Interest Equalisation Scheme Restricted to MSME Exporters: What It Means and How Exporters Can Respond

The recent move to largely restrict the Interest Equalisation Scheme (IES) to MSME exporters has sent a clear signal across India’s export sector. For many exporters, especially those operating on thin margins, interest subvention had become an embedded part of cost calculations. Its contraction is undeniably bad news, particularly at a time of elevated global interest rates, volatile exchange markets, and uncertain external demand.

However, from a trade-finance and policy perspective, this development also exposes a deeper structural reality: export competitiveness cannot be built on subsidies alone. Schemes are transient. Financial strategy is permanent.

Why the Interest Equalisation Restriction Hurts Exporters

The Interest Equalisation Scheme helped reduce the effective cost of borrowing for exporters by subsidising interest on pre- and post-shipment credit. Its restriction raises the cost of working capital, directly affecting pricing power, liquidity, and risk appetite—especially for non-MSME exporters and scale-driven firms.

In an environment where exporters already face:

• rising compliance and logistics costs,

• currency volatility, and

• tight global financial conditions,

The withdrawal of interest support acts as a margin squeeze rather than a neutral policy adjustment.

But Export Finance Does Not End With Subsidies

Even without interest subvention, India’s export finance ecosystem still offers powerful instruments. Exporters who understand and optimise these tools remain resilient.

Packing Credit (Pre-shipment Finance)

Packing credit continues to be the backbone of export working capital. It finances procurement, processing, manufacturing, and packaging before shipment. Efficient credit rotation, shorter production cycles, and negotiated bank spreads can significantly reduce effective financing costs even in the absence of interest equalisation.

Post-Shipment Finance

Post-shipment finance—through export bill discounting under DA, DP, or LC—remains crucial for liquidity management. Faster realisation of export proceeds improves cash flow, lowers balance-sheet stress, and supports continuous production cycles.

Exchange Earners’ Foreign Currency (EEFC) accounts allow exporters to retain earnings in foreign currency. This reduces repeated conversion costs and provides a natural hedge against exchange-rate volatility. In periods of rupee depreciation, EEFC accounts become a strategic financial buffer rather than a mere operational convenience.

In today’s environment, forward contracts are no longer optional. Exchange-rate uncertainty directly affects export margins, invoicing decisions, and profitability. Hedging through forward contracts transforms currency risk into a predictable cost, which is essential for long-term export planning.

The Structural Lesson for Indian Exporters

The restriction of the Interest Equalisation Scheme underscores a broader policy truth: governments may recalibrate incentives, but exporters must build internal resilience. Firms that rely excessively on subsidies face repeated shocks when policy priorities change. Firms that invest in financial literacy, trade finance strategy, and risk management adapt faster and survive longer.

Export success in the current global trade environment is less about chasing schemes and more about:

• understanding the cost of capital,

• managing currency exposure, and

• Aligning finance with trade strategy.

  
  

Conclusion: Strategy Beats Subsidy

The Interest Equalisation restriction is a setback—but not a stop sign. Indian exporters still have tools, institutions, and financial instruments to remain competitive. What is required is knowledge-driven decision-making, not dependence on incentives.