The Hindu Business Line : Weighing tonnage tax, one year later — Boost to fleet growth, but more needs to be done

AS FAR back as in 1980, keen observers of the Indian maritime industry realised that what had been described as the "Golden Age" of Indian fleet expansion had come to an end. This period lasted from 1959 to 1975, when Indian shipping tonnage grew from a paltry 0.59 million GRT to 5 million GRT. From then on, however, tonnage stagnated.

At that time, policy-makers, anxious to repeat the earlier growth rates, fixed a target of 7.5 million GRT for 1985. The tonnage did not, in the event, even touch 7 million GRT, and languished at 6.36 million. The next year was no better. For a short time, in 1996-97, the Indian fleet did register 7 million tonnes but soon slipped back to the 6-million-tonne range. Until the end of 2003-04, the fleet stubbornly refused to cross the 7 million GRT barrier, hovering at 6.90 million GRT.

It was with justifiable pride, therefore, that Mr G. S. Sahni, Director-General of Shipping, announced on the National Maritime Day that Indian tonnage now stood at 8.01 GRT.

What led to this dramatic turnaround in India's shipping fortunes? Some would give credit to the reform process. Globalisation and the increased integration of the economy with the world economy has resulted in an increase in merchant trade and, as about 90 per cent of this trade, by volume, is carried by sea, the shipping industry must necessarily benefit.

The reform movement started some years ago and has remained more or less on course. Last year did not see any new initiative for boosting sea trade. Foreign trade has increased, but not to the extent that could explain such a huge jump in shipping tonnage and reverse the pattern of stagnation in Indian shipping.

The real reason for the upswing in India's shipping fortunes, then, must be linked to the initiative taken by the Finance Minister, Mr P. Chidambaram, in the 2004-05 Budget, to introduce tonnage tax as a substitute for the regular corporate tax that Indian shipping majors had earlier been levied.

The shipping industry has reacted positively to this initiative to revitalise the sector. For the fleet to record such a sharp increase in the very first year of the new tax regime, when many vital features are still not fully in place, speaks volumes of the importance of tonnage tax in facilitating increased shipping tonnage. Even in the UK, where the tax was introduced some time ago, the effects were seen only after some years. Tonnage did increase, but it took time.

The British fleet could not record a dramatic increase of nearly 15 per cent in the very first year after the new tax was levied. That this was achieved in India is something both the industry and the maritime administration should be proud of.

What are the prospects for growth? And what are the implications for the economy? The growth of the national fleet must not be seen merely as a desire to be recognised in world forums as an important maritime power (although the latter has its uses). The growth of the domestic fleet will definitely lower India's burgeoning freight bill, and, given the massive growth that we have witnessed in international trade, this is no mean advantage.

More important, it will lead to greater employment, and give India a chance to establish itself as a regional centre for maritime affairs. Ship-broking, insurance, manning and ship management could well become, the new buzzwords in India's economic development.

It is surprising that, even as the country continues to be the largest supplier of trained officer manpower to the shipping industry, not one major manning company is headquartered in India. If fleet expansion continues as before, this and other shipping-related industries could become a regular part of the Indian industrial and commercial scene.

Growth can be expected to be robust as long as the economy remains competitive and continues to grow at the present pace. If a question arises, it is on the absence of suitable policy initiatives needed to sustain the latter.

One example of the reversal of a policy encouraging the maritime sector is the recent ruling, that the benefits of tonnage tax will not be available to income accruing from sale of ships. It is difficult to understand the logic behind this diktat. If income earned from plying a ship is eligible for tonnage tax why should income earned from selling an over-aged ship not be given the same benefit?

Buying and selling ships is as much a part of any shipping company's business as plying a ship on the high seas for profit.

The world over, it is recognised that easy acquisition and disposal of vessels is essential for the growth and development of a cyclical industry like shipping.

To inhibit this aspect and declare only the plying of ships as deserving of policy support is to stall the industry and retard its growth.

What message does this send about avoiding pollution and ensuring that rust buckets do not clutter the shipping scene? The recent oil spill in Goa only highlights this aspect.

If Indian shipping is to become a major player in the global maritime industry, there must be a strong commitment to modernising the fleet and reducing its average age. Placing impediments in the way of selling old ships and acquiring new ones is no way to do this.

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

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