The Union Cabinet has recently given approval for a new scheme designed to offer subsidy support to Indian Shipping companies in the event of global tenders being floated by Ministries and Central Public Sector Enterprises (CPSEs) specifically for the import of government cargo.
Mechanics of the New Scheme
This new scheme is expected to result in an increase in flagging, and will tie access to Indian cargo with an investment in Indian ships. In practical terms, flagging in refers to the process of adding a vessel to the national registry, while flagging out involves removing a vessel from that same registry.
Subsidy support for this initiative will range between 5% to 15% of the lowest quote offered by foreign shipping companies, with this amount hinging on whether the ship was flagged before or after February 1, 2021. Ships older than two decades, however, will not be eligible for the scheme, as per stipulations by the Ministry of Ports, Shipping and Waterways.
Rationale behind the Scheme
Smaller Dimension of the Indian Shipping Industry: Despite the presence of a 7500 km long coastline and considerable national EXIM (Export-Import) trade along with 100% FDI in shipping since 1997, the size of the Indian shipping industry and its national fleet remains small, especially when compared to their international counterparts.
At present, the Indian fleet is a paltry 1.2% of the world fleet when assessed in terms of capacity. Additionally, Indian carriers’ share in India’s EXIM trade has plummeted from 40.7% in 1987-88 to a mere 7.8% in 2018-19.
Higher Operating Costs Offset: The Indian shipping industry is plagued by relatively high operating costs due to various factors such as higher costs of debt funds, taxation on the wages of Indian seafarers, IGST on ship imports, blocked GST tax credits, and so forth. This scheme will provide a huge relief by offsetting these costs significantly, thereby making flagging merchant ships in India more financially viable.
Foreign Exchange Outflow
Due to high operating costs, it is cheaper for an Indian charterer to import a shipping service as opposed to contracting the services of a domestic shipping company. This practice has inevitably resulted in a higher foreign exchange outflow due to freight bill payments being made to foreign shipping companies.
Significance of the Scheme
Employment Generation: An increase in the Indian fleet will provide more direct employment opportunities to Indian seafarers as Indian ships are mandated to hire only Indian seafarers. Furthermore, cadets aspiring to become seafarers are required to undergo on-board training on ships; therefore, Indian ships will offer training slots for young Indian cadets.
Strategic Advantages: A policy that promotes expansion of the Indian shipping industry is crucial because cultivating a larger national fleet will yield economic, commercial, and strategic benefits for India.
Economic Advantages
An indigenous shipping fleet that is diverse and robust would not only yield foreign exchange savings but also reduce dependence on foreign ships for transportation of India’s critical cargoes. This would contribute towards realizing the goal of Atmanirbhar Bharat and contribute to the growth of the Indian GDP.
