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Debate on further easing India’s cabotage law enters a crucial phase

A cautious easing of cabotage has already been implemented by India for the container trans-shipment terminal run by Dubai’s DP World Ltd at Vallarpadam in Cochin port for a three-year period beginning September 2012. Photo: Wikimedia CommonsPremium
A cautious easing of cabotage has already been implemented by India for the container trans-shipment terminal run by Dubai’s DP World Ltd at Vallarpadam in Cochin port for a three-year period beginning September 2012. Photo: Wikimedia Commons

At a time when Indian fleet-owners are clamouring for total protection from foreign competition, expert opinion favours a judicious view on cabotage law with a long-term perspective

At a time when India fleet-owners are clamouring for total protection from foreign competition on the country’s coast, expert opinion is favouring a judicious view on cabotage law with a long-term perspective.

Cabotage is a local law that makes it mandatory to use Indian ships for transporting cargo between different ports along the country’s coast. Foreign ships can be allowed to operate only when Indian ships are not available after taking a licence from India’s maritime regulator, according to the cabotage law.

A high-level committee set up by the government has concluded that while it may be desirable to exercise absolute cabotage (total protection to Indian ships), given the current inadequacy of India’s coastal fleet and the need to introduce competition and growth in containerization, a certain degree of cautious relaxation of cabotage policy must be made for the next couple of years till coastal shipping grows sufficiently.

“The more desirable, absolute cabotage might be imposed beyond a certain growth in national tonnage (shipping capacity) and achievement of desired outcomes," the panel headed by Rakesh Mohan, a former deputy governor at India’s central bank, wrote in its report presented to the government last month.

A cautious easing of cabotage has already been implemented by India for the container trans-shipment terminal run by Dubai’s DP World Ltd at Vallarpadam in Cochin port for a three-year period beginning September 2012.

Most maritime nations such as the United States, China and Indonesia practice absolute cabotage, restricting movement of cargo on local routes only on their own flag vessels. China has, effective January 2013, issued new regulations that further underscore the ban on foreign-flagged ships on Chinese waters. Such an approach, however, might be premature in the case of countries such as India, which has a long way to go before becoming self-reliant in supporting the needs of coastal sea transport. It may be worthwhile only after this is achieved to consider imposing absolute cabotage.

The Rakesh Mohan panel recommendation will surely boost the chances of other Indian ports such as Mundra, Pipavav, Vizag and Vizhinjam on getting a cabotage relaxation. These ports have sought easing of cabotage for their respective ports, similar to the one given to the Vallarpadam facility, to achieve full potential. India’s shipping ministry, though, is not in favour of relaxing cabotage for more ports.

Those supporting a relaxation say that cabotage restrictions may hamper the growth of India’s coastal shipping when the country does not have adequate capacity. They also argue that international competition would lead to greater efficiencies.

A contrary view is that relaxing the cabotage law will tilt the scales against Indian shipping. However, if the primary objective is to expand coastal shipping and make it competitive, it might be desirable to allow foreign ships to compete for coastal cargo.

India should enforce absolute cabotage for import and export of crude, critical energy cargo and defence equipment/parts. Cabotage should be relaxed to allow foreign vessels to carry bulk, general cargo and trans-shipped export-import (EXIM) containers, including empty containers, on Indian waters, according to the Rakesh Mohan committee. This could facilitate efficient movement of containers and ease congestion at ports and port storage.

This would also help enhance domestic mobility for Indian cargo while also inducing competition-led efficiency and contributing to a reduction in the stress on road transport.

Indian shipping owes a lot to Rakesh Mohan. India adopted a globally followed taxation system for the shipping industry in 2004 by introducing a tax based on the cargo carrying capacity of ships, based on a recommendation made by Mohan in 2002. The tonnage tax—a regime in which close to 95% of the global shipping fleet operates—pruned the tax outgo of Indian shipping companies to 1-2% of their income, compared with the corporate tax rate of 33.9%. The tonnage tax is applicable only to those ships that are registered in India and fly the Indian flag. As such, the Rakesh Mohan panel recommendations on cabotage will carry a lot of weight with the government.

The fact that the report was signed off by Bharat Sheth, managing director of Great Eastern Shipping Co. Ltd and one of the 21 members on the panel, speaks volumes about the suggestions on cabotage. Great Eastern is India’s biggest private ocean carrier.

The Indian National Shipowners Association (Insa), a shipping industry lobby of which Great Eastern Shipping is a prominent member, has opposed the relaxation of cabotage. The committee report has come at a crucial time in the ongoing debate on further easing cabotage law.

P. Manoj looks at trends in the shipping industry.

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