6 days ago
Narendra Modi Govt Works Out Emergency Action Plan To Assist Most-Hit Exporters
By Ashok Nilakantan Ayer
When the U.S. President Donald Trump slapped heavy tariffs on a range of Indian goods this month, Prime Minister Narendra Modi responded almost immediately with quiet contingency planning: supply a targeted, limited financial backstop to exporters and small manufacturers whose cash flows are being squeezed by sudden loss of competitiveness in the U.S. market.
According to officials briefed on the plan, the Indian finance ministry has proposed a credit-guarantee package for banks that extend fresh liquidity to stressed exporters and small firms whose loans are overdue but not yet classified as non-performing assets — the so-called Special Mention Account (SMA) cohort.
The headline mechanics are simple: the government would guarantee roughly 10–15% of the value of new or restructured short-term bank exposure to these firms (accounts overdue up to 90 days), and has discussed an initial allocation in the order of ₹40 billion to support the scheme.
Why SMA accounts? Banks already flag accounts as SMA-0, SMA-1 or SMA-2 when repayments are overdue but before the 90-day mark that typically triggers an NPA classification. By targeting SMA loans, the government aims to help borrowers who are stressed by a shock external to their business model — a sudden tariff shock in a major export market — and to prevent a cascade of downgrades that could choke working capital across entire clusters, especially among small and medium exporters.
The Reserve Bank of India's SMA framework and reporting norms provide the regulatory scaffolding for such targeted relief.
The assistance is clearly aimed at smaller, export-dependent enterprises and the banks that finance them. Officials described the focus as firms with turnover below a threshold (public reports say the scheme would concentrate on smaller firms and MSME exporters), and on sectors with outsized exposure to the U.S. market: textiles and garments, jewellery, a growing list of premium consumer export categories (including some spirits makers), and certain labour-intensive manufacturer segments.
Several industry CEOs have publicly warned of catastrophic margin compression where U.S. duties jump to historic highs.
Pharmaceutical exports — a major earner for India — appear to have been spared the worst of current tariff action so far, according to bankers and officials, though the threat of supply-chain disruptions keeps lenders cautious. The tenor of policymaking in New Delhi suggests the relief is designed to be surgical rather than universal: targeted credit guarantees to keep working capital flowing to exporters most exposed to the tariff wave, not blanket subsidies.
To get a sense of scale, consider the market: India's merchandise exports to the United States were in the region of tens of billions of dollars annually — roughly $79.4 billion in 2024 by United Nations/COMTRADE and trade-data aggregates — making the U.S. one of India's largest single-country markets.
Reporting by officials suggests that around 55% of India's goods exported to the U.S. may now face higher duties under the recent measures, meaning a large share of the bilateral goods flow is potentially affected. That combination — big baseline volumes and a high share of goods hit — is why even modest working-capital shortfalls could ripple through supply chains.
The government's talk of a ₹40-billion initial envelope sounds substantial in rupee terms but is modest compared with the aggregate value of exports at stake. To illustrate: if $79.44 billion is the benchmark annual exports to the U.S., and 55% of that ($43.692 billion) is deemed subject to higher tariffs, even a conservative assumption that firms need working capital equivalent to 10% of the affected annual exports implies short-term financing demand of roughly $4.37 billion.
If the government guarantees 10%–15% of that additional working capital, the contingent liability created by guarantees would be on the order of several hundred million dollars (roughly ₹38–40 billion for the 10% example) — in the same ballpark as the reported ₹40-billion allocation. In short: the proposed envelope appears sized to back a relatively small slice of the immediate working-capital needs of the most exposed firms rather than to fully underwrite the entire hit.
Officials and market participants describe the relief as temporary and tactical: a bridge to help cash-flow strained exporters until market access normalises or companies reorient supply chains and pricing. That said, 'temporary' in trade politics can stretch — tariff disputes, retaliation and trade negotiations often unfold over months or years.
if tariffs persist, New Delhi could either extend the scheme, broaden guarantees, or shift toward more structural measures such as production subsidies, accelerated export-credit support, or diplomatic countermeasures. The intention now, though, is unmistakable: bleed control first, policy redesign later.
Credit guarantees are attractive for the Modi government because they shift much of the immediate cash cost to contingent liabilities rather than outright transfers. The fiscal impact accrues only if guaranteed loans default and the state must pay the bank. That means the official ₹40-billion outlay is best read as a provisioning of headroom for contingent liabilities, not an upfront cash cost equal to that amount.
If losses remain limited because the shock is temporary and many exporters recover or find alternate markets, the actual fiscal hit could be small. But if tariffs stay high and defaults rise, contingent guarantees can convert into real spending, and public finances would feel the strain. For banks, partial state guarantees reduce immediate provisioning pressures and allow incremental lending — but they do not remove credit-risk discipline entirely.
The tariff measures do not hit every sector equally. Labour-intensive apparel and garment exporters — a big employer and consistent U.S. supplier — face immediate demand re-routing as importers seek tariff-favoured origins. Jewellery and certain consumer luxury categories (including single-malt exporters) have already reported margin erosion.
Auto parts and certain intermediate goods that feed U.S. manufacturers could lose orders or see buyers shift sourcing. By contrast, many pharmaceutical finished-dose exports and specialised IT services (a services export, which faces a different trade regime) remain less affected at present. The uneven sectoral hit explains why the government wants a selective, SME-focused guarantee rather than broad industrial subsidies.
Monitor three things: First, the fine print of the guarantee scheme (eligibility thresholds, whether the guarantees are capped by firm turnover, the tenor covered and whether they apply to existing exposures or only new lending). Second, how banks implement sectoral risk reviews — if lenders start to reprioritise credit away from U.S.-exposed sectors beyond the government's umbrella, pressure will mount on real activity. Third, whether tariffs ease after negotiations or escalate, which would determine whether New Delhi's support is a bridge or a permanent cost.
For now, the Indian approach mixes fiscal prudence with targeted risk-sharing: a modestly sized guarantee pot intended to keep factories humming and ports clearing while policymakers buy time to negotiate, diversify export markets and help firms adjust their product mix and pricing. Whether it will be enough depends on how long Washington's tariffs remain in place — and how quickly Indian exporters and their bankers can pivot.
Pharmaceuticals remain a stronghold: with exports of about $10.9 billion in 2024, this sector is currently tariff-free, providing stable earnings. Jewellery and precious stones (roughly $10.2 billion) face immediate pressure, especially with tariffs hitting up to 50%, threatening jobs and competitiveness in hubs like Surat and SEEPZ. Textiles and ready-made garments, modest at around $1.8 billion, are still highly vulnerable; tariffs could decimate margins — industry leaders warn of serious disruptions in places like Ludhiana.
Telecom instruments and petroleum products provide moderate value but variable exposure; telecom isn't in the immediate line of fire, while petroleum products could face indirect or classification-based vulnerability. Electronics (e.g., smartphones) are a rising export — notably exempt under the new tariff rules — while auto components are partially at risk: passenger-vehicle parts at 25%, commercial-vehicle parts at 50%. (IPA Service)
