India may provide sops for Ukrainian exporters

india-sops

Indian Market
by 5paisa Research Team Last Updated: 2022-08-08T19:02:28+05:30

The war between Russia and Ukraine is just one part of the story. The bigger challenge is that now the US and EU have imposed sanctions on Russia and there is also a virtual blockade of the Black Sea. As a result, exports to Ukraine and even imports from Ukraine are suffering. As a result, the government is planning to quickly rustle up a rescue package for the exporters who are currently having a large exposure to Ukraine.

There are a number of measures on the cards and greater clarity should emerge in the coming days. But, it is true that India is considering guarantees of lenders' letters of credit as well as soft loans for exporters, especially those exporters who are hit by the cash squeeze. The sanctions on Russia and Russian banks has caused a squeeze for a number of exporters and importers as payments are stuck and in many cases even cargo is stuck in ports. 

In the last few days, Indian banks are facing a unique problem. The Indian banks are scrambling for alternatives after bills for imports from Russia have started bouncing and as a result the payments for exports have been stuck. While the amount is not much, even a $500 million outstanding from Russia can be huge as the impact directly falls on the scores of MSMEs that contribute to half of India’s exports. That is pain that is to be mitigated.

One of the options is that "letter of credit or some form of bank guarantees can be given, so that trade settlement is not impacted in any negative manner. For now, the government is keeping all the options open and nether the RBI nor the individual banks were willing to comment on the specific measures. Among the options being explored are letters of credit, concessional loans, export incentives etc, which can help to resolve short term pain.

The government is also exploring the possibility of state owned banks lending to these exporters at concessional rates so that the short term liquidity mismatch can be taken care of. Also, payment mechanisms will have to be explored since most payments out of Russian banks are likely to be stuck for now due to the sanctions on Russia and the ban on the Russian banks participating in the SWIFT payment mechanism. 

Meanwhile, the RBI is also exploring how such Russian and Ukrainian trades can be settled bilaterally or through rupee route to avoid using the rouble route, which is under some sort of ban at this point of time. India’s trade with Russia is significant if not large, although Russia does not feature in the top-15 trading partners of India on merchandise trade. India exports $3.33 billion to Russia and imports $6.9 billion with total trade in double figures.

In terms of product basket, India exports to Russia were largely in the areas of pharmaceutical products, tea and coffee, while imports were in the areas of defence goods, mineral resources, fertilizers, metals and precious stones. If you add up Ukraine, then the total trade for India is worth $15 billion so it is around 1.5% of the total India trade. The first priority is to ease the pain of exporters and imports will be looked at after that.

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