Hurt by plummeting freight rates and poor demand for ships because of global recession, local shipowners have asked the government to strictly enforce rules that protect them from foreign competition in Indian waters.
The country’s coastal trade—transport of cargo between different Indian ports—is reserved for Indian-registered ships. Foreign ships are allowed to carry cargo along the coast only when Indian ships are not available for the job, and that too with permission of the maritime regulator, the director general of shipping.
However, recent cases, notable among them being one involving Chennai-based firm Caravel Logistics Pvt. Ltd, have led local shipowners to demand a tightening of the rules. Shipowners have managed to convince the regulator to set up a working group, headed by maritime lawyer S. Venkiteswaran, to review the rules framed in 2002 for hiring foreign ships and suggest ways to make them more effective.
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Protectionism to a certain extent is desirable, but it can never be unconditional and surely not at the expense of Indian customers. Otherwise, it will result in cartelization and monopoly, two highly avoidable evils.
For some time now, local shipowners have been ganging up to scuttle competition along the coast from new entrants by using the rules, including the requirement of a so-called no-objection certificate (NOC) from the industry lobby group, the Indian National Shipowners’ Association (Insa).
Caravel had to threaten Insa with a court case before it could secure an NOC to hire a foreign ship to start a coastal shipping service for containers. The logistics firm was left with no choice because a local owner was willing to offer his ship, but at rates not acceptable to Caravel.
Local private entities such as Caravel that are looking to hire foreign ships will have to first take an NOC from Insa before submitting an application to the regulator for permission to hire foreign ships to haul cargo along the coast. The NOC is to ensure that an Indian ship of the capacity and specification required by the cargo owner is not available for the work.
However, NOC has become a convenient tool for local shipowners to block competition from newcomers. Given the economic downturn, local coastal ship operators say they have sufficient space on their ships that could be utilized by companies such as Caravel to transport container cargo collected from customers. The existing operators are also ready to rent out their ships, but only at rates that are higher than those prevailing in the global market. If Indian ships are to be hired at higher rates, it becomes uneconomical for newcomers to run shipping services. And, why should they be forced to hire Indian ships at higher rates when there are plenty of ships available in the global market at dirt cheap rates?
The NOC rule has been misused by local ship owners to further their own vested interests, causing much harassment to new entrants. Why should an association such as Insa control the fundamental right of an Indian citizen to do business? Why should new entrants be at the mercy of an association if they want to do business?
Out of some 120 shipping companies in India, Insa has representation from barely 37 firms. Out of this, up to eight firms control 85% of India’s shipping fleet by capacity.
Local owners should offer competitive rates on a par with those prevailing globally or let new entrants hire ships from the global market to operate coastal container shipping services. There are several instances where Insa has delayed granting an NOC just to discourage newcomers.
Competition in any area of business is good because it drives down prices for customers. Apart from coastal container shipping, it could benefit India’s state-run oil refiners that are now at the mercy of a few operators to ship petroleum products along the coast, and have to pay higher rates that form a part of the subsidized retail fuel prices.
India’s coastal shipping business could be a potential area of interest for the Competition Commission of India, the antitrust body, as it settles down in office. The NOC rule has become ineffective in protecting the cause of customers and should be scrapped in their best interests.
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday. Respond to this column at firstname.lastname@example.org