Mumbai: The shipping ministry is working towards extending a subsidy it offered shipbuilders that expired in August last year, but is looking to lower the magnitude of the incentive in an effort to secure the approval of the finance ministry, which is opposed to any such financial benefit.
The move comes in the wake of lobbying by shipbuilders such as ABG Shipyard Ltd, Bharati Shipyard Ltd and Larsen and Toubro Ltd, and if the finance ministry gives its go ahead, it will likely provide a boost to the domestic shipbuilding business.
In a draft cabinet note explaining its proposal that has been circulated to various ministries for comment, the shipping ministry has proposed a subsidy of 20% for a period of 10 years beginning 15 August 2007, the date the previous subsidy scheme expired.
A finance ministry official, who did not wish to be identified, said that the ministry had received the draft note, but it was yet to take a decision on it. “Right now, we do not have a position on this,” the official added.
The old subsidy scheme provided a 30% incentive for ocean-going merchant vessels more than 80m in length sold to Indian companies, and all ships sold to foreign firms. Thus, a company that received a $100 million (Rs395 crore) order from a foreign buyer would have been eligible for a $30 million subsidy or incentive from the government. The objective of the old subsidy scheme was to encourage shipbuilding, a labour- and capital-intensive industry.
The new scheme, a shipping ministry official said, would be reviewed in August 2012. The official did not wish to be identified because the proposal is yet to be considered by the Cabinet Committee on Economic Affairs (CCEA) that will finally decide on it.
All economic policy proposals are first circulated by the ministry or department that deals with the subject to other ministries/departments such as finance, commerce and industry, corporate affairs, law and the Planning Commission for comments. The final note sent to CCEA incorporates the views of various stakeholders in the government. The shipping ministry is keen that the proposal goes through.
“We are examining what should be the optimum level of subsidy,” said shipping secretary A.K. Mohapatra.
Shipbuilders said a scaled-down subsidy would help, but reiterated their demand for a revival of the old scheme. “We feel that a 30% subsidy will completely wipe out the systemic disadvantages on financial and taxation faced by local builders and put Indian yards on par with global yards,” said Vijay Kumar, managing director, Bharati Shipyard and secretary of industry body Shipyards Association of India.
In a recent report submitted to the government, audit and consulting firm KPMG India Pvt. Ltd had recommended an extension of the 30% shipbuilding subsidy scheme for a 10-year period till 2017 and also suggested that the business be treated as an infrastructure activity, making it eligible for incentives such as tax holidays. The firm was hired by the Shipyards Association after finance minister P. Chidambaram asked for a study on shipbuilding subsidies given by other countries and the quantum of such subsidies.
The KPMG report said shipbuilding has been supported directly or indirectly by governments in countries such as Japan, South Korea, China and Vietnam. According to the report, Indian yards carry a minimum cost disadvantage of around 32-37% on the price of a typical ship as compared to yards in other major shipbuilding countries.
With capacities in traditional shipbuilding nations such as Japan, South Korea and Norway booked for the next few years, fleet owners have started looking at new destinations, including Vietnam and India, to build ships.
The subsidy is given to public sector yards such as Cochin Shipyard Ltd and Hindustan Shipyard Ltd in instalments, while private sector firms get it after the ship is built and delivered to the buyer. Local shipbuilders say the subsidy had played a key part in India penetrating the shipbuilding market, dominated by Korea, Japan and China, which collectively account for nine out of every 10 ships built.
The order book position of Indian yards has grown from Rs816 crore in 2002 to Rs21,800 crore as on 31 December 2007.