Access to Subsidised Packing Credit for Financing Export: Who are the Gainers?

Abstract

This study examines the packing credit or pre-shipment credit (PC) as a key determinant factor for the export growth in India. PC is considered to be an important means of financing export if advance payment is not received by the exporter prior to the shipment of goods. The Government of India’s (GoI) scheme of interest subsidy in PC is mostly to boost the export growth in India. In this backdrop, this article is having threefold objectives: (a) to examine the distribution pattern of PC across various exporting sectors; (b) to analyse the availability of export financing at different interest rate range; and (c) to estimate the sensitivity of export growth of India to its utilisation of PC in small, medium and large exporting sectors. Our preliminary analysis reveals that natural elimination takes place, and the present practice of disbursing PC is not able to fulfil the goal of establishing a level playing field for the exporters. Per capita utilisation of PC shows highly skewed preference of the banks to large borrowers, even if they are not subject to the benefit of interest subvention. This study also reveals that small exporters hold the maximum number of PC account, although having the least outstanding amount per account. On the contrary, our Arellano–Bond Dynamic panel analysis for the period 1996–1997 to 2015–2016 shows that the utilisation of PC by medium and small exporters respectively are more sensitive to boost the export growth of India. This study also finds that the effect of the interest subvention scheme was dampened due to the financial crisis and concludes that the export growth would have been much worse affected in the absence of the subvention scheme. Our empirical examination concludes that interest subvention plays a positive and significant role to boost the export growth and additional reduction in the cost of production may add to the export growth of India. This study recommends that the government may introduce a differential interest subsidy for different creditworthy exporters within the entitled sectors to reduce the cost of fund effectively for more needy and sensitive exporters. Given the resource constraint, it may be ensured that large exporters are restricted from receiving the subsidised export finance.

JEL: F49, F30, G01, G18, G32

Keywords

Export growth packing credit financing policy financial crisis

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