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A Plan To Beat The Odds

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India has prepared a contingency plan for Greece exiting the Euro Zone and even a collapse of the monetary union, Indian officials said on Tuesday.

The euro zone debt crisis has already put a damper on India's exports to Europe, the biggest destination for Indian goods, as well as capital inflows into equity and debt markets. Prime Minister Manmohan Singh's government blames Europe's woes for the slowdown in Asia's third-biggest economy, although economists say Indian policy inertia is also to blame. (Read: Contingency Plan)

The government on Tuesday also unveiled a 7-point strategy to boost exports which include extension of interest subsidy scheme by one year till 31 March 2013. (Read: Seven-Point Strategy To Boost Exports)

"We have now decided to extend the scheme (interest subvention) for another year till 31 March 2013 and expand its coverage to include other labour-intensive sectors namely toys, sports goods, processed agricultural products and ready made garments", commerce minister Anand Sharma said while releasing annual supplement to the Foreign Trade Policy in New Delhi.

"The underlying philosophy of this year's supplement is based on seven broad principles", he said, adding these would include added thrust on employment-intensive industry and continuation of market diversification strategy.

The minister also exuded confidence that India would be able to sustain 20 per cent export growth in the current fiscal.

"It is our expectation that with these measures, we shall be able to sustain an annual export growth of 20 per cent this fiscal", he said. India's exports grew by 21 per cent in 2011-12 to touch $303 billion.

The governments moves were welcomed by corporate India and exporters (Read) who said the Foreign Trade Policy would help in sustaining export growth momentum amid global uncertainties.

Ficci President R V Kanoria said tThe policy will help exports a lot during the time when there is economic problem in the US and European markets. as did Federation of Indian Export Organisations (FIEO) President Rafeeq Ahmed who said the measures would have a lasting and positive impact on trade.

"The announcements have exceeded our expectations. Labour-intensive sectors like textiles have been the thrust area of the FTP. We welcome the steps," Ahmed added while Apparel Export Promotion Council Chairman A Sakthivel said the measures would give a huge boost to textiles sector.

Engineering Export Promotion Council (EEPC) Chairman Aman Chadha also welcomed the measures.

Services PMI Contradicts GDP Data
In a happy turn of event, India's services sector grew at its fastest pace in three months during May, and firms were more optimistic about the year ahead, a survey showed on Tuesday (Read: May Services PMI Bounces).

HSBC's services purchasing managers' index, compiled by Markit, rose almost two points to 54.7 in May from 52.8 in the previous month. It has posted an above-50 growth reading since November. (Above 50 reflects expansion while below 50 represents contraction.

Contingency Plan
"Yes, India does have a contingency plan. There are different crisis management groups within the government to deal with such a possible scenario," Kaushik Basu, the chief economic adviser to Finance Minister Pranab Mukherjee, told Reuters.

He declined to give details of the plan, but another senior official familiar with the planning said the Finance Ministry and central bank were prepared to take monetary and fiscal measures if necessary to try to insulate India from the shockwaves of a euro zone collapse.

He did not spell out the measures, but they could include lowering interest rates, which are among the highest in the world, and lowering the amount of money that banks have to keep on deposit in the central bank.

In fact, most economists polled by Reuters now expect the RBI to cut interest rates at its policy review later this month, driven by dismal economic data, falling oil prices and recent comments by a central bank official.

For many, that marks a recent change in view.

Of 20 analysts polled, 15 expect the Reserve Bank of India to cut the policy repo rate on June 18. Of those, 11 expect a 25 basis point cut to 7.75 percent and 4 expect a 50 basis point cut.

However, a contrary view was given by J.P. Morgan. The depreciation in both nominal and effective terms of the rupee has already resulted in a "substantial" loosening of monetary conditions in India, said JP Morgan (Read: Rate Cut's Not The Answer).

The bank estimates the 10 per cent depreciation of the rupee in nominal (NEER) terms over the past three months is equivalent to 100 basis points of rate cuts, calling it "something that should bring pause to those who still believe substantial rate cuts are warranted."

It added that the Indian economy is today more integrated with the global economy, meaning the impact of the rupee's falls on exports has a broader impact.

Encouraging Exports
To encourage exports, the government came out with an interest subvention scheme under which 2 per cent interest subsidy was given to handlooms, handicrafts, carpets and SME sector.

The scheme, which has been extended by a year, was to end on 31 March 2012.

The seven-pillars to boost exports, Sharma said, would also include efforts to increase exports from the north-east region and provide incentive for manufacturing of green goods.

Besides, he said, there would "endeavour to reduce transaction cost through procedural simplification and reduction of human interface."

Efforts, the minister said, would be made to promote technological upgradation of exports to retain a competitive edge in global markets and encourage domestic manufacturing for inputs to export industry, thus reducing dependence on imports.

On market diversification, Sharma said, market-linked focus product scheme has been extended till the end of the current fiscal for exports to the US and European Union, in respect of apparel sector.

As regards the Special Economic Zones (SEZs), he said, "we will come out with new guidelines to make the operation of the SEZ policy more buoyant."

Besides, the minister said the government would revamp the 100 per cent Export Oriented Unit (EOU) scheme in the next few months.

In order to boost value-added exports and encourage technology upgradation, Sharma said, the zero-duty EPCG (Export Promotion Credit Guarantee) scheme would be extended by an year to March 31, 2013.

The benefits under the scheme, he said, would also be available to those units which had taken benefits under the Technology Upgradation Fund Scheme (TUFS).

The EPCG scheme will also be available for those who had surrendered their benefits under the Status Holder Incentive Scrip (SHIS) scheme.

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