Context: Ahead of the Union Budget 2025-26, the Commerce and Industry Ministry has approached the Finance Ministry to extend the revamped Rs 3,000 crore Interest Equalisation Scheme (IES) to prioritise Micro, Small and Medium Enterprises (MSMEs) involved in exports.
Relevance of the Topic: Prelims: Key facts about the Interest Equalisation Scheme.
Interest Equalisation Scheme
- Launched: April, 2015
- Aim: To provide pre- and post-shipment export credit to exporters in Indian rupees at subsidised rates.
- Implementing agency: Reserve Bank of India (RBI) through various Public and non-Public Sector banks.
- Monitoring: Jointly monitored by Directorate General of Foreign Trade (DGFT) and RBI through a consultative mechanism.
Key Features of the scheme
- Who can apply for IES?
- MSME manufacturer exporters
- Other merchant and manufacturer exporters exporting along 410 HS (Harmonised system) lines.
- Interest Subvention: Subsidy ranges from 3% to 5% on credit.
- Documentation:
- An eligible exporter has to submit a certification from the external auditor to the concerned bank to claim this benefit.
- Banks provide IES benefits to the eligible exporters and claim a reimbursement from the RBI, based on the external auditor certification furnished by the exporter.
- Digital application process: An active IEC (Import Export Code) is mandatory and digital signature/ Aadhar e-sign token is required.
- The Scheme has now been made fund-limited, and the benefit to individual exporters has been capped at Rs 10 Crore per annum per IEC (Import Export Code).
Benefits of Interest Equalisation Scheme
- Provide credit to the exporters at competitive rates.
- Helps the identified export sectors to be internationally competitive.
- Achieve a high level of export performance.
Need for Revival of the Scheme
- Boosting Economic Competitiveness: Subsidies offset the high cost of credit in India, addressing structural inefficiencies in the Indian financial system.
- MSMEs and Exports:
- MSMEs contribute 45% of India’s total exports.
- Challenges faced:
- High credit costs
- Inflation
- Logistics issues (E.g., the Red Sea crisis)
- Export Credit Trends:
- Export credit declined from ₹2,27,452 crore (March 2023) to ₹2,17,406 crore (March 2024).
- Rising demand for longer credit durations: from 30-60 days to 120-150 days.
Challenges
- Skewed Towards Larger Exporters: Past misuse by non-MSME entities prompted calls for focusing IES solely on MSMEs.
- Liquidity Concerns: High inflation and logistical delays (E.g., Red Sea crisis) has increased working capital needs.
- Insufficient Support: The ₹50 lakh cap on credit subsidies for MSMEs is insufficient for many MSMEs.
Suggested Reforms
- Targeted Focus: Restrict the scheme exclusively to MSMEs to ensure equitable benefits.
- Long-Term Continuity: A sustained IES can improve predictability and help MSMEs manage orders better.
- Revamping Through EFC: Modifications will not require budgetary announcements but can be implemented via the Expenditure Finance Committee (EFC) route.