Origin
The Interest Equalisation Scheme (IES) was launched in India on April 1, 2015. It was originally intended to run for five years, but has been extended multiple times.
- Ministry:
- The Commerce and Industry Ministry
- The Director General of Foreign Trade (DGFT) is responsible for the IES.
About
- The Interest Equalisation Scheme (IES) is a crucial mechanism used by governments to promote exports by reducing the cost of financing for exporters.
- This scheme primarily helps to create a favorable economic environment for international trade by providing a subsidy or support to exporters in the form of lower interest rates on export financing.
- It acts as an economic tool to support a country’s balance of payments, increase foreign exchange earnings, and boost the competitiveness of its products in global markets.
What is the Interest Equalisation Scheme?
- The Interest Equalisation Scheme is an initiative introduced by governments to make export financing cheaper for exporters.
- The idea behind this scheme is to equalise the interest rates that exporters have to pay for financing their export transactions, making them more competitive on the global stage.
- Under this scheme, the government steps in to bridge the gap between the higher domestic interest rates and the lower interest rates that exporters would typically pay for loans in international markets.
- By doing so, it reduces the financial burden on exporters and encourages them to increase their exports.
Purpose of the Interest Equalisation Scheme
The main objective of the IES is to:
- Promote Export Growth:
- By making export financing more affordable, the scheme encourages exporters to explore new markets and expand their reach internationally.
- Enhance Competitiveness:
- It helps exporters to lower their cost of borrowing, enabling them to offer competitive pricing for their products and services in the global market.
- Boost Foreign Exchange Earnings:
- Increased exports contribute to the inflow of foreign currency, which helps improve the country’s balance of payments position.
- Support Employment and Economic Growth:
- With more exports, there is greater demand for domestic goods and services, which leads to the creation of jobs and overall economic growth.
How the Interest Equalisation Scheme Works
The mechanism of the IES varies slightly from country to country, but the general principles remain the same. Here’s a step-by-step breakdown of how it works:
- Financing Exporters:
- Exporters typically need to secure financing for their businesses to produce goods for export. This can be in the form of working capital loans, term loans, or export credit.
- Export Credit Rates:
- Commercial banks or financial institutions usually offer loans to exporters, but the interest rates in the domestic market are often higher compared to those available in global markets.
- Government Subsidy:
- To make export financing more affordable, the government provides an interest subsidy. It either directly pays part of the interest on the loan or offers a reduced rate that brings the effective interest rate down to a level comparable with global market rates.
- Equalisation Process:
- The government may directly compensate the difference between the domestic interest rate charged by banks and the lower rate typically offered in international export finance markets. This equalises the effective rate and ensures that exporters don’t face a financial disadvantage compared to their international competitors.
- Eligibility:
- Not all exporters may be eligible for this scheme. Generally, the government specifies conditions regarding the volume of exports, the type of products, or the market they are targeting.
Benefits of the Interest Equalisation Scheme
The IES has several benefits for both exporters and the economy at large:
For Exporters:
- Reduced Cost of Borrowing:
- By lowering the interest rates on loans, exporters save on finance costs, making their products more price-competitive in international markets.
- Increased Liquidity:
- With reduced financial burdens, exporters have more liquidity to invest in their businesses and expand operations.
- Access to Better Financing Terms:
- Exporters may find it easier to secure financing with the government’s backing, as financial institutions are more likely to lend to them under the scheme’s favorable terms.
For the Economy:
- Improved Balance of Payments:
- By incentivising export growth, the IES helps the country increase foreign currency earnings, which in turn improves the national balance of payments.
- Job Creation:
- As exports rise, there is an increase in demand for goods and services, which may lead to higher production, thus creating more jobs.
- Economic Diversification:
- By encouraging exports across various sectors, the IES can help diversify the economy and reduce reliance on domestic markets.
Challenges and Criticisms of the Interest Equalisation Scheme
While the IES has several benefits, it also faces some challenges and criticisms:
- Fiscal Burden:
- The government’s interest subsidy can be costly and may put a strain on the national budget, especially in times of economic downturn.
- Distortion of Markets:
- By providing a subsidy, the scheme may lead to market distortions, where only certain sectors or companies benefit from it, potentially leaving others at a disadvantage.
- Over-dependence:
- If exporters become too reliant on government support, they may not focus on improving efficiency or competitiveness in the long term.
- Inequity in Distribution:
- The scheme might benefit large corporations more than small and medium-sized enterprises (SMEs) as the latter may have limited access to financing or may not meet the eligibility criteria.
Global Examples of the Interest Equalisation Scheme
Various countries have implemented forms of the Interest Equalisation Scheme to support their export industries.
- India:
- India introduced the Interest Equalisation Scheme in 2015 to reduce the cost of credit for exporters. The government provides a subsidy on interest rates for specific sectors, including textiles, leather, and engineering goods. The subsidy rate typically ranges from 3% to 5%.
- China:
- China also offers similar schemes to boost its exports, providing preferential export credit and interest subsidies to manufacturers and exporters in key sectors.
- European Union:
- The EU has several programs in place to support exporters, including interest equalisation initiatives through its Export Credit Agencies, though these are often more focused on export credit guarantees rather than direct interest subsidies.
Conclusion
- The Interest Equalisation Scheme plays a significant role in enhancing the competitiveness of a country’s exports, thus supporting economic growth, employment, and foreign exchange earnings.
- By lowering the cost of borrowing for exporters, the government enables businesses to invest, expand, and tap into global markets more effectively.
- However, while the scheme has clear advantages, its sustainability depends on careful management to avoid fiscal burdens and market distortions.
As global trade dynamics evolve, it is essential for governments to continually assess the efficacy of such schemes and adjust them in response to changing economic conditions, both domestically and internationally.
