New Delhi: India said next week's budget may widen a programme providing subsidised credit to exporters as the nation strives to pare a trade deficit that has hurt the rupee.
"We have made an additional request for incentives," commerce secretary S. R. Rao said in an interview in his office in New Delhi on Thursday.
The expansion of the so-called interest subvention policy, which gives some exporters a 2 percentage points discount on bank lending rates, could be announced in the February 28 budget if the finance minister agrees, Rao said.
India's shipments slid for most of 2012, hurt by an uneven United States expansion and the recession in the euro area. A record deficit in the nation's current account, the broadest measure of trade, has contributed to a 9.6 per cent drop in the rupee against the dollar in the past year.
The central bank has signalled the gap may also limit room for interest-rate cuts.
"The request for new products to be included in the subvention scheme is to ensure competitiveness," Rao said.
"The factor cost is prohibitive because of high rate of interest. We are trying to cushion that."
The government prolonged and widened the interest-subsidy program in December last year, part of a series of economic policy changes since mid-September to revive an economy expanding at the weakest pace in a decade.
The rupee has appreciated 1.8 per cent since then. It was little changed at 54.47 per dollar in Mumbai. The BSE India Sensitive Index of stocks rose 0.1 per cent.
The longer-term depreciation in the rupee has failed to help exporters, who prefer a stable currency, Rao said.
The current-account shortfall swelled to $22.31 billion in the quarter ended September 30, the widest in Reserve Bank of India data beginning 1949.
"The dramatic fall in exports is leading to weakness in the rupee despite strong foreign institutional investor inflows," said Jagannadham Thunuguntla, a strategist at SMC Global Securities in New Delhi "If exports don't pick up and if the equity markets experience a bear run, it could be a double whammy for the rupee, which could depreciate to 57 or 58."
Reserve Bank of India governor Duvvuri Subbarao said last week the "external sector is very vulnerable," adding the current-account gap may widen to a record in the year through March 2013.
Oil and gold
Imports of crude oil and gold have fanned the trade shortfall. The government has raised taxes on imports of the metal, and partially freed diesel prices from state control last month to allow higher tariffs.
Rao said officials are trying to promote exports to markets such as Africa, the Middle East, Latin America, the Far East, the Commonwealth of Independent States and South Asia.
The announcement of any widening of the credit-subsidy programme may also come outside the budget, Rao said.
United States economy
Signs of recovery in the United States economy may help exports, he said. Shipments climbed 0.8 per cent in January from a year earlier, the first advance in nine months.
"Overall, merchandise exports are not doing well, but service sector exports are doing well, so that will provide some measure of support to the rupee," Rao said.
Finance minister Palaniappan Chidambaram faces pressure to curb spending after vowing to pare India's budget deficit to 4.8 percent of gross domestic product in the year through March 2014, from a goal of 5.3 percent this fiscal year. Rao declined to specify the cost of widening the subsidized-credit programme.
Commerce Minister Anand Sharma said in December the program applies to all small and medium-sized enterprises, and has been extended to engineering goods such as hand tools, electrical machinery and boilers. Certain exports through the Export- Import Bank of India will also qualify, he said.
Government-spending curbs as Chidambaram strives to avert a credit-rating downgrade may make India more dependent on exports and business investment to revive growth. GDP will climb 5 per cent this fiscal year, the weakest pace since 2002-2003, says the statistics agency.