India offers incentives to revive merchandise exports

Mobile cranes prepare to stack containers at Thar Dry Port in Sanand in Gujarat October 1, 2012.

NEW DELHI (Reuters) - India announced incentives to revive growth in exports on Wednesday as it looks to narrow a trade deficit that has put the country's current account balance and currency under pressure.

As part of the package, the government extended a 2-percentage-point interest subsidy on rupee-denominated export loans for labour-intensive and small-scale industries by one year to the end of March 2014 to cushion the impact of weak demand in developed economies.

Commerce and Industry Minister Anand Sharma also extended the interest subsidy to the engineering sector, which has been the biggest contributor to Indian exports. However, he did not quantify the monetary value of these incentives.

"They are directly linked to productivity, job creation and job sustenance," he said. "A sharp decline in labour-intensive sectors is adversely impacting employment sectors, job creation."

Merchandise exports, which make about one-fifth of India's economy, have grown just once in the last nine months. The underperformance of the sector has exacerbated the pain for Asia's third-largest economy, which is battling its worst slowdown in a decade.

Economic growth for the current fiscal year that ends in March is forecast to be 5.7-5.9 percent, the country's slowest since 2002/03.

Sharma said falling exports were a "matter of concern" that, coupled with a high import bill, had left the country with a worryingly high trade deficit.

India's exports fell by 5.95 percent between April and November from the same period of last year, leading to a trade deficit of $129.5 billion.

That contraction has cast doubt on the government's exports target of $360 billion for fiscal 2012/13.

"Our export performance has also to be viewed in the backdrop of the global slowdown, particularly the developments in Europe," Sharma said. "The (exports) contraction is directly linked to that."

The widening trade gap has swollen India's current account deficit to a record high and pushed the rupee sharply lower.

The current account gap stood at 3.9 percent of gross domestic product (GDP) in the April-June quarter, the latest period for which data are available, slightly lower than an all-time high of 4.5 percent the previous quarter.

Economists at Nomura expect the deficit to have hit a new high of 4.9 percent of GDP in the July-September quarter due to high non-oil imports.

The deterioration in the current account deficit caused the rupee to be one of the worst-performing currencies in Asia this year and increased the country's reliance on volatile capital inflows to fund the shortfall.

(Writing by Rajesh Kumar Singh; Editing by John Chalmers and Ron Popeski)