Last week, captains of India’s shipping industry met the shipping secretary A.P.V.N. Sarma seeking the government’s intervention to strictly enforce rules that protect them from foreign competition in Indian waters.
The meeting took place after the government rejected the demand of local shipowners to set up a corpus of Rs10,000 crore in soft loans for purchasing ships amid a liquidity crunch in the global financial markets. The government also turned down their request to treat ships as infrastructure.
Reeling under lower earnings, local fleet owners are now turning attention to India’s coastal trade where they have recently come under increasing foreign competition as global shipowners look at potential regions to stay afloat.
The country’s coastal trade is reserved for India-registered ships. Foreign ships are allowed to carry cargo along the coast only when Indian ships are not available and also need permission of the maritime regulator.
Chennai-based logistics firm Caravel Logistics Pvt. Ltd had to hire a foreign registered ship to run a container shipping service along the coast because it could not get an Indian ship at a competitive rate.
In June, Malaysia’s AET Tanker Holdings Sdn Bhd, a petroleum shipping firm, unveiled plans to register some of its ships in India to tap the potential in the coastal trade here.
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State-run oil refiners are now hiring ships registered in foreign countries to carry their cargo along the coast because they are offering rock-bottom rates, which Indian shipowners concede they are not able to match. The rates quoted by foreign owners have left many Indian ships to idle at anchor rather than operate at rates that cannot recover even operating costs.
The oil refiners are happy with the lower ship rentals because transportation cost gets reflected in the price customers pay for petroleum products. In the absence of an independent mechanism to verify or benchmark rates quoted by foreign owners that Indian owners are then asked to match, the Indian shipping industry has offered a solution. It wants the government to draft Transchart, the centralized ship-chartering wing of the government, into the process of finalizing shipping arrangements for the oil industry.
A government policy mandates that all state-owned firms, when importing cargo, have to make their shipping arrangements through Transchart, which gives first preference to Indian ships to move cargo into India provided they match the lowest rates quoted by foreign shipowners. This system was designed to provide cargo support to Indian ships.
However, in 2006, following strong lobbying by Indian Oil Corp. Ltd, the government gave freedom to state-run oil refiners to make their own shipping arrangements. As a result, IOC exited from the Transchart system, followed by Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd.
Local shipowners say they are game to match rates quoted by foreign shipowners but are constrained by the dozen extra taxes, which foreign owners do not have to pay. These taxes take away the advantage accruing from the introduction of a new tax in 2004 for the shipping industry based on the cargo carrying capacity of ships. The tonnage tax cut the tax incidence of shipping firms to just 1-2% of their income, compared with India’s corporate tax rate of 33.9%.
The local shipping industry wants protection from the government in the country’s territorial waters, arguing that countries such as Indonesia and China have framed rules allowing only firms from those nations to move coastal cargo to deal with the global recession. Firms such as AET are complying with Indian laws by registering ships here to be able to do business along the coast. Moreover, India allows 100% foreign direct investment in the shipping sector.
The very fact that AET is ready to operate under our rules and regulations with all its attendant taxation problems clearly shows potential exists in the coastal business.
A host of taxes that local shipowners pay is an issue. But, some of these are not specific to the shipping industry; they affect firms in other sectors as well. Indian owners already enjoy protection on the coast. And the demand for a rate protection is untenable. Rates are better left for market forces to decide. As competition intensifies along the coast, customers would be the biggest beneficiaries.
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday.
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