The Hindu Business Line : Shipping cos should build on Budget gains

The Budget has done for the shipping industry what few other Budgets in the past were able to do. The breakthrough should not be frittered away by thoughtless bureaucratic flourishes.

A MAJOR attempt at tight-rope-walking between the imperatives of reform and the constraints of a coalition with the left was seen in the Budget that the Finance Minister, Mr Mr P. Chidambaram, presented to Parliament a few weeks ago. And while the dust is just about settling on turnover tax, the last has probably not yet been heard on raising the caps on FDI in specific sectors. But there is one sector in which Mr Chidambaram has come up trumps and that is in shipping. Not only did he finally concede the industry's most pressing demand for tonnage tax but, as a bonus, he made a special mention of the new container terminal that is to come up through private public partnership in Kochi.

Kochi container terminal

The latter idea is not new. For a long time the trade has articulated the demand for a modern container terminal in Kochi, which given its proximity to major trade and sea routes, can truly lay claim to being the ideal candidate for a hub port.

So, when the project was put up for bidding on the BOT basis and was won by the Dubai Ports Authority (DPA), there was a general feeling of relief that the transshipment of Indian cargo in ports outside the country, with all its attendant delay and enhanced costs, would gradually become a thing of the past.

Mentioning it in the Budget only reiterates government's firm commitment to the project and raises expectations that it will soon become a reality.

The jury is still out on whether a special mention in the Budget will expedite this project but there can be no doubt that it has given it a major shot in the arm. Having secured official government recognition of the importance of the project, the Shipping Ministry must now move quickly to ensure that this translates into the support the project needs.

The first task will be to get the Government's commitment to guaranteeing the minimum draft that is needed for large ships to access the port. There has been a lot of ambiguity about who is responsible for the maintenance of adequate draft in India's major ports.

The preferred solution has been to place the responsibility squarely on the port which, in turn, passes it on to the user. While at first glance this might seem reasonable, a closer look at the question throws up several infirmities in the approach. The channel through which a ship accesses a port is like a road connecting an industrial area to the rest of the country.

If an entrepreneur is not expected to pay for the construction of roads to industrial areas, why is a shipping line made to pay for an approach to a port? And if we insist on making lines pay, why would they want to call at our ports?

Mainline vessels have a choice about which ports they need call at, and hub ports all over the world woo them with incentives and lower transactional costs. To be truly competitive, therefore, charges at our ports should be comparable with those prevailing elsewhere.

Locational advantage

Much the same thing is true of inter-modal connectivity between the port and the hinterland. Kochi maybe most advantageously located in respect of international shipping lines but it lies at one extreme of the Indian peninsula. If shippers are to choose this port over others they must be assured that imports cleared at this port reach their ultimate destination without any difficulty or delay.

Similarly, goods for export should be able to access Kochi port easily. For this, the State Government must ensure that road and rail communications are at par with the best. Currently, a single bridge links the proposed Vallarpadam container terminal with the mainland. This must be doubled, and rail links strengthened. Shippers from all over the country must be able to access the port without any difficulty.

Tonnage tax

The other major initiative taken in this Budget is the introduction of tonnage tax. Whole tomes have been written on this measure and the benefit it will bring to the shipping industry. The Finance Minister must be congratulated for being the one who finally acceded to this very legitimate demand.

Unfortunately, the fine-print in the financial documents does not adequately reflect the thinking behind his decision to introduce tonnage tax. The move to exclude leisure boats and passenger vessels from the purview of the new law is reasonable but it is difficult to understand why dredging has been denied the benefits of tonnage tax.

Dredging sector

If there is one sector above all others in the shipping industry that needs the protective embrace of a supportive fiscal policy, it is dredging. Except for the state-owned Dredging Corporation of India, there is hardly any Indian presence in the field of dredging. This leaves a vast and lucrative field to be exploited by foreign players.

The dredging needs of the country are growing rapidly but the true beneficiaries are European dredging companies who have been able to secure a major chunk of the market.

Arguably, the raison d'etre of the new measure is to make Indian shipping companies more competitive in the global market. Since more than 80 per cent of the world shipping fleet is taxed at nominal rates, and since Indian shipping companies must compete with them, they should not be taxed differently from their competitors.

Thus, tonnage tax ensures that the fiscal regime in which Indian shipping companies function is no different from that of its global rivals. If this is so, there is simply no reason why dredging has been left out of the loop.

Foreign rivals

Fledgling Indian dredging companies face the toughest competition from their foreign rivals, who have the twin advantages of a large diversified fleet of dredgers as well as long established presence in the field.

If in addition to this they are denied the benefits of a comparable taxation regime, it is a classic recipe for forcing them into oblivion.

What is at stake is not merely the fate of a handful of Indian dredging companies. The real concern is our ability to establish a foothold in an industry that is of vital importance for us but which is currently controlled by a few foreign companies (mostly from Europe), who are able to use their technical and financial clout to dominate the Indian market.

As the size of international vessels grows, Indian ports will have to rely more and more on capital dredging to maintain the draft needed by these vessels.

Regular maintenance dredging to ensure that the draft is not reduced will also be needed.

The opening up of the inland waterways and their utilisation as major routes for inland trade will similarly require a good deal of dredging.

If the domestic dredging industry is excluded from beneficial policies designed to make the Indian flag grow, we will have to reconcile ourselves to a situation in which we will be permanently dependant on foreign dredgers.

These fears are not exaggerated. Last year, foreign dredging companies are estimated to have secured dredging contracts worth about Rs 1,050 crore in India while their domestic competitors executed work worth hardly Rs 550 crore, or about 30-40 per cent of the total.

When it is recalled that dredgers typically work in major ports and important channels and waterways, the implications of this for national security will immediately be apparent.

Over the last few years, more than 23 different foreign dredgers have secured contracts from Kolkata to Kochi, and from Mundrato Paradip.

Immense potential

Nor is this the only reason to give the domestic dredging industry a boost.

A government that has shown the greatest sensitivity to the problems of unemployment in small decentralised communities all over the country can hardly afford to ignore the immense potential that the dredging industry has for offering jobs to marginalised youth.

Unlike foreign flag vessels, every Indian dredger will invariably be manned exclusively by Indians.

The level of skill not being very high, even training requirements will not be difficult to meet. Above all, the increased turnover of an Indian company only goes to swell the country's GDP. It was not for nothing that Singapore ensured that the benefits of tonnage tax were made available to its dredging industry as well.

This Budget has done for the shipping industry what few other Budgets in the past were able to do.

The breakthrough should not be frittered away by thoughtless bureaucratic flourishes that set at naught all the major policy initiatives that the Budget promises.

(The author is a former Secretary, Ministry of Shipping.)