Check freight outgo to save rupee

Over the past few days the Government and the Reserve Bank of India have been trying to rescue the rupee which fell below 60 a dollar. Since the beginning of the current fiscal, the currency lost nearly 11 per cent, the worst hit among its Asian peers. The worry is whether the rupee will stabilise at the current level or slip further.

The main villain pulling the rupee down has been long identified as the widening current account deficit or CAD. In simple terms, it is the gap between the county’s earnings and spending in foreign currencies.

India ended last fiscal with a CAD of $87.8 billion which is 4.8 per cent of its gross domestic product, much higher than the 2.5 per cent considered safe for the country. Oil and gold imports accounted for a major part of the forex outgo. Some measurers including duty on gold imports have been taken to tame CAD and it has moderated at 3.8 per cent during the June quarter.

Along with such measurers to reduce unproductive imports, it would be important to explore areas where the outgo of forex can be trimmed by simple policy measurers.

Freight outgo

Take for example, ocean freight. In the last fiscal Indian exporters and importers together paid a freight bill of nearly $50 billion to foreign ships. This figure is based on a simple calculation. India traded goods (both exports and imports) worth $792 billion in 2012-13. Of this, 70 per cent or worth $555.4 billion is moved by sea. The freight – considered ten per cent of the value of goods transported – works out to $55.4 billion. Of this nearly 10 per cent would have gone to Indian ships and the balance to foreign carriers.

Since freight market has been weak throughout the year, the freight bill could have been marginally lower. However, the point is that foreign vessels carried as high as 90 per cent of country’s cargo, leading to a huge outflow of foreign exchange. This outgo of ocean freight can be reduced substantially by increasing the Indian tonnage.

Cargo share

Currently, domestic ships carry less than ten per cent of the country’s international cargo. At one time their share was more than 40 per cent.

Take the case of import of crude, a major assured cargo. India imports close to 80 per cent of its crude requirement. Last fiscal local refiners bought 184 million tonnes of crude. Of this, domestic tankers carried only about 17 per cent. This is not a sudden development. Indian flag-carriers have been losing their share in POL (petroleum oil and lubricants) cargo for the last few years. Local oil refiners have been chartering foreign tankers by paying in dollars. Their argument is that they are forced to hire foreign vessels as the required size of ships are not available locally and even those that fit their requirement cannot match the market rates. Their arguments may not be totally baseless. But oil importers can certainly help rectify the situation. How?

Consider these facts that everyone knows: Given the level of domestic oil production, India will have no alternative but to depend on imported crude, which will have to be carried by ships. Importer of the cargo can have the right to decide on its terms of shipments. In other words, Indian oil importers can exercise their option to bring the cargo by domestic vessels. If there is an assured long-term supply of cargo, it would be easy for shipping firms to acquire the type of vessels required to carry it. And this will lead to an increase in national tonnage which in turn helps save foreign exchange.

But this is not happening. Even in the case of non-oil cargo, the situation is not any different. Domestic lines carry only about eight per cent of the bulk and two per cent of the containerised cargo.

No level playing field

According to local shipowners, they are not operating in a level playing field. While Indian flag carriers are subject to various taxes, foreign lines are free to come and pick up cargo. Though 100 per cent FDI is permissible in shipping, foreign lines are not coming forward to set up shop here as they will be subject to local levies.

This lack of level playing field makes Indian ships costly, they argue.

Whatever may be the reason, it is a pity that a leading maritime country like India failed to develop the fleet to carry a larger share of at least its strategic cargo.

Cargo support

Some countries have cargo reservation for their flag-carriers. In India domestic ships are suppose to get preference in carrying government cargo. Transchart, the chartering wing of the Shipping Ministry, has a centralised system of making shipping arrangements for government cargo. However, several public sector undertakings including oil companies have opted out of it. Recently, Steel Authority of India and Rashtriya Ispat Nigam were allowed to make direct shipping arrangements for import of coal. Such policies could seriously affect the growth of Indian shipping.

Impact of recession

Normally, depreciation of rupee should benefit Indian shipping lines as their earnings are in dollars. But, most of them have foreign borrowings and their debt servicing costs have gone up. Besides, part of their operating costs such as payments for bunkering and dry docking are in dollars. Those who had ordered vessels at foreign yards and have to take delivery now will an added burden. They will have to pay more in rupee terms.

Globally, shipowners have been hit by the longest recession in their life. Charter rates have been ruling at uneconomic level leading to huge tonnage lay-ups. The impact has been clearly visible in India for sometime now. Most lines have been reporting losses or lower profits for several quarters. Pratibha Shipping, a Mumbai based shipping firm which owns nine oil tankers, collapsed. Varun Shipping, which has the largest LPG fleet in the country, has been in dire strait, not paying salaries to employees for months.

A workable option

Right now ships are available at dumping price, but shipping lines are not in a position to buy them. They are cash-starved and freight markets are weak. Rupee is getting weaker. Foreign loans are not easily available. Yet, if there is assured long-term supply of cargo and the government support, shipping lines would be able to line up additional tonnage. Unlike other assets acquired by foreign capital, ships are floating foreign exchange assets, which can be liquidated at any time.

The ball is in the Shipping Ministry’s court. It can take the lead in evolving a policy to ensure that Indian fleet carry a larger share of at least the strategically important oil cargo. It is not an impossible task. With the support of the Petroleum Ministry, it can crate a win-win situation for both oil importers and shipping lines. And such a policy will eventually help save a large potion of the $50 billion annual forex outgo on account of the ocean freight.

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