Why the subsidy scheme for ship owners is flawed

The subsidy scheme for local fleet owners approved by the Cabinet on Wednesday for hauling government-owned cargo and boost Indian tonnage suffers from several flaws.

In the views of prime minister Modi-led Cabinet Committee on Economic Affairs (CCEA), a subsidy support is necessary to improve the competitiveness of Indian flagged ships against its foreign peers. This would also make it more attractive to flag cargo ships in India as their current relatively higher operating costs would be offset to a large extent through the subsidy support.

By linking access to cargo owned by state-run firms to investment in Indian ships, the Cabinet reckons that more government imports would be carried on Indian flag ships and help arrest the declining share of Indian ships in the country’s export-import cargo.

The subsidy scheme, though, is a short-term, knee jerk response by the government to expand the national fleet - currently a meagre 1.2 per cent of the world fleet in terms of capacity - which will do more harm than good to the local shipping industry in the long run.

It will give scope to foster bad industry practices such as cartelisation and promote inefficiencies at the expense of state-run importing entities. Besides, only 3-4 fleet owners would stand to benefit from the scheme as it is applicable only to crude, LPG, coal and fertiliser cargo imported by state-run firms and ministries on the basis of global tenders.

Operating costs

A subsidy to neutralise the adverse effects of Indian taxation and corporate laws that has inflated the operating costs of Indian ships, lacks logic. The effort should have been to remove those adverse effects without been seen as partisan to one industry.

The shipping industry has already been singled out earlier for a separate tax treatment on par with a global practice. In 2004, the government introduced tonnage tax for the shipping industry to help fleet owners compete on a global stage where close to 90 per cent of the tonnage operate on a low level of tax in the range of 1-2 per cent.

The tonnage tax helped ship owners to offset the cost implications of statutory levies applicable to all industries. However, a few years later, the shipping industry found the advantages of tonnage tax fade away as new levies were introduced.

The high operating costs of Indian ships (estimated at about 20 per cent on a foreign voyage) are attributed to higher costs of debt funds, shorter tenure of loans, taxation on wages of Indian seafarers engaged on Indian ships, IGST on import of ships, blocked GST tax credits, discriminatory GST on Indian ships providing services between two Indian ports, all of which are not applicable to foreign ships providing similar services.

In view of this, Indian ships became less competitive, which in turn made the right of first refusal (RoFR) policy incapable of growing Indian tonnage.

RoFR policy

According to the RoFR policy, Indian flagged ships have a right to match the lowest rate offered by a foreign flag ship in tenders issued by state-run firms for hiring ships and take the contract. If Indian shipping companies declined, then only the foreign flag ship, that had quoted the lowest rate, is allowed to carry the cargo or provide services.

The Indian National Shipowners Association (INSA), the local industry lobby, issued no-objection certificates (NOCs) in 95 pe cent of the cases processed under the RoFR mechanism, implying that Indian fleet owners declined to match the lowest rate quoted by foreign shipowners and take the contract.

By the Cabinet’s admission, “RoFR does not ensure bankable long-term contracts and it is only an opportunity to match the rate provided by foreign shipping companies which enjoy a competitive advantage due to lower operating costs”. The policy of RoFR for Indian ships will only be beneficial provided Indian ships are made competitive, the Cabinet observed while backing the subsidy scheme.

In effect, Indian ships will get extra money from the government on the rates discovered through a competitive tendering process to carry the cargo.

The argument that foreign ship owners will have to flag ships in India using the 100 per cent FDI route to secure Indian state-owned cargo contracts, thereby boosting Indian tonnage, does not carry weight. This is more so because they will be subjected to the same taxation and corporate laws which the Indian owners are subjected to now. Plus, there is the risk of the five-year time frame of the subsidy scheme.

The cause of Indian shipping would have been best served if the ₹1,624 crore budgeted for the subsidy pay-out was used as a seed capital to build a shipping fund to extend low cost, long tenure finance for buying ships, coupled with a long-term cargo support of 3-5 years from state-run firms. The long-term cargo contracts would give stable revenues and help leverage more bank funding to buy ships.

This would have helped the local industry to expand the tonnage across a broad range of ship types such as offshore vessels, oil drilling rigs, coastal ships, containers and niche vessels rather then be restricted to crude tankers, LPG carriers and bulk ships.

Such a move would have benefited both the shipping industry and the larger trade fraternity. India’s exporters led by micro, small and medium enterprises have been reeling under sky-rocketing container shipping rates at a time when exports are doing well for a change. This had triggered calls for setting up an Indian container shipping company and cut dependence on foreign lines.

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