Mr. Ramu S. Deora, President, Federation of Indian Export Organisations (FIEO), Commenting on the monetary policy review stressed that the interest rate increase by 25 basis points had only confirmed the worst fears of the export sector.
The FIEO chief pointed out that in the last 15 months, key policy rates had gone up 10 times, from 3.25 per cent to 7.50 per cent, impacting the growth momentum while making some leeway in reducing wholesale price inflation, which fell to 9.06 per cent in May, from 9.68 per cent a month ago.
"However, the flip side has been a moderation in the economic parameters, such as IIP declining to 4.4 per cent in April (against 8.8 per cent in March) and 4th quarter GDP dropping to 7.8 per cent, against 8.3 per cent recorded in the 3rd quarter," he said.
Mr. Deora contends that the macro-economic indicators of neither the United States nor Europe (with Greece approaching EU for a second bailout) are in the best of health and, therefore, there could be a correction in global commodity prices, which would mean a slowdown in exports. "Further, oil prices will continue to be a cause of concern and act as a 'drag' on the GDP," he fears. He highlighted the estimation of analysts that an increase of $10 a barrel in oil prices had the potential of raising the fiscal deficit by around 0.2 per cent of GDP.
The FIEO President expects banks to, sooner or later, beef up the cost of credit, which could touch 11.5 per cent for exporters compared to 7.1 per cent in July 2010, a jump of over 60 per cent in a year. "How will we compete with countries with interest rates ranging between 1-5 per cent?" he asks.
In order to maintain export momentum and immediately introduce interest subvention, Mr. Deora urged the government to distinguish between exports and domestic finance and provide export credit to the MSME sector at 7 per cent and to others at 9 per cent.
On exports, he elaborated that higher interest rates and their differentials (meaning more arbitrage opportunities and more FDI, which could result in rupee appreciation) hamper export competitiveness.
Mr. Deora said he looked forward to the Panel on Exports and FDI in the Planning Commission sizing up the situation in the Middle East (Libya/Syria/Bahrain) as well as the fragile state of the advanced economies, while addressing India's own inherent transaction costs, quantified at $ 13 billion by the Ministry of Commerce's High-Powered Committee, and draw up a package consistent with the requirements of the trade and the emerging economic realities.
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