Atmanirbhar Poth Utpadan: A National Imperative

NITI AAYOG is best positioned to integrate, coordinate and harmonise the programmes and plans of the various ministries to avoid duplication, resolve conflicts, optimise investments, and synergise efforts and resources towards making Atmanirbhar Poth Utpadan a national imperative in real sense

Indian Navy, Indian Navy Day Feature

By Commodore Sujeet Samaddar (Retd)

 

‘India has great potential in the area of shipbuilding, and this must be pursued as part of the ‘Make in India initiative’

Narendra Modi, Prime Minister of India

Shipbuilding and shipping have a direct relationship with nation building. History informs us that every great power possessed a vibrant shipbuilding industry and operated best in class ships that helped maintain continued and unimpeded access to resources, commodities and markets which are the vital pillars of a nation’s economy.

Though 95 per cent of the country’s trade by volume and 70 per cent in terms of value amounting to about US$330 bn (2019) is moved by sea, the subsequent paragraphs give a snapshot of the present position of the sector in India.

Shipbuilding and Ship Repair

  • India’s share of Global Shipbuilding is 0.15 per cent.
  • India has 28 shipyards of which four are bankrupt. The balance except the Central Public Sector shipyards are working at much less than their installed capacity.
  • India can build aircraft carriers and nuclear submarines and has the capacity to build ships of up to 240,000 DWT but does not build LNG carriers or Container & Car carriers, dredgers but imports them.
  • India’s ship repair facilities are minimal and non-competitive. Except for emergency repairs not a single large merchant vessel has been repaired by Indian shipyards.
  • With the new International Convention on Prevention of Marine Pollution (MARPOL) requirements for higher energy efficiency, Ballast Water Management Systems, requirement of clean fuels and scrubbers India is losing a larger than annual US$1-1.5 billion Ship repair opportunity unless ship repairs are made more competitive in Indian shipyards.
  • So far as warship building is concerned the Indian Navy’s early thrust on atmanirbharta in design and building warships has paid rich dividends and today all new build ships, except two frigates, are being built in India to best in class global standards.

Shipping. India’s share of world merchant fleet by dead weight tonnage is 1.27 per cent. Of this 36 per cent of the Indian-owned merchant fleet is flagged outside India.

    • Coastal Cargo. Only 6.4 per cent is the share of water transport in the national freight modal mix. Comparatively, the freight modal mix of water transport in People’s Republic of China (PRC) is 24 per cent, Australia 17 per cent, Bangladesh 16 per cent, Thailand 12 per cent and Germany 11 per cent. With 7516 km of coastline and 14,500 km of national waterways there is every possibility to increase the modal share and reduce the logistics cost. The fact is:-
      • Only 54 per cent of this Coastal cargo is carried on Indian hulls.
      • A five per cent modal shift of cargo from roads/ rail to coastal shipping would save US$283 million annually in logistics cost.
    • Unless cabotage relaxation is reversed, the strategic implication is that Indian cargo for short sea shipping will majorly ferry on ships built, owned, operated and crewed by India’s competitor nations and entities.
    • EXIM Cargo. Only 7.5 per cent of India’s EXIM cargo, down from 46 per cent enjoyed in mid 1980s, is carried on Indian hulls.
      • US$58 bn is paid annually to foreign flagged ships to carry Indian cargo. If only five per cent of the EXIM cargo is diverted to Indian flagged ships the annual savings in FFE would be US$2.93 bn.
      • India is the fourth largest consumer of oil with 4% of world share and is the fifth largest exporter of petroleum products with world share of 6.2 per cent. But, Indian flagged Tankers constitute only 1.5 per cent of total tankers.
So far as warship building is concerned the Indian Navy’s early thrust on atmanirbharta in design and building warships has paid rich dividends and today all new build ships, except two frigates, are being built in India to best in class global standards
  • India is the largest importer of Petroleum gas with a share of 5.5 per cent but has only 0.3 per cent of total Gas carriers.
  • India has a global exports share of 7.1 per cent of limestone, 51.3 per cent of granite/ stones and 11.2 per cent share of fertiliser imports (apart from other imports and exports of bulk commodities) but own only 1.5 per cent of bulk carriers.
  • India has a global export share of 1.8 per cent of Iron ore and exports around 30 million tonnes of iron ore annually, 80 per cent of which is directed towards China. Globally iron ore shipments are made in large Capesize and Panamax vessels, which can be built and owned in India but are not. Also, Iron ore exports are predominantly made on an f.o.b. basis, implying lack of opportunity for Indian ship-owners.
  • India imports around 253 million tonnes of coal, with 66 per cent coming from Indonesia and Australia, on Handymax bulk carriers vessels. Indian ship-owners, led by SCI, have a miniscule share amounting to only about four million tonnes.
  • India imports about five million tonnes of fertilizer and three million tonnes of rock phosphate and sulphur, chiefly in small size Handymax and Handysize bulk carrier vessels. But these ships are still not being built in India.
  • The strategic implication is that Indian EXIM cargo carries the risk of freight subjugation and monopolistic manipulated freight rates that may make Indian products non-competitive in global markets.

Reviving the Sector

With a share of about 3.2 per cent of global GDP and aspiration to grow to a US$5 trillion economy, our shipping and shipbuilding credentials do not yet make the mark. On a positive note, we have plenty of headspace to grow.

Key Requirements for Growth. The industry is an interconnected ecosystem comprising various stakeholder predominantly the shipbuilders, ship owners, ship operators, ship repairers and ship recyclers. Apart from them there are many other direct and indirect stakeholders who in various measures contribute to this strategic sector. Hence, isolated and independent schemes to develop any one stakeholder are always, though being highly focussed, holistically less than sub optimal. Hence, an integrated, coordinated and harmonised approach to developing the sector in its entirety is necessary.

There are three key requirements

  • Cargo. The first key requirement is committed long term cargo. Unless there is assured cargo ships are of little use. Hence, any model for development of the shipping sector must first ensure long term assured cargo. This spurs demand for building ships as a bankable business model. In other words India must achieve atmanirbhar vanijya.
  • The importance of institutional credit in boosting the sector is a given. The second key requirement is, therefore, low cost, assured credit necessary to incur capital expenditure towards capability and capacity building in shipyards, finance to own ships, finance to operate ships, finance to repair ships and finance to recycle ships.
  • Unless a sunset clause on Cabotage is introduced to disallow foreign shipping from carrying Indian Cargo for short sea shipping routes neither Indian shipping nor shipbuilding will grow.
With a share of about 3.2 per cent of global GDP and aspiration to grow to a US$5 trillion economy, our shipping and shipbuilding credentials do not yet make the mark. On a positive note, we have plenty of headspace to grow

The above issues need to be addressed as an urgent strategic imperative to meet the requirements of a US$5 trillion economy. Coastal shipping is fundamentally multimodal and hence developing coastal shipping develops the other modes also at both the first mile and last mile. Shipbuilders, ship owners, ship operators, ship repairers and ship recyclers are one integrated ecosystem and hence isolated and independent schemes to develop any one stakeholder, though being highly focussed, is less than sub optimal.

Outsourcing Cargo to foreign Shipping compromises security of trade and access to commodities and markets. It also increases risk of freight subjugation and monopolistic manipulated freight rates to make Indian products non-competitive. It also puts to risk the Indian manufacturing sector due to supply chain disruptions artificially created by adversarial powers. There are also highly unaffordable job losses. Revenue and foreign exchange loss to the state as highlighted earlier. For Indian products to be globally competitive there is a vital need to reduce logistics costs down from 14 per cent of GDP to about 10 per cent by 2022 and coastal shipping can be the game changer.

The economic ramifications are equally important. Recent incentives for various sectors issued by the Government ignored shipbuilding and ship repair. Shipbuilding is material driven and labour intensive. Shipping and Shipbuilding enjoys an investment multiplier of 11.2, an employment multiplier of 6.4 and a turnover multiplier of 4.2. Ships are miniature townships and require a range of equipment which is mostly produced in the MSMEs. There are also up-stream, mid-stream and down-stream benefits of port based warehousing, additional berths and terminals, IT enabled Systems etc.

Recommendations for Revival

Towards this purpose various instruments for reviving the sector need to be considered. The following is proposed:-

  1. First, is the formulation of a national shipbuilding plan covering the period 2020-2035 which would ensure that all Indian cargo, EXIM or Coastal, is carried on Indian built, Indian owned and Indian operated ships by 2035.
  2. Second, design standard hull forms which can be used for coastal traffic to meet short sea shipping requirements particularly of foodgrains, fertilisers, limestones and building materials, product, ores etc. This frozen design would be built by different shipyards in a pipeline production model in consonance with the national shipbuilding plan.

This would introduce standardisation of various machinery, equipment and systems that would incentivise the growth of the ancillary industries. The Indian Navy’s ship design competency must be fully leveraged to design these ships. In addition, using the best available technologies India should design VLCC (250,000 DWT), 18000 TEU container ships and car carriers by 2023 and commence building them by 2025.

Long term contracts with Indian shipping companies owning and operating Indian built ships with attractive freight rates and benefits would provide the foundation for shipbuilding
  • Third, user government agencies, departments, corporations and ministries of the Government must be assigned minimum targets for transportation of finished products or raw material by coastal shipping. Long term contracts with Indian shipping companies owning and operating Indian built ships with attractive freight rates and benefits would provide the foundation for shipbuilding.
  • Fourth, a National Bank for Development of Shipbuilding and Shipping should be incorporated to provide low cost finance. The Bank could be funded by imposition of a 0.3 per cent cess on all EXIM and Coastal cargoes, which would yield about Rs 2500 crores annually. This could be the annual ZERO COST capital infusion which could be utilised to provide finance to Indian shipyards and shipping companies at the lowest possible rate of about 3-4 per cent to mainly cover administrative and operational organisational expenses.

  • Concurrently, a sunset clause on cabotage effective January 1, 2025 is an absolute necessity so that all coastal cargo is only carried by Indian shipping companies spurring demand for shipbuilding.
  • Ship repairs (ITC HS code 9987) attract a GST rate of 18 per cent which should be brought down to five per cent as applicable to MROs in the aviation sector. Import of spares for both Indian owned or foreign owned hulls undergoing repairs in an Indian shipyard should be nil rated.

Conclusion

These measures are certain to revive Indian shipbuilding. However, through discussion and debate the above model could certainly be further refined and detailed. This model will only work if there is a ‘buy in’ from all government stakeholders in the sector. Such an approach can reform and transform the shipbuilding industry to perform at world beating levels. Since this would require an unbiased bipartisan approach free of the silos in which ministries usually work it may be appropriate to assign this task to the NITI AAYOG as they are best positioned to integrate, coordinate and harmonise the programmes and plans of the various ministries to avoid duplication, resolve conflicts, optimise investments, synergise efforts and resources to the common purpose of Atmanirbhar Poth Utpadan.

-The writer is former Senior Consultant, NITI AAYOG and Secretary, Society for Aerospace Maritime and Defence Studies (SAMDeS). Views expressed are personal and do not necessarily reflect the views of Raksha Anirveda

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