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EXPLAINED | Why is government betting on project exports, larger export insurance cover?

At a time when directly generating demand is the need of the hour, the government has chosen to pump in money into schemes which will bear fruit slowly. But the announcements in the export sector are set to have long term impact in augmenting India's export footprint globally.

June 30, 2021 / 03:58 PM IST
Representative Image

Representative Image

Finance Minister Nirmala Sitharaman announced a Rs 33,000 crore boost for project exports through the National Export Insurance Account (NEIA) on June 28. She also announced Rs 88,000 crore of additional export insurance coverage for the trade sector. Both the fund infusions have been allocated from FY21 to FY26.

Other policy interventions announced on June 28 include credit guarantee schemes to increase availability of cheap loans or direct grants and benefits in select sectors. At a time when many experts say that directly generating demand is the need of the hour, why has the government chosen to pump in money into schemes, which are set to bear fruit after a much longer time

Moneycontrol looks at why policymakers are taking such steps and what they can achieve.

What are project exports ?

While it is not suitably defined by the government, project exports refer to setting up of engineering, construction or infrastructure projects overseas. It could also involve export of engineering consultancy or other engineering services as desired by the project owner.

In simple terms, export of engineering goods/services on deferred payment terms which lead to execution of turnkey projects including civil construction works abroad are collectively categorized as Project Exports. Project construction items, excluding steel and cement are also categorized under it.

What is India's capability in project exports ?

According to the Project Export Promotion Council, exports from India have swung wildly over the past five years. Project exports depend on the securing of rights to develop major projects overseas which depend heavily on the volatile nature of global investment flows, political climate and pace of government contracts being awarded.

Project exports touched $8.27 billion in 2016-17, but slumped to $4.23 billion in 2019-20. The possibility of project exports from any country in general is determined by the state of its economic and technological advancement on one hand, and on-going global development on the other.

Hence, project exports are aptly regarded as a key indicator of the technical maturity and industrial capabilities of a country and have occupied an important place in India's export portfolio.

Why is the government focused on project exports ?

Project exports are crucial to not only earning foreign exchange but also serve as a diplomatic tool for India. It is important in projecting India's economic power and the strength of its engineering and construction sectors overseas.

This method has been perfected by neighboring China which has blanketed the African continent with major civil engineering projects. These includes railways, like the $3.2 billion Nairobi to Mombasa train line in Kenya, urban rapid transport systems like the $3.4 billion Addis Ababa metro in Ethiopia's capital, hydoelectric power plants like the Merowe Dam in Sudan and the Imboulou dam in Congo and a string of highways across Sub-Saharan Africa.

Most Chinese projects are undertaken by Chinese state-run construction majors backed by the government flushed with cash. The projects are modelled on cheap long term loans with tricky repayment conditions.

Project exports also involve significant employment opportunities across the skill chain. While most countries now place some restrictions on en-masse bringing in labour from outside, major projects overseas undoubtedly lead to Indian engineers, data scientists, business administrators, and financial planners being employed.

How will the latest funding help?

The latest support for both medium and long term projects will push project exports in Africa where India is locked in a battle for influence with China.

While it can't match China's spending prowess, India plans to still provide government support to Indian construction majors to dent China's control of especially the East African infrastructure market.

With many countries growing wary of the 'Debt Diplomacy' practiced by China and the inflated bills that come with these projects, Indian policymakers sense a shift in perception among African nations.

What is export insurance and why is it needed ?

Export credit insurance (ECI) protects an exporter of products and services against the risk of non-payment by a foreign buyer. In other words, ECI significantly reduces the payment risks associated with doing business internationally by giving the exporter conditional assurance that payment will be made if the foreign buyer is unable to pay.

Exporters can protect their foreign receivables against a variety of risks that could result in non-payment by foreign buyers. It not only takes care of exporter's working capital needs, it also builds risk appetite for businesses to venture into distant markets, build contacts and build trade links.

The domestic industry has repeatedly asked the government to raise proper insurance cover to boost overall trade. Export Credit Guarantee Corporation (ECGC) promotes exports by providing credit insurance services. Its products support around 30 percent of India’s merchandise exports, according to latest official estimates.

How is the government trying to raise export insurance ?

Spurred by experience from across the border in China, which has built a huge global export portfolio based on cheap credit given to exporters, India has continued to focus on increasing export insurance coverage, which continues to remain low.

In 2019, an inter-ministerial working group started monitoring disbursal of export credit through a public dashboard. This is now reviewed with the help of trade institutions, with key figures being made available to the public periodically.

In 2020, the government had proposed an export financing scheme to offer lower interest rates in rupee and dollar terms as well as reduced premium cost for small businesses.

Subhayan Chakraborty