A consultant hired by the shipping industry has recommended that shipbuilders in the country get a 10-year extension of a lucrative 30% subsidy scheme and their business be treated as an infrastructure activity, making it eligible for incentives such as tax holidays.
KPMG India Pvt. Ltd was hired by the Shipyard Association of India after finance minister P. Chidambaram asked for a study on shipbuilding subsidies given by other countries and the quantum of such subsidy. The finance ministry’s approval is necessary to restart a government subsidy scheme that ended on 14 August.
In its report submitted to the Union shipping ministry, KPMG has recommended continuation of the subsidy until 2017 and that the subsidy be scaled down to 25% for another five years, through 2022, said Vijay Kumar, managing director of private sector shipbuilder Bharati Shipyard Ltd.
The KPMG report was discussed by the shipping ministry and representatives of shipbuilders in New Delhi on Tuesday. The ministry is expected to move a cabinet note to extend the subsidy scheme.
The shipbuilding subsidy scheme offers shipbuilders 30% extra on every ship they build of a certain size for the local market and for all ships for exports.
The 30% subsidy enabled shipbuilders constructing a ship that would cost, say, Rs100 crore at market rates, to offer it for Rs70 crore to the buyer, effectively competing with international shipyards. This subsidy is given to public sector yards such as Hindustan Shipyard Ltd, Cochin Shipyard Ltd and Mazagon Docks Ltd in instalments during the construction of the ship while private firms such as ABG Shipyard Ltd, Bharati and Larsen & Toubro Ltd get it after the ship is built and delivered to the buyer.
The report, called “Shipbuilding Sector: Economic Benefits and Benchmarking Government Support across Countries” claims there could be huge multiplier benefits to the economy if the subsidy support is extended. About Rs17,000 crore to Rs20,000 crore investments would flow into the shipbuilding sector if the support is continued.
“This kind of investment will lead to the turnover of the Indian shipbuilding industry and result in downstream investments worth Rs2.22 trillion in ancillary industries that support shipbuilding. Finally, it will fetch the government Rs26,000 crore a year as taxes and duties from 2017 onwards,” Kumar said, quoting from the report.
The government support would also be a major driver for the heavy engineering industry and result in additional employment generation of 2.54 million people over the next 10 years, the report says.
“If the government support is not given, the prices that Indian yards can quote for building ships will have a cost disadvantage ranging from 35% to 55% over Chinese, Korean and Japanese yards,” maintains Kumar.
KPMG’s report points out that shipbuilding has been supported directly or indirectly by their respective governments in countries such as Japan, South Korea, China and Vietnam.
Local shipbuilders have been strongly lobbying for an extension of the subsidy at a time when the global shipbuilding industry is experiencing a boom in demand. 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.
Indian shipbuilders are looking to grab a higher share of the global market and capture the space that was vacated by the closure of yards in Europe and other developed regions.