Indian exporters are urging the government to remove the cap on interest subvention under the Interest Equalisation Scheme (IES), arguing that the current 3% ceiling fails to offset rising global borrowing costs and volatile export demand amid persistent trade uncertainties, as stated by the Federation of Indian Export Organisations (FIEO) on April 16, 2026. The scheme, which subsidises pre- and post-shipment rupee export credit, has not been adjusted since 2020 despite a 42% surge in average external commercial borrowing (ECB) costs for Indian firms over the past 18 months, according to Reserve Bank of India (RBI) data. Exporters contend that lifting the cap would enhance competitiveness in key sectors like textiles, engineering goods, and pharmaceuticals, where margins are under pressure from rupee volatility and weak global demand.
Why the Interest Subvention Cap Matters to India’s Export Competitiveness
The existing 3% cap on interest subvention under the IES creates a growing gap between actual financing costs and subsidised rates, particularly for labour-intensive exporters reliant on working capital loans. With the RBI’s repo rate held at 6.5% and global benchmark rates like SOFR averaging 5.3% in Q1 2026, Indian exporters face effective all-in costs exceeding 9% on foreign currency loans after hedging—far above the scheme’s current support level. This disparity risks eroding India’s share in global exports, which declined 2.1% YoY in FY2025 despite a 6.8% rise in merchandise exports to $478 billion, per Directorate General of Commercial Intelligence and Statistics (DGCI&S) data. FIEO estimates that removing the cap could boost export growth by 1.5–2 percentage points annually, directly supporting the government’s $1 trillion export target by 2030.
The Bottom Line
- Lifting the IES cap could reduce effective borrowing costs for exporters by up to 400 basis points, improving EBITDA margins by 3–5% in sectors like textiles and engineering.
- Failure to act may accelerate export market share losses to Vietnam and Bangladesh, where rival subsidy schemes offer comparable or better financing support.
- The fiscal cost of removing the 3% cap is estimated at ₹8,500 crore annually—equivalent to 0.03% of GDP—based on current scheme utilisation of ₹28,300 crore.
Market Implications: How Subvention Policy Affects Stocks and Supply Chains
Shares of export-oriented firms have underperformed the broader market, with the Nifty Export Index down 4.7% YTD versus the Nifty 50’s 2.1% gain, reflecting investor concerns over margin pressure. Companies like **Raymond Ltd (NSE: RAYMOND)** and **Lupin Ltd (NSE: LUPIN)** have cited rising financing costs in recent earnings calls, with Lupin’s CFO Ramesh Swaminathan noting in its Q4 FY2025 call that “interest expenses rose 22% YoY due to higher global rates and limited subvention pass-through.” Conversely, importers and domestic-focused firms like **ITC Ltd (NSE: ITC)** have benefited from stable input costs, highlighting the policy’s uneven impact. Supply chain analysts warn that prolonged financing disadvantages could shift export orders to Southeast Asia, where Vietnam’s interest support programme covers up to 6% of loan costs for textile exporters, according to a March 2026 Asian Development Bank report.
“India’s interest equalisation scheme was designed to neutralise currency disadvantages, not to withstand a sustained period of high global rates. Without adjustment, it becomes a structural headwind for exporters.”
— Dr. Rajiv Kumar, Former Vice Chairman, NITI Aayog, in an interview with Livemint, April 10, 2026
Fiscal Space and Macroeconomic Trade-Offs
The government faces a calibrated trade-off: expanding the IES would increase fiscal outlays but could be offset by higher GST and customs revenues from expanded export volumes. Current IES expenditure stands at ₹28,300 crore for FY2025, covering ~4.2 lakh exporters. Removing the 3% cap—assuming full utilisation and a revised effective rate of 5%—would raise annual costs to ~₹36,800 crore, a net increase of ₹8,500 crore. Though, the Ministry of Commerce estimates that a 1.5% uplift in export growth could generate an additional ₹12,000 crore in GST revenue annually, creating a net fiscal positive. This dynamic mirrors past adjustments, such as the 2020 expansion of the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme, which paid for itself through higher trade compliance and volume gains within 18 months.
| Metric | FY2024 | FY2025 | YoY Change |
|---|---|---|---|
| Total IES Expenditure (₹ crore) | 24,100 | 28,300 | +17.4% |
| Average ECB Cost for Indian Firms (%) | 5.1 | 7.2 | +41.2% |
| Merchandise Exports ($ billion) | 447.4 | 478.0 | +6.8% |
| Nifty Export Index (YTD Return) | – | -4.7% | – |
| Nifty 50 (YTD Return) | – | +2.1% | – |
The Path Forward: Policy Adjustment as a Growth Lever
With global trade fragmentation persisting and the rupee trading in a 82–85 range against the dollar, exporters need targeted support to maintain price competitiveness. The FIEO has proposed a tiered subvention model—offering up to 5% for MSMEs and 4% for large exporters in high-priority sectors—aligned with the Production Linked Incentive (PLI) scheme’s sectoral focus. Economists at ICRIER estimate such a tweak could lift manufacturing GDP growth by 0.3–0.5 percentage points without triggering inflationary pressures, given India’s current output gap of -1.2%. As markets await the RBI’s April monetary policy decision, the interest subvention debate underscores a broader truth: in an era of expensive capital, targeted fiscal tools remain vital to sustaining export-led growth.
Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute financial advice.
