse and because of these controls, only genuine exporters are using this scheme.
Banks pays the benefits of interest equalisation to exporters upfront and then submit
claims for reimbursement to RBI. He again re-iterated that it needs to be extended to
MSME Merchant Exporters because earlier when it was available to the Merchant
Exporters, the outgo was not very high. He also explained that exports from the
country in the year 2013-14 reached its peak and thereafter we are struggling to get to
the levels of 2013-14. As regards depreciating Rupee, he stated that depreciation does
not always lead to increase in exports, especially when it occurs due to weak
fundamentals like higher domestic rates of inflation etc. Therefore, there is an urgent
need to provide the enhanced interest equalisation to MSMEs and inclusion of MSME
product merchant exporters in order to increase the exports. While appreciating the
suggestions of SS&F A, DoC, he explained that the interest equalisation is an on,‘41inik
__.,74744.,v,TAjiv
'Ministry of Fine.
t ,Ministry of Finance, Department of Expenditure F. Noll(01)/PF 11/2015
-
VAtirM/Direct c,- k

grEi r4,4111/Dcptt. of Expenditu r e

1112M/Government India
Rt t'ihlew Delhi
EFC on Modification of the Interest Equalization Scheme on Pre -Post Shipment Rupee Export Credit
Proposal for enhancement of Interest equalisation from 3 % to 5% for MSME sector :
Minutes of Meeting on 24.10.2018

scheme and DoC is only proposing to increase rate of equalisation for a specific sector
on existing terms. Likely additional outgo will be relatively modest and the scheme
should not be made complicated, which may lead to operational problems.
Secretary, Expenditure observed that in view of budget constraints, it is
difficult to agree to the proposal for inclusion of MSME products merchant exporters under
the scheme, particularly in view of the fact that the scheme had specifically excluded them
in 2015.
13. After detailed deliberations, the Committee recommended the proposal of
Department of Commerce for increase in the rate of interest equalisation from 3% to
5% for MSME exporters with a rider that it should be benchmarked to the MCLR.
The additional financial outlay would only be available for MSME exports (excluding
merchant exporters).
Scheme 2018-19 2019-20

Interest equalisation 800 1000

scheme @ 5% for exports
of all MSME's (Excluding
merchant exporters)

The meeting ended with a vote of thanks to the Chair

(1-4M qvq- 9/RAJIV WADHANAN

-

- k i t p / i D i r e c t o . . •
itgMtiiMinistry of Finance
tirg FOrPT/Deott• of Expenditure
'T ITURTIGovernment of India
********** A f-41/1■Iew Delhi

Ministry of Finance. Department of Expenditure F. No11(01)0 F 11/2015

-
EFC on Modification of the Interest Equalization Scheme on Pre-Post Shipment Rupee Export Credit
Proposal for enhancement of Interest equalisation from 3 % to 5% for MSME sector :
Minutes of Meeting on 24.10.2018

Annexe-1

List of Participants
Department of Expenditure

1. Shri Ajay Narayan Jha Secretary (Expenditure) & Chairman

2. Shri Sanjay Prasad, Joint Secretary (PFC-II)
3. Shri. Rajiv Wadhawan. Director (PFC-II)
4. Shri Chetan Doctor. Asstt. Director (PFC-l!)
5. Shri Rangin Murmu, Asstt. Director (PFC-II)

Department of Financial Services

6. P K Singh, Under Secretary

NITI Aayog

7. Shri S.K. Saha, Adviser (PAMD)

Department of Commerce

8. Dr. Anup W adhawan. Secretary

9. Dr. S.C. Pandey. SS & FA.
10. Ms. Rupa Dutta, Economic Adviser
11. Shri Alok V. Chaturvedi, DGFT
12. Shri Vijay Kumar, Addl. DGFT
13.Shri Dilip Kumar, DDG, DGFT

Department of Industrial Policy & Promotion

13. Shri A. S. Bhal, Sr. Economic

Adviser

Ministry of Micro, Small & Medium Enterprises

TOM AAT0 /RAJ ADHPAAN
rl-I'TX/Director
14. Shri Anshuman Mohanty, f 4 7 .1 1-41-14/Min istry of Finance
r44.111/Deptt. of Expe ndi tu r e
Director ffita fl-COX /Government of India
t001/NeW Deihl

Ministry of Finance. Department of Expenditure F. No11(01)/PF-11/2015