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Contents

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Monthly Newsletter Volume 3 No 11 December 2008

EximNews

TRADE STRATEGIES

Stimulus Version 2.0: Measures

announced to help exporters, more

needed ....................................................2

TRADE STATISTICS

Global Meltdown: Exports continue

declining trend ......................................3

OTHER NEWS

Currency derivatives adversely

impacting exporters ..............................4

SOURCE: CMIE

FDI Inflow in India

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

1999-

2000

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

US$Billion

SOURCE: CMIE

Tracking Foreign Exchange Reserves

0

50

100

150

200

250

300

350

1999-

2000

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

US$Billion

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Stimulus Version 2.0

Measures Announced to HelpExporters, More Needed

In an attempt to reverse the recessionary trend inthe economy and to boost exports, which have showna negative growth for two continuous months, thegovernment on 2 January 2009 gave the economy asecond stimulus, which was aimed at easing creditdelivery to sectors impacted most by the economicslowdown.

The second fiscal stimulus package, announcedalmost a month after the first on December 7 lastyear, enables the industry to borrow more fromabroad and allows FIIs to invest more in the country.

Announcing the package, Dr. Montek SinghAhluwalia, Deputy Chairman, Planning Commissionsaid special attention was being paid to housing sector,macro and micro industries and infrastructure sectorsthrough a series of measures, including provisionfor higher credit and greater liquidity for the non-banking financial companies.

The package liberalised overseas borrowing norms,restored benefits to exporters, set up an alternativechannel of finance for non-banking financecompanies and allowed state-run India InfrastructureFinance Company Ltd (IIFCL) to issue additionaltax-free bonds. The major incentives introduced by

the government in the package include Liberalised pricing norms for overseasborrowing: The package announced in coordinationwith the central bank liberalised overseas borrowingnorms from interest rate caps that were fixed to theLondon Interbank Offered Rate (Libor).

Increased refinance for infrastructure: IIFCL,which was designated to act as refinancer for loansto the core sector, would be allowed to borrow Rs30,000 crore by issuing tax-free bonds three timesmore than the initial sanctioned amount in first week

of December. This will enable additionalinfrastructure financing of Rs 75,000 crore over next18 months.

Slew of Measures for Exporters

Exporters Incentives: For exporters, thegovernment tried to tackle the twin challenges: lackof credit and making Indian products competitive inoverseas markets. To this end, the governmentrestored the Duty Entitlement Passbook (DEPB)scheme to pre-November levels, enabling exportersto claim a higher amount of tax paid on imports

used to make exported products.

Secondly, the RBI will provide a credit line of Rs

5,000 crore to Exim Bank, which will provide exportcredit at a time when financial institutions havedeveloped a risk-aversion to lending.

However, the exporters say their additional demandslike a moratorium on term loans and additionalinterest subsidy of 2 per cent were not considered.

States allowed to tap market: State governmentshave also been allowed to borrow an additional 0.5per cent of their Gross State Domestic Product(GSDP), amounting to about Rs 30,000 crore, forcapital expenditure.

In a bid to stimulate the Indian economy andminimise the impact of the global economicslowdown, the Government had on 7 December2008 announced a slew of measures. The firststimulus package cost the government around Rs31,000.

The measures announced on 7 December 2008included an additional Plan expenditure of up to Rs20,000 crore in 2008-09, an estimated excise dutygive-away of Rs 8,700 crore, a 2 per cent interestsubvention for the labour-intensive export sectorsand steps for improving the financing environmentfor infrastructure projects.

Indian economy has been facing the pressure eversince the advent of global financial crisis in mid 2008.Lack of access to credit, slowdown in exports anddomestic demand, as well as accumulation ofinventories have been key sources of stress for theeconomy.

Booster Dose: Policy announcements for

Exporters

DEPB rates restored to pre-November 2008rates. Scheme extended till 31st December 2009.

Duty Drawback benefits for knitted fabrics,bicycles, agricultural hand tools and specifiedcategories of yarn enhanced with retrospectiveeffect from September1, 2008

A committee chaired by finance secretary &including secretaries of the department of revenueand commerce to examine and resolve proceduralissues on a fast track basis.

EXIM bank has from RBI obtained a line ofcredit of Rs 5,000 crore and will provide pre-shipment and post-shipment credit, in rupees ordollars, to exporters at competitive rates

CII Welcomes the RBI Measures & the

Fiscal Package, Seeks More

The Confederation of Indian Industry (CII) haswelcomed the measures taken by RBI. The reduction

TRADE STRATEGIES

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TRADE STATISTICS

in repo and reverse repo rates by 100 bps is in linewith the recommendation made by CII. CII hopesthat RBI would further reduce the CRR from thecurrent levels. Bond yields had already begun to pricein a reduction in the RBIs policy rates, given thatinflation has been falling for the last few weeks. CIIexpects that deposit and lending rates would easefollowing these measures, giving an impetus toconsumption and investment.

The fiscal stimulus package announced by theGovernment also includes several measures aimedat addressing some of the problems being faced bythe economy. CII had highlighted the lack of accessto credit, the slowdown in exports and domesticdemand as well as the accumulation in inventoriesas the key sources of stress in the economy. Wewelcome the steps taken to reduce interest rates andincrease availability of credit. Greater access toexternal borrowings, special liquidity measures forNBFCs and increase in FII investment limit in

corporate bonds are positive measures said Mr. K VKamath, President, CII.

The stimulus package has increased access to externalborrowing by removing the interest rate ceiling onECBs, allowing development of integratedtownships as an end-use for ECBs and allowingNBFCs dealing exclusively with infrastructurefinancing to raise ECBs. This will reduce the

financing constraints faced by non-bankinfrastructure finance companies. Liquidity supporthas also been provided to NBFCs to ease theirfinancing constraints.

Significant benefit could flow to the economy fromthe additional funding option provided to IIFCL. Ifindeed infrastructure projects worth Rs. 100,000crore are implemented over the next 18 months, as

envisaged in the package, this will provide asignificant stimulus to the economy. However, thegovernment must focus on implementation. In thisregard, CIIs suggestion of giving this responsibilityto a single agency may be considered.

On the one hand, the government has targetedinfrastructure creation to stimulate domestic demandwhile on the other, it has made sure that theconstraints on the availability of finance are eased tothe extent possible. While the measures are broad-based, there is a need for specific additional measuresto address the challenges being faced by the SMEsector. The enhancement of the credit guaranteecoverage for very small credit facilities is awelcome measure. There is however a large sectionof SMEs that face difficulty in managing liquiditygiven the elongation of the working capital cycle,and in accessing credit facilities. CII hopes that theneeds of this sector would also be addressed goingforward.

Impact of Global Meltdown

Exports Continue Declining Trend

Indias exports for the month of November 08shrank by 9.9% to reach the levels of US$ 11.5 billionfrom US$ 12.76 billion in November 07. For thefirst eight months of the fiscal year 2008-09, Indiasexports were recorded at the levels of US$ 119.3billion from US$ 99.91 billion during thecorresponding period of 2007-08.

Indias imports during November 08 grew by 6.1%

to reach the levels of US$ 21.5 billion from US$20.32 billion in November 07. In the first eightmonths of 2008-09, Indias total imports wererecorded at US$ 203.64 billion as against US$ 153.10billion during the same period last year.

Oil imports during November, 2008 were valued atUS $ 7.25 billion which was 11.9 % higher than oilimports valued at US $ 6.48 billion in thecorresponding period last year. Oil imports duringApril- November, 2008 were valued at US $ 74.11billion which was 55.7 per cent higher than the oil

imports of US$ 47.59 billion in the correspondingperiod last year.

Non-oil imports during November 2008 were valuedat US $ 14.31 billion, which was 3.4 per cent higherthan non-oil imports of US $ 13.84 billion inNovember 2007. Non-oil imports during April-November 2008 were valued at US $ 129.52 billion,which was 22.8 % higher than the level of suchimports valued at US $ 105.51 billion in April-November 2007.

Indias total trade for November 08 wasrecorded at US$ 33 billion, which is same as during

November 07. During the first eight months of2008-09, Indias total trade expanded byclose to 27.8%, to reach US$ 323.5 billionfrom US$ 253 billion in the first eight months of2007-08.

Indias trade deficit expanded by 31.5%during November 08 over November 07. Tradedeficit expanded from US$ 7.6 billion inNovember 07 to US$ 10 billion in November 08.From April to November 2008, Indias tradedeficit was recorded at US$ 83.1 billion

compared to US$ 53.2 billion in correspondingmonths of 2007.

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Published by Confederation of Indian Industry, The Mantosh Sondhi Centre, 23, Institutional Area, Lodi Road, New Delhi - 110 003

January 2009

www.cii.in

Kindly send in your queries & suggestions to

Confederation of Indian Industry

International Trade Policy Division

The Mantosh Sondhi Centre, 23, Institutional Area, Lodi Road, New Delhi-110 003

Tel: +91-11-2462 9994-7 Fax: +91-11-2463 3168 Email: eximnews@ciionline.org

Latest DGFT notifications can be accessed at the following link

http://164.100.9.245/exim/2000/not/not08/indexn0809-ftp.htm

OTHER NEWSCurrency Derivatives Adversely Impacting

Exporters

The appreciation of the Rupee against the US dollarbetween April 2007 and January 2008 has had asignificant impact on the competitiveness of theexporting community in India.

In 2007, when the Indian rupee appreciated by morethan 11 % against the US dollar, the private and theforeign banks and certain nationalised banks, tookcue from the pressure faced by the exporters(primarily from the MSME sector) and sold currencyderivative products to them.

These derivative products were predominantlyspeculative in nature. The exporters, who werealready constrained by the falling top line and thebottom line in their balance sheets (because of therising rupee), entered into such derivative contractswith the banks, without realising their potential risk.

These derivative products were sold in violation ofthe Indian Contract Act (ICA), which states that theparties to the contract must be competent. However,it was difficult for even the expert financeprofessionals to decipher such intricate instruments,let alone the exporting community.

These currency derivatives were also in violation ofthe Reserve Bank of Indias (RBI) guidelines oncurrency derivatives.

In order to allow SMEs to understand the riskof these products, the RBI guidelines state thatthe banks with which exporters have a creditrelationship can only offer such facility. Also theRBI states that these facilities should have somerelationship with the turnover of the entity.However, both these conditions were violated as

the banks, which had offered such products werenot the bankers for the exporters and the valueof the contract had no relationship with theturnover of the exporter firm.

The RBI states that the derivative transactionsthat do not hedge any underlying exposure are

not permissible and are contrary to RBIguidelines. Also as per the RBI guidelines, thebanks are required to verify the genuineness ofthe underlying exposure. However no suchverification was carried out.

The RBI allows hedging only for protectionagainst currency risk. However the currencyderivatives that were offered increased thecurrency risks of the exporters.

The banks thus persuaded the exporters to enter intothese contracts and when the exporting community

expressed its inability to understand these complexfinancial products, the banks took upon the role offinancial advisor and assured the exporters that theywere experienced in handling these products.

The banks, therefore positioned themselves in afiduciary capacity with their advice on cost reductionand risk management. While initially these banksstructured few profitable deals to gain confidence ofthe exporters, later on they even pushed throughproducts, which were unsuitable for exporters andconcealed the inherent risks in these contracts fromthe exporters. The exporters were thus, thrust withunlimited risk of currency fluctuation in return oflimited gains.

As a result of these currency derivative products, theSME exporters in Ludhiana, Tirupur, Karur, Kanpur,Mumbai, Delhi, Chennai, Panipat, Sholapur are onthe verge of closure.

DGFT NOTIFICATIONS

DISCLAIMER: The data and news used here are from various published and electronically availablesources. We have taken care to verify and crosscheck the accuracy of these reports and data.

However, despite due diligence, the source may contain occasional errors. In such instances, CII

is not responsible for such errors.

OTHER NEWS