The Hindu Business Line : Government should make shipping sail-safe

The share of foreign trade carried in Indian bottoms is dropping consistently while the country's freight bill continues to increase. The Government's first priority should be to create an environment in which shipping tonnage can grow. — A. Shaikmohideen

ONE of the first acts of the United Progressive Alliance Government has been to put both the Ministries of Road Transport and Shipping under the same Minister. Though the erstwhile Ministry of Surface Transport, which was responsible for all surface transport except Railways, has not been revived in its old form, essentially, its functions are under the control of just one person, who is both Minister for Roads and Shipping. This is a good beginning. If the development of these two vital organs of surface transport is not closely coordinated, they can quite easily end up working at cross purposes. And one way to ensure this coordination is to place both under a single Minister.

The Common Minimum Programme (CMP) is not very forthcoming on what this government plans to do for the shipping sector. Perhaps, this is a reflection of the relatively low priority that it commands among top policy-makers. And yet, shipping and ports are so vital to the development of the country that neglecting them can effectively nullify the gains notched up by other sectors of the economy.

India's foreign trade has been growing by leaps and bounds and is now well in excess of $100 billion. In the last month alone, exports rose by more than 29 per cent and imports by a similar figure. Even though some, at least, of the latter figure is accounted for by higher crude oil prices, the gains are impressive.

Over the years, the share of foreign trade carried in Indian bottoms has consistently declined while the country's freight bill continues to increase. No government, therefore, can afford to neglect this vital sector.

The first priority should undoubtedly be to create a facilitative environment in which the country's shipping tonnage can grow. The upturn in the fortunes of the shipping industry in the recent past has seen the Indian fleet grow to about 7 million GRT. While this is an encouraging trend, it is clearly not enough.

The figure of 7 million GRT was achieved as far back as 1996-97, but could not be sustained in the face of a hostile environment and the absence of any incentives to growth. In fact, the Indian fleet fell to about 6 million GRT before recovering in the last year. In the Ninth Plan, a target of 9 million GRT was fixed for the Indian fleet.

That more than two years into the Tenth Plan, we are still far short of this figure tells its own tale. That our tonnage is still much below countries such as Singapore and China, which, about 30 years ago, had smaller fleets than India's is even more significant. A sure sign of how indifferent India's performance has been.

The single-most meaningful policy initiative that the shipping industry needs is the immediate introduction of tonnage tax. This measure has been discussed at great length in the past and is admitted to be in the best interests of the maritime industry. In fact, in his Budget speech in February, one of the important fiscal incentives announced by the former Finance Minister, Mr Jaswant Singh, was the early introduction of tonnage tax.

This is a policy measure that the new government should adopt speedily. Very simply, tonnage tax is a system by which a company's tax burden is calculated not on the basis of its profits but on the basis of a notional income applied on its net registered tonnage. The effect is to ring fence the tax liabilities of the company, thus making tax planning much easier. Typically, tonnage tax is a nominal one that puts a burden of barely 1-2 per cent on the company.

Tonnage tax has invariably been opposed because critics object to the fact that it gives the shipping industry an advantage that is not available to others. The reason for this seeming anomaly is found in the peculiar nature of the shipping industry and the type of competition it faces. It is estimated that about 89 per cent of the world's fleet functions under a nominal tax regime.

This seriously affects the Indian shipping industry because, unlike most other industries that function in the domestic tariff area (DTA), shipping is an international industry that knows no boundaries. Typically, therefore, Indian shipping companies do not compete among themselves (in which case all would suffer from the same disadvantage if they paid a corporate tax of about 35 per cent) but with companies from all over the world.

To expect to remain profitable when your rival is taxed at a nominal level, while you yourself pay at a much higher rate, is clearly unrealistic. The absence of a playing field vis-a-vis foreign competitors is one of the major reasons why the Indian flag has not grown.

In addition to international shipping, the new government must lay special emphasis on coastal shipping. For far too long, we have ignored the fact that nature has endowed us with a massive coastline of 7,500 km, which we have never exploited. Instead, we implemented a massive Rs 60,000 crore project to build a network of roads into a Golden Quadrilateral.

When future generations begin paying these massive bills, they will, perhaps, ask whether our priorities were right and if we should not have instead exploited our the huge God-given coastline. Contrary to widely-held views, coastal shipping does not require large dollops of subsidy. Analysts who insist that it needs cargo reservation or a special status that confers access to low-cost funds not available to others, have missed the point.

Coastal shipping confers a cost advantage over other forms of transport such as road and rail. The per tonne km cost of moving goods in ships along the coast is much lower than that of either rail or road. This being so, it is difficult to see why it requires a subsidy.

What coastal shipping really needs is a network of small, inexpensive ports with excellent multi-modal connectivity to the hinterland.

Allied to this is the need to develop inland waterways. This is another gift of nature with which we have been most profligate. Our waterways require little more than an assured draft, small wayside jetties that allow cargo to be loaded and unloaded and minimal handling equipment at such jetties. The difference that this can make to small inland communities without access to major markets is incredible.

In addition, it has another quality that should be music to the ears of those who swear by the CMP. Moving more traffic by inland waterways encourages much greater employment in decentralised locations.

Ship-building will immediately get a fillip because inland water transport needs the kind of small vessel for which technology is readily available. Manning these vessels will again demand the kind of skill that is found quite easily in rural areas. Above all, opening small hitherto closed communities to wider markets will bring immense prosperity to hitherto marginalised people.

It is important, however, for the State to realise that their role must be confined to providing infrastructure and must not extend to owning and operating inland vessels. If our waterways have an assured draft for 12 months in a year and user-friendly jetties are set up, no subsidy or cargo reservation will be necessary and no state enterprise will need to enter what must, by definition, be a very competitive market. Private shipowners will be only too eager to benefit from the business opportunities that functional waterways present.

Another area where speedy action is required is the Sethusamudran project. If the channel in the Palk Strait is deepened to allow larger vessels to go from coast to coast without having to circumnavigate Sri Lanka, it will bring immense savings to the country. Some technical problems will have to be sorted out along with some diplomatic ones, but none is insurmountable.

Finally, policy initiatives to ensure that the major ports will be able to meet the increased responsibility placed on them by India's growing trade and its importance as a burgeoning economic power, must be taken. Private investment of more than Rs 7,000 crore has already found its way into this sector.

This has not only reduced the strain on budgetary resources but has also been instrumental in benchmarking our performance with international standards. It is impossible to over-emphasise the importance of this.

Major ports must gradually become landlord ports responsible for the waterfront management and security, but leaving handling operations on different berths to private entrepreneurs. It must be ensured that at each port, the consumer has a choice between different terminal operators so that adequate competition can ensure the highest levels of efficiency high. The congestion at JNPT is a clear case of lack of sufficient capacity.

A third container terminal must be made operational very quickly. Similarly, Kochi — the only port in India that can truly become an international hub port — must get its act together and establish a container terminal at Vallarpadam.

Preliminary work on these projects has been completed and, in the case of JNPT, it seems that the new government has already acted. Early decisions on the transshipment terminal at Vallarpadam and the corporatisation of major ports will put the seal on the new government's determination to take this sector forward.

(The author is former Shipping Secretary, Government of India.)