Mumbai: Nearly eight years after India opened its door to 100% foreign direct investment (FDI) in shipping, not a single global shipping company has invested a penny to start a shipping firm in the country.
This, despite the fact that overseas trade of the world’s second fastest growing economy is galloping at about 30% a year, raising demand for more Indian shipping tonnage to carry the additional cargo.
“It’s difficult to understand why foreign shipowners don’t come to India,” said D.T. Joseph, former shipping secretary.
In shipping terminology, tonnage means the cargo carrying capacity of a ship. India’s overseas trade is expected to increase to more than 1,000 million tonnes (mt) a year by 2011-12 from the existing 600mt.
Smart play: A file photo of a loaded container ship being escorted out of the Singapore port. Shipowners say it is very easy to register ships in the island state, which is aggressively attracting foreign firms.
Currently, only 13% of India’s overseas trade by quantity is carried on Indian registered ships.
“Just to maintain this share, Indian shipping needs an investment of $20 billion (Rs79,400 crore) over the next five years to replace and renew its fleet,” said S. Hajara, chairman and managing director at state-run Shipping Corp. of India Ltd.
“Given the growth in India’s overseas trade, every fourth or fifth ship on order in the world will be servicing Indian trade,” said Ajit Tewari, chairman and managing director at state-run shipbuilder Hindustan Shipyard Ltd.
However, foreign shipowners are not enchanted by this huge opportunity to invest in India unlike sectors such as telecom, information technology, pharmaceuticals, banking, and even ports, to name a few. And there are reasons behind this.
“The Indian system is not so accommodating and not so transparent as Singapore,” said Torben Janholt, chairman, Danish Shipowners’ Association, during a recent visit to Mumbai. The island state is aggressively attracting foreign shipowners through a liberal fiscal regime. Even Indian shipowners such as Mercator Lines Ltd have opened subsidiaries in Singapore.
“It is very easy to register ships and settle down in Singapore. The country has transparent rules and regulations and is very accommodative on tax and on employment of seafarers,” said Janholt, who is also president and CEO of Dansih shipping firm J Lauritzen A/S.
In contrast, only Indians holding continuous discharge certificate (CDC), or seamen’s passport, issued by the director general of shipping, India’s maritime regulator, are allowed to work on Indian ships.
“Indian shipping means Indian officers and Indian ratings. Yet, we talk about globalization at every fora. They don’t gel together,” said Joseph, who was shipping secretary between June 2003 and December 2005. A plan to allow Indian shipowners hire foreign nationals to work on Indian ships has got entangled in security issues.
“Sustained presence of foreigners on board our ships could become a potential security hazard in sensitive Indian ports,” warned former chief of the naval staff, Admiral Arun Prakash, in a 29 June 2006 letter written to Union shipping minister T.R. Baalu.
Janholt said his own country provided good taxation and employment regime for the benefit of shipowners. Recently, 50 Indian officers were certified as masters on Danish ships. “It has never happened before that so many Indian officers have been certified as masters on Danish ships,” said Jorgen Hammer Hansen, director general, Danish Maritime Authority.
India introduced tonnage tax for shipping firms in 2004 that brought the tax incidence of local shipowners to 1-2%, sharply down from the corporate tax of about 33%.
Tonnage tax, a levy based on the cargo carrying capacity of a ship, aimed at promoting Indian shipping fleet through a fiscal regime comparable with the rest of the world. About 90% of the global shipping tonnage operates on tonnage tax. The new tax is applicable only to those ships that are registered in India and fly the Indian flag.
But, the existence of 12 other taxes for the shipping industry has nullified this advantage. The list include service tax, fringe benefit tax, dividend distribution tax, wealth tax, minimum alternate tax on profit on sale of ships, corporate income tax on other income and withholding tax on interest paid to foreign lenders, among others.
“These taxes dilute the fiscal incentives granted under the tonnage tax and reduce the competitiveness of Indian shipping. Simplification of these taxes would help in improving the competitiveness of Indian shipping,” said Arvind Mahajan, executive director, advisory and national industry director for energy, infrastructure and government at audit and consultancy firm KPMG India Pvt. Ltd.
Shipping Corp.’s Hajara said Indian registered ships lacked government policy support or preference to carry Indian cargo. “We have to exploit that by offering some kind of premium to Indian registered ships for carrying Indian cargo,” he added. In the absence of such a policy support, crude and iron ore are shipped on foreign registered ships. India is the world’s fourth biggest importer of crude oil and second biggest exporter of iron ore.
“Apart from lack of fiscal incentives, foreign shipowners do not need to come to India to carry Indian cargo when they can access the same cargo sitting in Singapore and Dubai,” Hajara said.
According to him, the FDI policy has worked in sectors such as telecom because service providers cannot access the Indian market without sitting in India. “That is not the case in shipping. That’s why about 87% of India’s foreign trade is carried by foreign registered ships,” he said.
Atul J. Agarwal, managing director, Mercator Lines, said that ownership of ships is important and not the flag where the ship is registered. “A European shipowner once told me that if he can access 87% of India’s cargo sitting in Singapore, why should he come to India. In fact, he strongly recommended that I should wind up my company in India and go to Singapore,” Agarwal recalled.
Lauritzen’s Janholt said India needs to look at what Singapore was doing and compete with that country to attract foreign shipowners. “If the Indian system is accommodating in terms of taxation and employment of seafarers, it could attract Danish shipowners to India,” he added.