ECBs to help exporters retire high-cost loans.

NEW DELHI: The government plans to allow certain export sectors such as gems & jewellery and engineering goods to raise foreign loans and pay

off high-cost domestic debt, said a commerce department official on condition of anonymity.

A drop in London Interbank Offered Rate (Libor), a reference rate at which international banks borrow from each other, will enable exporters to access cheap credit abroad, the official said. This proposal forms part of the government’s efforts to make Indian exports competitive in the global market by bringing down the cost of finance.

The commerce department will put forward the proposal in a meeting of the committee of secretaries (CoS) working on incentives for the exporting community. At present, the Reserve Bank of India (RBI) guidelines do not permit the industry to use commercial loans taken from foreign lenders to pay off existing debt.

“We are going to make a case for this in the CoS meeting. It could then be followed up with RBI,” the official said. The CoS will also consider exempting exporters from paying fringe benefit tax (FBT) for the next few months. The commerce department’s argument is that FBT that can be as high as 33% depending on the benefit being taxed — applicable on a number of activities such as travel, hospitality, food and beverages — is acting as a disincentive for exporters to travel abroad and woo foreign clients.

With the global downturn squeezing credit and shrinking markets, exports from India have gone into the negative territory recently. Exports declined by 12.1% in October 2008 followed by falls of 9.9% and 1.6% in the next two months. It has been officially acknowledged by commerce and industry minister Kamal Nath that it is impossible to meet the export target of $200 billion for the current fiscal.

At present, exporters get finance from public sector banks at 10-10.5%. Sectors like textiles, handicrafts and marine, which get support from the government, get finance at about 8%. With the Libor recently averaging around 1.5%, exporters could get foreign funds at rates much lower than 8%.