Exporters met the finance minister yesterday to discuss measures to ameliorate the impact of the rising rupee and prevent export growth from slackening further. The meeting was timely. Export growth has slowed down significantly this year, coming in at 18% for the April to September period. Non-petroleum export growth is considerably lower. There are now reports of units closing down, being unable to absorb the impact of the rising rupee on their bottomline. This cannot be good either for sustaining growth or generating employment. What should exporters be demanding from the government in this regard? Here are a few suggestions. First, the government should immediately wind up the large number of export promotion councils that serve no purpose at all. These have become sinecures of vested interests that thrive on petty handouts from the government and enjoy the occasional junkets organised in the name of export promotion. Second, exporters should also ask for the discontinuation of the fiscal incentives for export promotion as these are discriminatory, administratively cumbersome and distract attention from the real issues which must aim to prevent a further appreciation of the rupee resulting from excessive capital inflows.

Therefore, attention should be focused principally on measures for reversing the recent rise of the rupee. A large share of our exports?some estimates put these at as much as 60%?come from small and medium enterprises (SMEs). These remain woefully neglected, despite the huge paraphernalia that has been built up (akin to the export promotion councils) to support SMEs and the rhetoric in their support. The FM should announce practical steps, implemented in a time-bound manner, to improve access to commercial bank credit for SMEs undertaking exports. The share of commercial bank credit going to the SME sector has been declining over the past few years, and this needs to be reversed. Banks could be encouraged to minimise transaction and interest costs to the extent feasible when dealing with genuine SME exporters. Moreover, exporters should ask why domestic interest rates cannot be brought down to try reversing the recent trend of a rising differential between global and Indian interests since the third quarter of 2006. Other impediments that prevent scaling up by SMEs should also be addressed. Export documentation and clearances, which become extremely costly for SME exporters, should be rationalised urgently.

Exporters may also do well to suggest that the rising foreign capital inflows are too much of a good thing at this time and need to be curbed. They are contributing to asset bubbles in the equity and real estate markets that could cause much pain later. The government could require that foreign equity inflows be put in zero interest bearing deposits with the RBI for a period of up to six months before being allowed to be invested in the stock market. This is not the first time such a measure will be put in place. This will be a far more effective means to curb capital inflows than to cap external commercial borrowings, which hurts exporters as they are unable to leverage their export earnings to raise external credit at cheaper rates. This helps them offset the impact of rising domestic interest rates, and should be permitted.

Exporters can also ask for a more robust use of the market stabilisation scheme (MSS). In a welcome step, annual limits for MSS for 2007-08 have been raised to Rs 2.5 lakh crore on November 7. By November 2, Rs 1.77 lakh crore was outstanding under this facility. The interest rate burden on this amount, to be borne by the government and not by the RBI, can be estimated by using the interest rate payable on 10-year government bonds as these are the most used instrument for MSS operations. But the dollars mopped up by the RBI to hold the rupee down generate interest income of 4.53%, which is the rate on 10-year US treasury bonds. This implies a cost to the Indian government of 3.35% on every unit of MSS holdings. On an outstanding amount of Rs 1.77 lakh crore (RBI, November 9), this amounts to Rs 5,958 crore for the full year. This is then the subsidy borne by the government to keep the rupee from rising and can be seen as a subsidy to maintain export competitiveness. As against this, the budgetary provision for subsidies to food, fertilisers and petroleum is Rs 54,330 crore! And these do nothing for the efficiency or competitiveness of any productive sector!

Thus, exporters can surely demand that limits under the MSS be doubled and used effectively to ensure that the exchange rate does not look like a one-way bet. If interest rates are brought down, as they should be, then the subsidy burden will be that much lower. Curbing capital inflows and preventing the rupee from appreciation are clearly a more straightforward and effective means of helping exporters than the export promotion councils and fiscal incentives which practically do precious little for exports.

?The author is director and chief executive of Icrier, a Delhi-based thinktank, and member of India?s National Security Advisory Board