The Hindu Business Line : Shipping Ministry seeking 10-yr shipbuilding subsidy extension

Plea for sops
Shipbuilding firms say about 50% subsidy will be returned as taxes, duties on inputs in first few years.
KPMG studying the benefits of subsidy in terms of attracting investments, job creation.
Shipbuilding industry does not enjoy duty protection like other manufacturing segments.

Mamuni Das

New Delhi, July 20 The Shipping Ministry is trying to get a 10-year extension of the shipbuilding subsidy with a periodical review after five years or so even as the Finance Ministry fears losing an estimated over Rs 35,000 crore as subsidy for the orders won by the Indian industry over the next five years.

The payout of these subsidy would be spread over 10 years or so since Government subsidy accrues to the shipbuilders only when the ships are delivered — and orders for the next five years would extend for much beyond five years. At present, the Government provides a shipbuilding subsidy of 30 per cent, subject to certain conditions, that would end on August 14 this year.

Shipbuilding firms, meanwhile, point out that given the current level of taxes and duties on inputs for shipbuilding like steel-sheets, the industry would return almost 50 per cent of the subsidy benefits to the Government in the initial few years and would return more than the subsidy in subsequent years.

Finance Ministry fears

With the Indian shipbuilding industry (with an order book of about Rs 15,000 crore now) expected to grow at a compounded annual growth rate of 30 per cent, the Finance Ministry fears that it may have to dole out about Rs 35,000-40,000 crore as subsidy over the next 8-10 years of deliveries if the current subsidy norms were to continue.

Thus, apart from not extending the subsidy at all, it is considering various options that include pruning the subsidy levels, extending subsidy on capital investments only and having a tapering subsidy roll out over a certain time period.

It may also limit the export subsidy to ships of over a certain size only, given that private shipyards like ABG, Bharati and Pipavav are witnessing the growth significantly from exports. According to consulting firm i-maritime’s analysis early this year, out of the private shipyards total orders of $2,686 million, export orders account for almost $2,284 million.

Shipbuilding firms’ view

The Indian ship manufacturing firms, on the other hand, feel that Finance Ministry’s fears are unfounded.

Pointing out that the Finance Ministry’s subsidy projections are based on the next five-year targets for an industry that is at a nascent stage, they are pleading that since shipbuilding does not enjoy any tariff or duty protection, the industry be treated differently than other manufacturing industries.

“Other manufacturing industries like automobile are protected by the Government by imposing duties and tariffs. However, any company can buy a ship from any country and bring it to India,” they point out. Given the maritime size of India, they feel it is a strategic industry for the country.

“Given the direct and indirect fiscal benefits extended to shipping firms internationally, Indian shipbuilding firms do not enjoy a level playing field,” they point out, adding that shipbuilding also leads to job creation in supporting industries. “As of now, costs of building a ship in India is 36-37 per cent higher, compared to internationally attractive destinations,” said sources.

Study commissioned

In the absence of the exact extent of benefits from the subsidy in terms of attracting investments, job creation, the ship manufacturing firms have commissioned KPMG to study cost structure of shipbuilding and submit a report. It would also work out the investment required per million tonne of capacity creation and give a comparison of the benefits that European, Japanese, Korean and Chinese shipbuilders enjoy.

At present, the shipbuilding subsidy is restricted to ocean-going merchant vessels that are over 80 metres in length if they are manufactured for the domestic market, and ships of all types are eligible for the subsidy if they are manufactured for exports, provided they are won by meeting certain norms like global competitive bidding process.

ABG Shipyard, one of the country’s large shipbuilding firms, has subsidy dues of about Rs 40 crore as of now and may get a subsidy of about Rs 60-70 crore in the current fiscal. For 2005-06 fiscal, the total subsidy for the firm was Rs 74.52 crore and Rs 51.05 crore for 2004-05. Bharati Shipyard officials say the company has received subsidy in the range of Rs 150 crore in the last two-three years.