Indian shipping companies have traditionally been able to compete in the cross-trading market where geographically available.
Post-COVID-19, global trade has been on a resurgence. From a quarterly low of $ 4.9 trillion in the second quarter (Q2) of 2020, the Q1 of 2022 hit a record $ 7.7 trillion, and expected to rise further. These figures are an all-time high. The highest pre-COVID-19 figure was $ 6.4 trillion in the second quarter of 2018. The growth in trade has been strongly fuelled by merchandise trade which reached $ 6.1 trillion in Q1 2022, an increase of about 20 percent relative to Q1 2021. During the same period, the developing countries had a similar merchandise trade growth rate of 21 percent.
India had a merchandise (EXIM) trade growth rate of 25 percent during the same period, between Q1 2022 and Q1 2021. The Q1 2021 EXIM trade for India had just crossed the pre-COVID-19 high which was in Q3 2018. This EXIM trade is continuing to grow. Shipping plays a critical role in India’s EXIM trade. It accounts for over 70 percent by value, nearly 90 percent by weight, and over 80 percent by transportation revenues.
The growth in the EXIM trade is largely due to containerised cargo carrying semi-finished and finished goods. While India is very aspirational for trade growth, driven by the spirit of ‘Atmanirbharta’, the interesting challenge is whether our port and shipping capacity is aligned with this growth.
With the opening up to private involvement in port capacity, and the government’s focus on hinterland connectivity through mega projects such as the dedicated freight corridors, the major express-ways and multimodal logistics parks, India should be in a position to deal with the land side issues in terms of infrastructure. The real challenge would be whether the service related issues including shipping are in keeping with the EXIM requirements, and from the principle of ‘Atmanirbharta’.
The annual freight revenue (at an estimated 7.5% of the trade value) of India’s total EXIM trade (at an estimated $ 0.95 trillion trade value) was about $ 70 billion during 2021. The share of Indian ships in carrying India’s EXIM trade was about 6.53 percent in 2019-20 and 7.8 percent in 2018-19. The share has been consistently reducing, and is significantly lower as compared to 40 percent in 1987-88. This share is at best expected to have changed marginally during the post-COVID-19 2021-22. Out of the total EXIM trade, 20 percent is containerised. Here, the share of Indian ships is much lower at under 1 percent. Thus, every year a significant amount of seaborne freight is paid by India to foreign shipping companies, which is draining Indian foreign exchange.
It is important to examine the policy issues that would increase the share of shipping revenues for India in its EXIM trade.
While India followed a protectionist regime to promote Indian shipping, the reality was that it had a counter-productive influence by making the Indian shipping industry secure in a protected market with no innovation and growth towards global competitiveness. This protectionism was at least at three levels. The first was protecting EXIM trade of public sector for Indian ships through a chartering regulation administered by an entity called Transchart; the second was to protect coastal trade through the Cabotage Law (this had the unintended consequence of the trans-shipment market establishing itself in foreign ports); the third was to offer a ready market to the Indian ship building industry through a ‘pari-passu’ clause, by which Indian ship openers had to order equivalent shipping capacity from Indian ship builders as from foreign ship builders. In addition, strict regulations towards external commercial borrowings (ECBs), taxation regime, and bureaucratic procedures for approvals essentially choked the sector including EXIM trade.
Over the past two decades, these measures have been relaxed to enable better competitiveness for our trade. In the process, while trade was facilitated, the shipping sector had to face a lot more competition. The philosophy of protectionism changed from rule-based to incentive-based. The tonnage tax regime was brought in as an option to enable better management of taxes and consequent risks for Indian shipping companies. Instead of a chartering regulation, a Right of First Refusal (ROFR) for Indian Shipping with supporting subsidies was introduced. The Cabotage Law was relaxed for EXIM and empty containers. The ‘pari-passu’ clause was done away with.
These resulted in marginal increase in Indian ship owning, sustained a higher share of Indian flagging (as compared to the top shipping nations of the world), set a context for bringing in the trans-shipment market into India, and enabled the Indian ship building industry to re-strategise and build on their strengths (for example ship repair, niche markets including for defence, etc.).
Despite these moves, the share of revenues for the Indian shipping sector has not gone up. It should be noted, however, that more large companies are entering the Indian ship owning segment, though sometimes preferring to flag the ships out of India. Further, Indian shipping companies have traditionally been able to compete in the cross-trading market where geographically available. Indian shipping manpower continues to compete globally due to its quality training, especially at the officer level.
Some of the restrictions in the tonnage tax, and the manning requirements and related income tax regulations have been viewed as pain points by those who can grow the Indian shipping sector. It would be worth having a flagging regime that addresses these pain points with appropriate benefits tied with their focus on Indian EXIM trade.
Alternately, or in addition, the concept of ‘Place of Effective Management (POEM)’ can be leveraged for similar benefits. Privatising the Shipping Corporation of India (SCI) and the Container Corporation of India (CONCOR) would be a step in the right direction to enable a market-oriented aggressive play. However, in both these instances, it is important to note that the public sector entity has a substantial market share in the relevant market, and could hurt the performance of the smaller players. It would be important to consider whether these entities should be ‘unbundled’ for privatisation. While the value for the ‘unbundled’ entities would be lower than the ‘bundled’ entity, the benefit in value for the other players and for the industry through market growth, both current and potential should be considered.
While we have set a context for bringing the trans-shipment market into India, it is important that some ports be developed with (i) the appropriate draft and other requirements for the increasing sizes of the mother vessels, (ii) the service facilities for the trans-shipment (hi-tech cranes, large backup yard, quick intra port movements with IT support and trained manpower), and (iii) scope for hinterland cargo and movement.
While we consider ship-owning and ports, it is also important to recognise that the support service sector has a revenue value equivalent to that of freight revenue. This part of the shipping ecosystem for Indian EXIM trade also has a large foreign share. We should recognise this and enable Indian players to build ‘world-class’ branded service organisations. These would include the domains of (a) shipping agencies (b) shipping finance and insurance; and (c) legal services and dispute resolution. The initiative of GIFT city in Gujarat is a good example of enabling greater global competitiveness from Indian shores in the service sector.
G Raghuram is Professor Emeritus – Gujarat Maritime University, Distinguished Visiting Faculty at Gati Shakti Vishwavidyalaya, and Former Director, IIM Bangalore. Dharmesh Raval is Assistant Professor, Gujarat Maritime University. Views are personal, and do not represent the stand of this publication.
