India can afford to offer its exporters a relief package

While there appears to be room for discussion on a trade deal, India should be prepared for the worst: A scenario in which the US threat of a 25%-plus tariff comes to bear. Is there anything the Indian government can do to protect exporters?

Yes. A kind of public-private arrangement could be made—with a sunset clause—for the overall cost imposed to be shared by the government and exporters so that higher prices at the other end do not depress US demand.

A support framework should be drawn up to help exporters adjust to this new normal over a period of 1-3 years.

Policy decisions would need to be taken on two scores. First, should the package be only for impacted exports to the US or for all merchandise exports?

The former could imply discrimination, while supporting the export of goods to all destinations could be justified on the need for a fillip to this broad activity in the face of global headwinds.

Second, for how long should such support last? Specifying a time-frame will spell certainty for exporters. Both will, of course, depend on the Centre’s fiscal space.

After those calls are taken, a package can be devised. A narrowly aimed one need not involve any special new scheme, as existing policy programmes can be used to help tariff-affected businesses. This way, we will need only minor budget-outlay additions.

First, support can be provided through India’s production-linked incentive (PLI) scheme. The utilization of funds under it was targeted at around ₹2 trillion over five years from 2020-21, but is likely to fall short. This incentive can be extended to companies that face raised US tariffs.

The payback provided under the PLI scheme can serve as compensation for firms that maintain or increase their exports to the US. The payback rate can be based on the comparative tariff disadvantage within an industry vis-a-vis competing industries in other countries.

Thus, if Vietnam has a tariff of 20% and competes in ready-made garments, this industry can be provided a payback that takes that difference into account. Its thematic contours would be similar to the PLI scheme’s.

Second, the government could deploy an interest subvention scheme, promising a credit cost payback of 1-2 percentage points.

A call can be taken on whether this should be industry-specific or only for micro, small and medium enterprises (MSMEs), which contribute significantly to India’s overall exports but probably is the most vulnerable sector.

MSMEs face borrowing challenges and hence any subvention will help. Ideally, though, such a benefit should apply to all exporters.

Third, the Reserve Bank of India’s (RBI) targeted long-term repo operations (TLTRO), which were largely successful during the pandemic, can be revived. The central bank could provide funds at a sub-repo or repo rate to banks, which in turn can lend to tariff-affected exporting units or industries.

This can be another way to lower their cost of credit. The funds should be short-term in nature and only for working capital purposes. This way, exporting units can become more competitive on finance costs. RBI could announce a TLTRO programme for a period of 1-2 years.

Fourth, India’s credit guarantee scheme can be extended to exporters, so that banks lend them funds without hesitation. The pandemic-time Emergency Credit Line Guarantee Scheme was very popular and it worked well for MSMEs. As similar conditions arise for enterprises in tariff-hit sectors, this form of support could be considered again.

A credit backstop would mean a contingency liability for the government and so it would be a fiscal cost only in case of substantial defaults. This will also help lower the credit costs of exporters.

Fifth, the government could consider tax concessions. This can be aimed at companies with a record of exports to the US, with tax offsets allowed for income earned from exports to the US in the past three years. It could allow losses to be carried forward.

Some of these ideas may not be in compliance with World Trade Organization rules, but could still be justified by the exceptional circumstances exporters face.

Note that the US has announced variable tariff rates for different countries, which is not just unique as an idea, but has also tilted the scales in favour of some. Countries like Vietnam, Korea, Philippines, Bangladesh and Sri Lanka face lower US tariffs than India, which amounts to a major disruption.

Policy steps could offer exporters a cushion, while sunset clauses would give them time to scout for new export markets and prevent government props from leading to complacency.

Also, RBI would have to watch the rupee. The US reset could cause dollar volatility. In theory, higher tariffs should drive up US inflation and bond yields. This will attract investment from overseas, which, together with reduced US imports, should strengthen the dollar against other currencies.

Central banks will have to take a call on how much currency weakening they are okay with. A lot will depend on domestic inflation and the strength of foreign exchange reserves.

The government, meanwhile, could explore policy adjustments to provide outward shipments a large-scale fillip.

These are the author’s personal views.

The author is chief economist, Bank of Baroda, and author of ‘Corporate Quirks: The Darker Side of the Sun’