India's government is planning to pass on the subsidies it currently provides to Indian micro-, small- and medium-sized enterprises (MSMEs) exporting to developing countries to those countries.

This involves changes to the interest equalisation scheme (IES) and aims to increase letter of credit (L/C) availability for Indian exporters.

Current scheme

India introduced the IES in 2015 to provide a rebate on interest rates for pre-shipment and post-shipment credit for Indian manufacturing exporters.

Current interest equalisation rates under the scheme are either 2 per cent or 3 per cent, depending on the product.

Among the leading foreign exchange earners covered under the scheme are readymade garments, processed food items, handmade carpets and agricultural products.

Planned changes

Under the planned changes to the IES, developing countries would be encouraged to finance the interest equalisation portion of L/Cs issued under the scheme.

According to a report in the Business Standard newspaper, a government official aware of the plans has said this will marginally raise the cost of Indian exports for recipient countries, but only in the long term.

L/C-based development aid

India has long used support for L/Cs for exporters in its development aid operations, notably through Export-Import Bank of India (EximBank).

Foreign importers of Indian goods and services can tap EximBank funds by opening L/Cs to purchase Indian goods and services eligible for export under India's foreign trade policy.

Typically, L/C applicants must supply at least 75 per cent of the value of goods and services bought using the facility while the remaining 25 per cent may be procured from outside India.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.