India's Exporters Are Getting Hit As Credit Flows Dry Down Over Three-Year Span

Despite a fall in the rupee valuation, the going is getting tougher for Indian exporters. Shrinking credit flow amid rising commodity prices, high tariff and a sharp increase in freight costs driven by geopolitical tensions have hit the exports sector. And the uncertainties, which started with the Covid-19 pandemic, have multiplied with the Russia-Ukraine war, the Red Sea crisis, and the Israel-Hamas conflict.

Despite the central government's repeated pitch to make India the world’s factory, the Reserve Bank of India (RBI) data shows that export credit has been on a continuous fall from 2019 to 2020.

Outstanding On The Rise 

Sample this. In March this year, the export credit outstanding stood at a mere Rs 12,900 crore, a massive 37 per cent decline from Rs 20,490 crore recorded in the same month in 2023.

Ten years ago, in 2014-15, India’s export credit outstanding, or the loans being held by Indian exporters, stood at Rs 42,626 crore. 

In 2016-17, the figure was a tad lower at Rs 42,502 crore. However, it fell drastically to Rs 28,305 crore in the following financial year and in 2018-19, it further dropped to Rs 16,010 crore. In 2019-20, it saw an increase at Rs 29,969 crore. But since then it has been falling. 

Ajay Sahai, director general and CEO of the Federation of Indian Export Organisations (FIEO) told The Secretariat that, “There is a severe credit shortage for exporters. Also, for exporters shipment costs have surged due to unavailability of containers and longer routes. Along with this, there are payment delays due to the economic slowdown.” 

Sahai added that exporters were also facing up to the challenge posed by higher logistics costs.

Though RBI grants a nine-month timeline for realisation of export proceeds, there are payment lags and such instances are rising.

“Instead of credit flow improving with the kind of problems that India’s exporters are facing today, there is a severe dearth of finance... this is making the exports sector more uncompetitive globally,” a mid-sized exporter dealing primarily with China said.

According to the European Union, economic activity in 2023 is estimated to have expanded by only 0.5 per cent in both the EU and the Euro area. In a statement, it said that protracted geopolitical tensions and the broadening of the Middle East conflict to the Red Sea have tilted the balance of risks towards more adverse outcomes. Additional trade disruptions could bring renewed stress to supply chains, hampering production and adding price pressures, the EU noted in the statement.

MSMEs Worst Hit

The worst impacted are the micro, small and medium enterprises.

According to data portal Statista, the contribution of MSME-related exports as a share of total exports from India in the financial year 2023, stood at around 42.6 per cent. The share was around 49.0 per cent during the financial years 2020 and 2021. 

Sahai pointed out that though export credit is categorised as priority sector lending, loans to exporters have been thinning since there is no sub-target set for this critical sector. The chunk of priority sector lending is directed to agriculture and MSMEs.

Analysts also pointed out that since banks found it more comfortable to on-lend export credit to big players, the flow of export credit to MSMEs has dwindled even within the overall shrinking credit flow to the export sector. 

The FIEO has now urged the government to set a credit sub-target of 5 per cent of the total priority sector lending to exports. In a press statement, the organisation noted that the share of export credit in the net bank credit is abysmally low and not commensurate with the share of India’s exports in the GDP, which is over 20 per cent.

It added that the demand for credit has gone up with rising inflation, high commodity prices and abnormal increases in sea as well as air freight. With the longer voyage time, on account of diversion of cargo via the Cape of Good Hope, coupled with slow offtake from the shelves, the buyers are also taking longer time to remit export proceeds necessitating higher credit for a longer period.

“This requires additional flow at most competitive rates,” FIEO said in a statement. 

Though the government has several ongoing programmes including the duty drawback and advance authorisation schemes to promote exports, the main impediment is lack of timely credit.

Under the duty drawback scheme, exporters are provided the refund of customs and excise duties paid on inputs or raw materials. Similarly advance authorisation scheme allows exporters duty-free import of inputs that are required for exports.

In 2023-24, India’s merchandise exports shrank over 3 per cent. The tiny silver lining to this is that in April, it registered a 1 per cent growth. 

In a report earlier, The Secretariat pointed out that India’s exports continue to depend on developed economies such as the United States and the European Union. “The lack of export diversification is a major challenge,” it said.

As per World Trade Organisation, global trade volumes, which dropped 1.2 per cent in 2023, are expected to rise 2.6 per cent this year.

The economic situation of several countries with which India trades is also a cause for concern. “The growing shortage of dollars in many of India's trading partners in Africa and in the neighbourhood such as Bangladesh can dampen the positive effects that a rupee depreciation could bring to exports. The actual impact of the depreciation can only be determined based on the exporting partner country ultimately,” Nirupama Soundararajan, Founder and Partner, Policy Consensus Centre said. 

The dollar fetched Rs 77.82 on May 20, 2022, fetched Rs 83.26 0n May 23, 2024, a fall of nearly 7 per cent.

High tariff

Inverted duty structure – a tax on inputs higher than finished goods—has also been plaguing Indian manufacturers for years now.  

According to a Reuters report in February, Rajeev Chandrasekhar, Minister of State of Electronics and Information Technology in a letter to Finance Minister Nirmala Sitharaman expressed his concerns “about losing out due to the uncompetitive tariffs”. He also added that India needs to “act fast” or else it may lose out to China and Vietnam.

At a time when India is wooing foreign direct investments (FDI) and investors to “make in India for the world” a reality, a healthy credit flow to the export sector is perhaps non-negotiable.