A nation’s merchant navy is a strategic asset, second in importance only to its ‘fighting navy’. It needs to be protected from high taxes and discriminatory norms. "A strong and diverse indigenous shipping fleet will not only lead to foreign exchange savings…but would also reduce excessive dependence on foreign shipping,” says a recent press release announcing a subsidy scheme for Indian shipping companies bidding for carriage of government cargo. While the actual benefits of this Rs 1624 crore subsidy, spread over five years, are unclear, it could be a sign that the neglect of this vital component of India’s maritime sector is being acknowledged.
Not many realize that nearly 40 per cent of India’s GDP comes from export-import (EXIM) trade, which primarily takes place over the sea. As much as 83per cent of India’s crude oil and 45per cent of its natural gas requirements are imported. India is a major exporter of petroleum products as well as commodities and finished goods that are carried in and out of our ports by hundreds of container ships, oil tankers, chemical tankers, natural gas and ore carriers. Any interruption in shipping traffic would have a negative impact, not only on the country’s energy and power sectors, but also on industry and consumer supply-chains, and eventually on its economy.
This is the reason why, historically, during conflicts, it has been an adversary’s objective to deprive the opponent’s industry of vital raw materials and to starve their civilian population by destroying or disrupting seaborne traffic. A nation’s merchant navy is, therefore, a strategic asset, second in importance, only to its ‘fighting navy’.
Ownership in shipping sector
Ideally, a country should own as much of its shipping as possible so that it can ensure the adequate and regular receipt of vital supplies during times of crisis. Today, China, with a merchant fleet of 6,459 ships of 230,534 Thousands Dead Weight Tons, ranks third, while the Indian merchant fleet, with a strength of 1,179 vessels, 25,809 Thousands Dead Weight Tons ranks 17th. While India’s seaborne trade has seen exponential growth over the years, the share of cargo carried by Indian ships has declined drastically from about 40 per cent in the 1980s to 7.9 per cent in 2018-19 according to the Ministry of Shipping Annual Report 2019-20.
According to the Indian National Shipowners Association, India’s freight bill, at a conservative estimate, is $52 billion a major proportion of which goes into foreign coffers. This huge drain can be alleviated simply by bringing as much EXIM cargo as possible to Indian owned vessels. However, since the government so far has not had a policy for the promotion of shipping, we continue to pay and support merchant fleets of other nations to carry our cargo. The question that begs an answer is why can we not expand our shipping fleet?
The answer lies in the fact that it is the government’s perverse policies and tax structures that discriminate against our own shipping and make it cheaper to acquire the services of a foreign company. The higher rates of Indian shipping companies are due to the ‘double jeopardy’ they suffer. They have to pay taxes that are not imposed for the same service provided by a foreign ship and also pay higher costs of capital and debt/loans, as compared to foreign competition. This is what has made our shipping non-competitive in the international freight market.
Universally, consumers are encouraged to purchase and use goods or services that are available at home, and sufficient disincentives in terms of duties are imposed on imports to make them relatively costlier. Curiously, this policy does not seem to apply to shipping, and Indian traders are allowed to employ foreign shipping without paying any tariff. At the same time, import of all inputs by an Indian shipping company, including the cost of the ship itself, and its stores, spares, fuel as well as services are heavily taxed.
These discriminatory policies have effectively incentivised the import of shipping services rather than promoting and encouraging the use of Indian ones. This clearly works to the detriment of national interest by diverting cargo away from Indian companies that pay taxes in India, employ only Indian seafarers, train Indian cadets and contribute to the Indian economy.
In 2019, almost 90 per cent of EXIM and 40 per cent of coastal trade was carried by foreign shippers, who take home the freight fees, tax-free. This represents not only a colossal haemorrhaging of national wealth but also a strategic vulnerability. A ‘trade blockade,’ declared or undeclared, frightens away foreign-flag shipping and can bring a country’s economy and industry to its knees in a few days.
It happened to Pakistan in the 1971 war, when the Indian Navy imposed a virtual blockade of Karachi port, and could well happen to India too. It is, therefore, vital that India acquires a national fleet large enough to carry at least 50 per cent of its EXIM cargo and energy. Moreover, the average age of the Indian merchant fleet (in 2020) was over 20 years and many ships are in dire need of replacement.
Funding for companies
The Indian shipping industry is directly exposed to global competition and it is, therefore, necessary that the costs imposed on this sector match those of international competition. The industry needs long-term funds at competitive rates as available to global players. The few Indian banks, which do participate in the funding of shipping assets, provide money at very high costs and for shorter durations as compared to sources available to foreign companies.
The constitution of a ‘Maritime Development Fund’ to finance India’s maritime sector at internationally competitive rates would be of immense help. As an alternative, government relief in the burden of interest costs would help the Indian mercantile marine fleet add bigger and newer ships.
There is a need for speedy redressal and change of policies and rules which so obviously discriminate against Indian shipping companies in a broad range of areas — from manning norms and cost of fuel to the imposition of GST, personal and other taxes. The Modi government needs to assemble a group of experts to draw up a time-bound plan of ‘affirmative action’ to revive India’s vital shipping industry.
About the Author
Admiral Arun Prakash PVSM, AVSM, VrC, VSM is a former Chief of the Indian Navy, Chairman Chief of Staff Committee (COSC) and Commandant National Defence Academy (NDA). As a young Lieutenant, during the 1971 Indo-Pakistan war, he served with an Air Force squadron, flying fighter-bombers, and was awarded the Vir Chakra for gallantry in air action over West Pakistan.
He now writes and speaks on strategic and defence related topics. He has published a compendium of writings on maritime and other issues titled: ‘From the Crow’s Nest’. After retirement he now stays in Goa. He can be reached on Email: [email protected]. This article was first published in the 'Indian Express' and has been reproduced with due permission of the author
For more defence related content, follow us on Twitter: @MVictoryIndia and Facebook: @MissionVictoryIndia