The Union Cabinet on July 14 approved a scheme under which Indian shipping companies will be given a subsidy as they bid for global tenders for the import of cargo by the government or government entities.
As part of the scheme, the central government will provide a subsidy of up to Rs 1,624 crore in the next five years to the Indian shipping companies.
Indian flagged ships will be provided subsidy support of 5-15 percent to match the lowest bid for an import order by the government or government entities.
While the pandemic has led to a drastic cutdown of India’s commodity imports in FY21, major imports such as processed petroleum, coal, steel, and copper continued to stream in.
Processed petroleum, which continues to be the single largest item in the country’s import bill, stood at $ 59.4 billion. This was down from the $102.7 billion worth of petroleum imported in FY20.
India’s coal imports, most of which was in the form of coking coal or steam coal, stood at $ 15.6 billion, down from $21.5 billion in 2019-20.
Likewise, $8.2 billion worth of iron and steel was imported, down from $10.7 billion in FY20.
Copper, in all forms, was imported to the tune of $4.6 billion in FY21, down from $ 5 billion in the previous year.
While the government’s share in the total imports is very small, large public sector undertakings (PSUs) like Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corp, National Aluminium Company and the Oil and Natural Gas Corporation import a significant portion of their raw materials.
Why do Indian shipping companies need a subsidy to compete with global players?
There are four major reasons why the Indian shipping industry needs a subsidy to compete with the rates offered by foreign players. These are – lack of carrying capacity, inadequate large domestic ship manufacturing, or ship re¬pair facility, international alliances by large shipping companies and geopolitical trade wars.
Lack of carrying capacity and inadequate large domestic ship manufacturing or re¬pair facility
India’s national fleet is proportionately small when compared with its global counterparts, despite the country having a 7,500-km-long coastline, a growing national Exim trade, and 100 percent foreign direct investment (FDI) in shipping since 1997.
“Historically, all the shipping infrastructure in India has helped foreign shipping liners. Foreign ship owners carry our inbound and outbound cargo. This is the case in container shipping too. As a country, we have still not optimized our carrying capacity. Much of foreign currency is drained as transhipment and handling costs every day,” an official from the Ministry of Ports, Shipping and Waterways told Moneycontrol.
He added that due to foreign currency being drained from local ports, Indian maritime business operators have preferred to be agents for foreign ship owners or container liners rather than becoming ship owners or container liners themselves. As a result, there is a wide gap between carrying capacity and multi-folded cargo growth in the country.
“India has always been an import-dependent nation for raw materials like coal, petroleum, steel, etc and the country’s domestic manufacturers have always looked to cater to the large Indian market before looking at export markets,” an expert from a domestic rating agency said.
He added that most of India’s exports, historically, have consisted of low-margin products and the industries that have exported products from India have not had the financial muscle to develop the local shipping industry.
India’s biggest exports, historically, have also included products like processed petroleum, diamonds, and other commodities that do not require super large vessels to be transported.
Thus, investment in India’s shipping industry has been limited and the country’s capacity has remained stagnant in the last few years, another market expert from a domestic rating agency said.
Between 2011-12 to 2014-15, the Indian shipping industry received orders to manufacture 1,398 ships but only managed to deliver 237, leaving huge pending orders, thereby forcing the country’s importers and exporters to rely on foreign ships, data from the Ministry of Shipping showed.
Lack of long-term, low-cost funds, and long-term cargo support has been cited by fleet owners as the main reason for stalling the growth of Indian tonnage.
While investment in the country’s ship building industry has increased since 2014-15, the lack of government policy focused on increasing investment in the country’s shipping industry, has limited the setting up of a large ship manufacturer in India, an official from the Indian National Shipowners’ Association said.
Private and foreign investment in the country’s ship-manufacturing and repair industry has also remained low due to high taxation on the country’s shipyards, high interest in working capital in India, and lack of bank guarantees, he added.
Until the implementation of the GST tax regime, the country’s shipyards were subject to Octroi, CST, VAT, excise, service tax, and corporate tax.
Similarly, shipyards are required to provide bank guarantees to protect the ship buyers. While globally, governments provide sovereign refund guarantees, thus removing any related burden on the shipyard, in India the government has not offered any such support till now.
International alliances
Most of the top shipping companies in the world have formed alliances to strengthen their balance sheets. Although this protects the carriers from potential capital issues due to vessel sharing and bailout agreements etc, it makes the industry less competitive for the customers, an official from the United Ocean Ship Management said.
In addition, Indian companies are not a part of these international alliances due to their limited capacities and weak financial balance sheets. India has a meagre 1.13 percent share of global tonnage, he added.
“While freight increase is a global phenomenon, we may be suffering more as we have many MSMEs in exports, who have very little negotiating power. We require a large shipping company in India as we remit about $ 65 billion every year as transport charges overseas and yet remain at the mercy of foreign shipping lines,” President, Federation of Indian Export Organisations (FIEO), A Sakthivel, said.
Currently, the public sector Shipping Corporation of India (SCI) has a market share of less than five percent of the country’s total shipping business.
“Foreign companies are able to take advantage of operational efficiencies, global clearances, and financial aid from their governments in order to provide better services at lower tariffs,” the official from the Indian National Shipowners’ Association said.
Geopolitical trade wars
Traditionally, countries like China, South Korea, Singapore, and Sri Lanka, among others, have made the development of ports and global shipping supply lines a priority while developing their economies.
These countries have also set up indigenous shipping lines in the past to protect their domestic shipping industry.
A similar demand for an indigenous shipping line has been put forward by the Federation of Indian Export Organisations. However, the development of such a line would take time and may also lead to action by countries that have transhipment around India, which may hit the country’s shipping industry even more.
Earlier this year, the Sri Lankan government scrapped the trilateral deal with India and Japan to develop Colombo Port’s Eastern Container Terminal, which is expected to hit the Indian government’s ambitious plans to set up container transhipment hubs within the country to send and receive foreign-flagged cargo containers, instead of routing them via Colombo port.
Source: Moneycontrol