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Shipping industry in perspective

J. C. Anand

INDIAN shipping is facing a declining growth trend, and its prospects appear uncertain, because of various recent developments. The shipping sector is now passing through a most critical phase, facing as it does a threat to its very survival, in an envir onment where there appears to be not much concern about its vital importance to economic independence, the country and the critical role it can play, now and in the future, in the economic and trade growth.

The subject assumes added significance in today's context, when the industry stands at the crossroads in its development process. The relevance of the subject also arises from the fact that while there are 122 Indian shipping companies owing/operating In dian ships in coastal and overseas trade, five to six of them own over 71 per cent of the total Indian fleet, while the public sector Shipping Corporation of India alone owns and overwhelming 42 per cent.

At present, as a part of the government's policy of PSU disinvestment, it is sought to privatise and restructure the Shipping Corporation of India, established in 1961 as a public sector undertaking, with the main object of accelerating the growth of Ind ian shipping.

This has come at a time when the future of the shipping industry itself appears to be in jeopardy due to continuing erosion in fiscal funding and cargo support measures as also the constraints clamped on acquisition of second-hand ships for the last two years because of the erroneous interpretation of Exim Policy/Procedure by the DGFT/Commerce Ministry, while the imposition of 5 per cent Customs duty on import of ships in the current year's Budget proposals together with the harsh impact of withdrawal o f exemption of interest tax on ECB's would make acquisition of ships totally unviable.

These factors cumulatively could trigger the further depletion of the Indian fleet strength, and it may take several decades to restore competitive levels of skills and expertise. There can thus be no two views that the industry would then inexorably mov e towards a most undesirable phase in its history.

The government initiated various measures to assist the development and expansion of shipping and successive five Year Plans targets for shipping were fixed in pursuance of these goals. The measures introduced include the setting up of maritime training institutions for floating staff, officers and other crew and grant of soft-loan funding assistance for ship acquisitions.

Since then, the policy for assisting development of national shipping included the setting up of a Shipping Development Fund Committee for grant of loans to shipping companies, and the National Shipping Board as the highest policy making advisory body in shipping.

The industrial policy resolution of 1956 includes shipping in schedule B industries for development in both public and private sectors. While it remained unchanged till its amendment in 1991, in practice, in sanctioning investment proposals for tonnage a cquisitions and soft loans funding proposals of India shipping companies the allotment to Private sector companies was diluted considerably (35 per cent) thus giving the rise to apprehensions and uncertainties for the private sector shipping about the go vernment intentions on this score.

While the tonnage target of 7.5 million grt fixed for Sixth and Seventh Plans could not be achieved, even the Eighth plan target -- pegged at the reduced level of 7 million grt -- faced a similar fate at the end of the Plan period, having crossed the tar get ahead of schedule in December 1995. A declining trend in evidence during the Ninth Plan period as well, the fleet strength in fact standing at 6,9 million grt as on March 1, 2001, against the Ninth Plan target of 9 million grt to be achieved by March 2002.

In this scenario, of the top 20 maritime countries based on country of registration, India in 1995 with 7.13 million grt ranked 15th, but has now, with 6.81 million grt, slipped back to 17th position. Unless adequate steps are taken to augment tonnage, i t will not be long before India slips to the lowest position.

The proportion of Indian tonnage to world tonnage has also slipped -- from 1.47 per cent in 1992 to 1.28 per cent today. the negative growth of Indian fleet is reflected in the continued slippages in the share of Indian shipping in the carriage in India' s overseas trade at 30.8 per cent in 1989-99 General Cargo 14.3 per cent; dry bulk cargo 15.2 per cent and POL products, including other liquids 55.1 per cent. A new national Shipping Policy (based on the recommendations of the Pinto Committee) that prop oses certain fiscal and financial measures and adequate cargo support measures to Indian shipping for reinvigorating its growth, is yet to be implemented.

Besides in line with the Government policy on privatisation of PSUs, the move to restructure and disinvest SCI needs to be looked into, as it is likely to tilt the structural balance in the pace of growth of the Indian fleet. Against the earlier policy o f shipping being wholly managed and manned by Indian nationals, there is a progressive liberalisation of this policy and under the Merchant Shipping Act Indian shipping companies are now allowed to have 100 per cent foreign equity. In spite of this revis ed policy there are no takers -- the reasons are obvious.

What message do these structural changes herald for India shipping? One thing is clear -- that, in order achieve the planned growth of th Indian fleet, there is a paramount need to provide a conducive environment of the fiscal and financial support measu res to ensure a level playing field.

It is indeed a matter of deep concern to note the disturbing provisions of the Budget that could result in bringing to complete halt all acquisitions of ships and accelerate the declining trend of the Indian feet strength. The imposition of 5 per cent Cu stoms duty on import of ships is a step without precedent in the international shipping industry and it will no doubt place Indian shipping at a considerable disadvantage in international as well as domestic operations.

While the basic objective of levying Customs duty is to provide a level of protection to the domestic providers of manufactured goods, and acts as a source of revenue generation for the government exchequer, it is quite unlikely that either of these two objectives could be realised. This assessment is on the basis of the fact that the domestic shipbuilding yards do not have adequate capacity to build ships as per the tonnage plan requirements of Indian shipping.

On the other hand, most of the ships acquired are second-hand vessels. The imposition of the Customs duty would make the import of ships totally unavailable and hardly any ships will be imported by Indian shipping companies. It is noteworthy in this cont ext that the industry had been trying to convince the government that shipping companies are unable to shoulder any additional financial burden on the cost of acquisitions of ships following recent interpretation of the Exim Policy/procedure by the DGFT/ Commerce Ministry under which import of second-hand ships is to comply with the requirement to surrender SIL and the net effect was an additional capital cost burden of 1.5 per cent.

The other Budget proposal -- removal of exemption for withholding tax on ECB interest payments -- would also prove harmful as it will add 20 per cent to the interest cost of foreign exchange borrowing in respect of acquisition of ships which will further erode the competitiveness of Indian ships as it impacts refinancing also.

The industry is also very disappointed with the announcement of a significant increase in the rate of depreciation of ships to 40 per cent (to be on par with road vehicles and aeroplanes) and also with the Budget proposal to increase the rate of deprecia tion on road vehicles to 50 per cent. The Budget also does not cover the industry's representation for extending to shipping other fiscal measures such as tonnage tax option, tax relief to seafarers, etc., to bring it on par with the rest of the world sh ipping.

The Planning Commission has now set in motion another exercise to fix the target for shipping for the Tenth Plan to increase the share of Indian ships in overseas trade from the current 31 per cent, and cover fully the growing coastal trade.

The Government's plans to restructure and disinvest in the SCI have added new dimensions to the situation. The policy intentions in this direction are clear, with the increasing tilt towards a free-market economy. As the SCI gets no budgetary or funding support from the government disinvestments, this will afford it the much-needed free hand in its functioning. It will no doubt enable the company to deploy and manage its operation to best commercial advantage.

In conclusion, I would like to reiterate that the Government should take the following measures immediately:

*Recognise the vital role that shipping plays in the growth of country's trade and economy and its importance as a strategic industry.

*Take necessary measures to arrest the declining share of Indian ships in the country's trade and raising their participation in respective trades as per the national objective.

*With this in view, set out a pragmatic framework to stimulate growth by creating an investment and operating environment that which encourages growth of national fleet and allows it to compete on fair terms with international shipping.

*Remove discriminatory provisions in the Budget in regard to imposition of 5 per cent Customs duty on import on ships, lower depreciation rate and removal of exemption tax on interest payable on ECB to assist acquisition of ships.

*Plan tonnage acquisitions and allocate adequate resource for the same as part of integrated national planning to cover:

i) Renewing /replacing the fleet

ii) Remodelling the fleet to the changing needs of India's growing overseas and coastal trades.

*Address emerging threat to cargo support base arising out of changing environment.

(The author is with the Indian Register of Shipping. His views are personal.)

Excerpts from a speech delivered at the annual function of the Indian Maritime Foundation.