With more competitions gaining momentum in the world market and with new regulations introduced by the World Trade Organisation (WTO), it is important that export finance plays a major role in increasing our country’s exports. We can state the following reasons for the need of export finance.
Increase in production:
Generally, manufacturers, do not enjoy enough financial support and unless sufficient finance is provided, they cannot take up increase in production to meet export requirements.
Improvement in Technology:
Export market requires an updating of technology and without proper technological support, exporters will not be able to win over the traditional market. The changing technology has also resulted in cutting down the cost of production, if the exporter does not take this into account, he is bound to lose the foreign market. For upgrading the technology, export finance is required.
Importing of capital equipment:
Certain export companies fully depend on foreign machinery. For example, the export of knitted fabric in India depends on the foreign machinery. This involves foreign exchange and the exporter should be given finance in terms of foreign currency.
Value added exports:
Goods which are exported in the form of raw materials and semi-finished goods are not exported in the form of finished products which are value added exports. These involve more finance for the exporter.
Non-tariff barriers in the importing country:
After the introduction of WTO norms, certain countries started imposing restrictions on Indian products through non-tariff measures, such as banning products manufactured by child labor or products which cause pollution, etc. To overcome these, the exporter has to incur more expenditure for which he needs finance.
Export finance available to competitors:
In the competing countries, such as China, Hong Kong, Malaysia, Singapore and Taiwan, the exporters are provided finance at a very low rate of interest which not only reduces cost of production by enables them to sell their products on deferred payments such as hire purchase and installment trade. An exporter can compete effectively only when he is also provided export finance at a competitive rate of interest.
Diversification in exports:
With product life cycle playing its role, some of the traditional products are likely to disappear and new products are likely to replace them. Exporters require more finance to meet this challenge.
Of late, India has started getting more export projects, by undertaking civil construction, oil wealth, erection of plant and machinery and railways. These not only involve more foreign exchange but also involve a guarantee for the completion of the project.