In the biggest reform yet in the shipping sector, the Narendra Modi led government plans to totally remove a so-called cabotage rule for ships carrying all types of cargo on local routes, a move that will allow foreign registered/flagged ships to do business along the country’s coast without securing a licence from the Directorate General of Shipping, according to ETInfra.com.
The move, aimed at promoting coastal shipping and fulfil a Budget announcement by Finance Minister Nirmala Sitharaman, will roil local fleet owners, who have always opposed easing cabotage restrictions.
The Indian National Shipowners Association (INSA), a lobby group for local fleet owners, will discuss the government proposal at a meeting later this month to chalk out a strategy, people with knowledge of the matter said.
Only Indian registered ships are allowed to ply on local routes for carrying cargo, according to India’s cabotage law. Foreign ships can operate along the coast only when Indian ships are not available after taking a license from the DG Shipping, according to the decades-old law designed to protect domestic ship owners.
In 2018, following strong lobbying mainly from foreign container lines, the Ministry of Ports, Shipping, and waterways allowed foreign flagged ships to transport export-import (EXIM) laden containers meant for transhipment, empty containers meant for re-positioning, agriculture, horticulture, fisheries, fertiliser and animal husbandry commodities on domestic routes without a license from the DG Shipping.
Prior to that in September 2015, cabotage was relaxed to allow some types of foreign flag ships such as Ro-Ro, Ro-Pax, Hybrid Ro-Ro, pure car carriers, pure car and truck carriers, LNG vessels, and over dimensional or project cargo to operate in India’s coastal trade without a license from the DG Shipping.
Currently, coastal shipping only has a 7 percent share in India’s transportation modal mix, compared to 62 percent share in road and 31 percent in rail.
Making out a strong case for lifting cabotage restrictions completely to help foreign flag ships carry cargo on coastal routes without obtaining a license from the DG Shipping, the Ministry of Ports, Shipping, and Waterways said that the move will also fulfil the announcement made in the Budget speech, according to a document seen by ET Infra.
To promote a higher percentage of coastal shipping in the transportation modal mix, the Ministry said that the focus should be on potential cargo, enhancing ports/jetties, improving port connectivity, determining suitable vessel types and capacities considering lead distances and cost per ton/kilometre, mitigating financial burdens of multimodal transportation, and exploring integration with national waterways wherever possible.
The licensing condition, according to the Ministry, was earlier relaxed for certain types of specialised foreign flag ships due to non-availability of adequate number of such Indian flag vessels. Similar relaxation for specific cargo/commodities has been made to make available additional vessels for carriage of cargo along the coast at “competitive freight rates”, it noted.
Development of infrastructure on coastal routes, including evaluation of alternative routes, enhancement of existing ports/jetties, and creation of new jetties, are essential for successful coastal shipping and transportation of commodities like coal and fertilisers. This approach, integrated with national waterways where possible, should be supported by government policies and financial incentives to attract cargo users and achieve efficient supply chains, it said.
Similar criteria may be applied to other bulk cargo like iron ore, steel and food grains to promote coastal shipping, it added.
Local ship owners lobby group, the Indian National Shipowners Association, had opposed easing cabotage restrictions during previous occasions. This time it will be no better.
The plan, if and when implemented, will immediately affect a small number of Indian container ship owners/operators.
Citing the disruptions during the COVID pandemic, when an acute shortage of containers and other supply chain logjams sent container freight rates sky rocketing, the executive lamented India’s dependence on foreign shipping lines, saying the country “as at their mercy”.
“We are dependent on foreign shipping lines for as much as 93-95 percent of India’s export-import cargo. Indian flag ships are carrying only 5-7 percent of India’s EXIM cargo, the rest everything is carried by foreign ships. With only 5 percent independence, it is as good as we are slaves. It not only results in a massive outflow of foreign exchange but is also a huge opportunity for Indian fleet owners,” he said, indicating that the government’s move to ease cabotage totally may not see a smooth sailing.
Globally, maritime nations have cabotage restrictions to protect their national fleet to a much larger extent than in Asian countries. The United States, for example, does not allow coastal trade on ships unless they are built, owned and manned by the Americans.
“So, the foreign ship owners have the benefit of tax legislation in their favour and cabotage legislation in their favour and they also have cabotage relaxation favour in a country like India. So, the cost benefit will be heavily in favour of foreign flag ships,” said an industry source, while making a case for a level playing field for local ship owners.
The move to lift cabotage restrictions comes close on the heels of the arrival of a new category of fleet owners domiciled in the Gujarat International Finance Tec-City (GIFT City), India's first International Financial Services Centre (IFSC) under the Special Economic Zone Act.
Fleet owners operating under the IFSC regime are entitled to a tax holiday for ten years.
Ship owners under the INSA banner and operating under the Domestic Tariff Area (DTA) regime are reluctant to look at the IFSC regime for running ships due to lack of clarity on taxation including the Goods and Services Tax (GST) while making the switch and the limited ten-year period for tax holiday.