VZCZCXRO1290
RR RUEHAST RUEHBI RUEHCI RUEHDBU RUEHLH RUEHNEH RUEHPW
DE RUEHNE #0179/01 0291116
ZNR UUUUU ZZH
R 291116Z JAN 10
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 9310
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHGV/USMISSION GENEVA
RHEHAAA/WHITE HOUSE WASHDC
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 02 NEW DELHI 000179 
 
SIPDIS 
 
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD 
DEPT PASS TO USTR MDELANEY/CLILIENFELD/AADLER 
TREASURY FOR OFFICE OF SOUTH ASIA MKAPLAN 
USDA PASS FAS/OCRA/RADLER/BEAN/FERUS 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EFIN IN
SUBJECT: GOI ANNOUNCES ADDITIONAL ASSISTANCE FOR EXPORTERS 
 
¶1. Summary: In a bid to boost the Indian export sector, Minister of 
Commerce and Industry Anand Sharma on January 12 announced new 
sector-specific export incentives that retroactively took effect on 
January 1.  The benefits include expansion of products and 
destinations eligible for various export promotion schemes and 
inclusion of specific products entitled for duty neutralization 
schemes.  These benefits are in addition to the ones that had been 
announced in India's five-year Foreign Trade Policy in August 2009. 
The Commerce Ministry will fund the cost of the new measures, 
estimated at around five billion rupees (approximately $105 
million), from its budgetary resources.  While the Finance Ministry 
has been concerned about export incentives contributing to the 
swelling fiscal deficit, the Commerce Ministry and export industry 
groups have been demanding government support to stimulate India's 
export performance, which faced continual monthly declines between 
October 2008 and October 2009.  The Commerce Ministry has also 
proposed reduced interest rates on dollar credit to improve export 
profits and continuation of discounted interest rates for 
labor-intensive sectors (introduced as part of last year's stimulus 
spending) -- measures that the Finance Ministry will need to 
approve.  Despite the recent recovery in overall exports, which is 
partially attributable to the base effect, Minister Sharma believes 
certain sectors still need additional government support.  End 
summary. 
 
Debate on Export Stimulus Package 
--------------------------------- 
 
¶2.  With the backdrop of a hot debate in government circles over the 
continuation of a stimulus package for exports, Commerce Minister 
Sharma, on January 12, announced new measures to give a boost to 
India's export sector.  The Finance Ministry has opposed the 
continuation of the stimulus packages to industry in view of loss of 
revenues on account of duty rebates and the increasing fiscal 
deficit (projected to be 6.8 percent of GDP in FY 2009-10).  Finance 
Secretary Ashok Chawla had reportedly said that continuing stimulus 
measures was not good for the economy, arguing that "too much of 
stimulus can be injurious to health."  His views have come in sharp 
contrast to those of Minister Sharma, who indicated that his 
ministry has reviewed various export sectors, and some are still 
facing problems despite overall positive export growth since 
November 2009.  The sectors need government support until they 
return to strong growth patterns, especially in view of the 
continuing depressed demand in major western markets. 
 
Commerce Will Cover Cost 
------------------------ 
 
¶3.  Sharma made clear that the Commerce Ministry will bear the cost 
of the new benefits, estimated at around five billion rupees 
(approximately $105 million), using its annual budget allocation. 
The new measures include addition of 237 items to the list of 
products entitled for credits (of two-five percent of the 
free-on-board value of the export) under the Focus Product Scheme 
(FPS), which is meant to promote export of products which have high 
employment intensity in rural and semi-rural areas and offset 
infrastructure inefficiencies and higher marketing costs.  The new 
products include items in the engineering, electronics, rubber, 
chemicals, and plastic sectors.  The Commerce Ministry also added 
1837 new products (e.g., machine tools, earth moving equipments, 
transmission towers, electrical equipments, steel tubes and pipes, 
compressors, and auto components) to the Market-Linked FPS.  It 
added China and Japan to the list of export destinations that are 
eligible for duty credits, as part of India's efforts to diversify 
away from exports to the United States and Europe.  In addition, the 
Commerce Ministry has submitted a request to the Finance Ministry to 
approve continuation of interest discounts for exporters and allow 
reduced interest rates for dollar credit in view of the 
strengthening rupee.  Minister Sharma told a group of exporters on 
January 23 that this request included continuation of subsidized 
two-percent interest rate credit for labor intensive sectors such as 
textiles, handicrafts, carpets, leather, gems and jewelry.  While 
the new export promotion schemes are made retroactive to January 1, 
2010, the interest subsidy proposals will need to be approved by the 
Finance Ministry as part of the upcoming budget. 
 
India's Exports on Recovery Path 
--------------------------------- 
 
¶4.  Stimulus packages consisting of tax cuts, increased government 
expenditure, easy credit and interest rate cuts were announced in 
 
NEW DELHI 00000179  002 OF 002 
 
 
three phases between September 2008 and April 2009, which, according 
to many trade observers and government officials, have helped 
India's export sector recover.  According to the latest data 
announced by Minister Sharma at a recent conference in Mumbai, 
exports have grown 9.4 percent to $14.6 billion in December 2009 
over the previous month (which would be a 15 percent increase over 
December 2008), with strong growth in the pharmaceutical, 
engineering and auto components sectors.  Exports in November 2009 
registered positive year-on-year growth (18 percent) for the first 
time since they began plunging with the onset of global recession in 
October 2008.  India's cumulative exports for the eight-month period 
from April to November 2009 were still down 22.3 percent from the 
same period the previous year.  The Commerce Minister expects to 
maintain momentum in exports but he has emphasized ongoing concern 
regarding the sluggish demand in India's major export markets. 
 
Comment 
------- 
 
¶5.  Minister Sharma is right to view the recent positive export 
growth figures with caution, especially considering that they are 
now rising from a very low base.  But the fiscal deficit must be 
managed, too.  The GOI is scheduled to present its annual budget on 
February 26 before which the Finance Ministry must make a decision 
about the proposed subsidized interest rates for exporters.  In 
addition to the compelling need to manage its unsustainable fiscal 
deficit, the GOI has ahead a daunting task of dealing with very high 
food inflation.  Post is monitoring future GOI steps in this 
direction and will report accordingly. 
Roemer