As finance ministry moves to end subsidy, firms begin lobbying

As finance ministry moves to end subsidy, firms begin lobbying
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First Published: Fri, Jul 06 2007. 02 00 PM IST
Updated: Tue, Aug 14 2007. 07 31 PM IST
With 38 days left for a rich shipbuilding government subsidy that began in the mid-1990s to expire, Indian companies are mounting a vigorous public campaign to get the finance ministry, well known for its recent dislike of corporate sops, to agree to an extension.
The scheme, under which shipbuilders get a hefty 30% extra on every ship they build of a certain size or for the export market, has already been extended twice. The current five-year subsidy, introduced on Independence Day in 2002, is set to expire on 14 August.
Shipbuilders love the subsidy and the shipping ministry is also keen to see it continue, leaving the finance ministry as the remaining hurdle for a potential extension.
Builders claim that the subsidy has worked, at least in terms of the amount of new orders that the industry has received, though there is a global shortage of new ships.
In 2002, when the subsidy was last extended, Indian yards had orders worth Rs1,500 crore. “Today, Indian yards have about 220 ships on order, at an estimated worth of Rs15,000 crore,” says Ajit Tewari, chairman and managing director of the state-run Hindustan Shipyard Ltd.
Partly because of the attractive subsidy, shipbuilders, both existing and new ones, have lined up investments of about Rs10,000-15,000 crore to upgrade and modernize existing yards and set up new facilities to boost capacity. “If the subsidy is not extended, these investments will not materialize,” claims Tewari, who is also the president of the Indian Shipbuilders Association.
Originally, the scheme was meant only for public sector shipbuilding units, such as Hindustan Shipyard, Cochin Shipyard Ltd, Mazagaon Dock Ltdand Goa Shipyard Ltd. When it was extended for five years in 2002, the subsidy was also granted to all private yards, including ABG Shipyard Ltd, Bharati Shipyard Ltdand Tebma Shipyards Ltd.
“Subsidy is a key issue to shipbuilding in the country. Without the subsidy, it is not attractive to put up a shipyard,” said A.M. Naik, chairman and managing director of India’s largest engineering and construction firm, Larsen & Toubro Ltd(L&T), in an interview with Mint on Tuesday.
L&T plans to build the country’s biggest shipyard at Kattupalli in Tamil Nadu with an investment of more than Rs2,000?crore,?though?it has not firmed up the project pending a decision on the subsidy.
Indian builders are looking to grab a higher share of the international shipbuilding market and capture the space that was vacated by the closure of yards in Europe and other developed regions. India’s share in global shipbuilding is expected to be around 15%, or $22 billion (Rs88,000 crore), by 2020 from about 0.4% now, says a report prepared by Mumbai-based consultancy firm i-maritime Consultancy Pvt. Ltd.
This is how the subsidy has worked so far. Local builders get a 30% subsidy for building ocean-going merchant vessels that are more than 80m in length, if they are manufactured for the domestic market. For export orders, however, ships of all types and capacities are eligible for the subsidy.
Typically, this means that for building a ship priced at Rs100 crore, the yard would get Rs30 crore from the government. This subsidy is over and above the Rs100 crore that is paid by the company ordering the ship, which includes normal profit margins for the builder. This government subsidy is given to public sector yards in instalments, while private companies get it after the ship is built and delivered to the buyer.
The Union Centre has already given out Rs300 crore in the last five years and another Rs300 crore is slated to be given out.
The finance ministry would like to scale back or abolish the subsidy, says a shipping ministry official who didn’t want to be named. Even though the subsidy has been around for well over a decade, “shipbuilding is a long-term business (and the) subsidy cannot be for a short period. We are looking at a horizon of five to 10 years,” said the shipping ministry official.
The shipping ministry is now looking at ways to structure the subsidy scheme. “We have received the views and comments from various stake holders including the finance ministry,” this official said.
“We are formulating our response, which will be sent as a note to the (Union) cabinet shortly.”
It is unclear what the finance ministry’s official views are in this matter. Meanwhile, the lobbying is on.
L&T’s Naik told Mint that he met finance minister P. Chidambaramin June to lobby for continuation of the subsidy. “Before I put Rs2,000 crore on the table for building a mega yard, I met the finance minister and asked him whether the subsidy is going to continue or not,” said Naik.
Naik added that Chidambaram responded by saying that he has asked for studies on shipbuilding subsidies given by other countries and the quantum of such subsidy. “Once that is done, we will take a view in August,” Naik quoted the finance minister as having said.
Tewari of the Shipbuilders Association says that the spin-off benefits, in terms of development of ancillary industries and job creation, will be far more than the subsidy that the government is paying out.
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 China and India.
China, which has about 20 mega yards from a total of more than 100 such facilities, seeks to become the world’s biggest shipbuilder by 2015. “The Chinese government gives a direct subsidy of 17% and an indirect subsidy of 10% to shipbuilders,” says Naik. “On the back of that, there is a 25% currency advantage and a 7% equity advantage. Now, who’s going to build ships in India?” asks Naik.
Meanwhile, L&T is prepared to wait for a final decision on the subsidy before formally unveiling plans for its mega shipyard. “If L&T does not get into shipbuilding, no one will,” insists Naik. “Because no one is willing to have competition with unequal balance of advantage or unequal balance of favouritism.”
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First Published: Fri, Jul 06 2007. 02 00 PM IST