The Technology Upgradation Fund Scheme (TUFS) was introduced to make available funds to the textile industry for upgrading technology at existing units as well as to set up new units with state-of-the-art facilities. The government is now planning to tweak the Technology Upgradation Fund Scheme (TUFS) in the textile sector and may end interest subsidy provided to mills against investments made by them, as it intends to rationalise various dole-out-based schemes.

The move is a part of the government’s efforts to remove various interest subsidies across sectors to curb their distorting effect on the interest rate market. It aims to replace interest subsidy with other forms of support like viability gap funding and upfront capital subsidy, also aimed at ensuring better transmission of the monetary policy.

The details are being worked out in consultations with the Prime Minister’s Office (PMO), the government may decide to offer only capital subsidy or similar form of support for investments under the new scheme.

The PMO convened a meeting with senior textile ministry officials late last month to discuss the issue, one of the sources said. Currently, the government provides interest subsidy up to 6%, capital subsidy up to 30% in the form of a grant and support under the margin money scheme (another form of capital subsidy) under the TUFS, depending on the segment in which investments have been made.

The government has already trimmed Budget allocation for subsidy payment under the TUFS to Rs 1,521 crore for 2015-16, compared with Rs 1,864 a year before

Currently, the biggest beneficiaries of interest subsidies have been farmers (Farm credit target fixed at Rs 8.5 lakh crore for 2014-15) and exporters. The government’s major interest subsidy outgo, including for subventions on short-term credit to farmers and export promotion, is budgetted at Rs 14,903.42 crore for 2015-16, compared with Rs 11,147.17 crore in the previous fiscal. This amount, however, doesn’t include the subsidy payment under the TUFS.

RBI governor Raghuram Rajan had been warning that broad-based interest subsidies and loan waivers lead to the distortions of credit price and that distorted prices lead to the wrong kind of investments and the misuse of schemes.

According to analysts, success of the new scheme will depend on the amount of capital subsidy the government offers in the absence of interest subsidy. Any move to replace the interest subsidy with upfront capital grant will not just spare textile units the trouble of approaching banks frequently to get the subsidy cleared but also reduce errors in reporting by banks on the subsidy amount owed to mills. This will also cut the delay in the disbursements of the subsidy.

Since the inception of TUFS scheme, it has attracted investments of more than Rs 2,71,480 crore through 2014-15, according to the official estimate. Subsidies (both interest and capital) over Rs 18,000 crore have been extended under the scheme since the beginning to catalyse the investments.

The capital intensive spinning industry has been the largest beneficiary of the scheme, as most of the investments have taken place in this segment.