The pros and cons of India’s new subsidy scheme for shipping

Lloyd’s List

INDIA has announced a subsidy scheme for shipping companies hauling government cargo to boost domestic tonnage.
Under the proposal, Indian shipping companies will be given a subsidy as they bid for global tenders for cargoes imported by the government or its entities.

The subsidy support varies from 5% to 15% of the lowest bid by a foreign shipping company depending on whether the ship was flagged after or before February 1, 2021, and the age of the ship at the time of flagging in India.

However, ships over 20 years old will not be eligible under the scheme, according to the Ministry of Ports, Shipping and Waterways.
The subsidy budgeted by the government for five years is $218m (Rs1.6bn).

“The scheme is advantageous to the level of difference being funded between the Indian and foreign bidders,” Essar Shipping chief operating officer Rahul Bhargava told Lloyds List. “However, in case of long-term contracts the subsidy is reduced over the period each year, thereby giving little incentive to Indian owners to enter into long-term contracts.”

Furthermore, the provisions of the scheme will not be available if the lowest bidder is an India-flagged vessel, which makes the subsidy program look entwined — or compromised — by countervailing drives to support national owners.

Along with the right of first refusal (RoFR) available to local fleet owners in such global tenders, the scheme discourages foreign fleet owners from participating, as it would mean wastage of resources due to the current subsidy programme.

According to the RoFR policy, India-flagged ships have a right to match the lowest rate offered by a foreign flag ship in tenders issued by state-run firms for hiring ships and signing contracts.

If Indian shipping companies declined, then only the foreign flag ship that had quoted the lowest rate would be allowed to carry the cargo or provide services.

However, in the absence of foreign shipowners from the tenders, the new subsidy scheme holds no water —mainly because it will become difficult to compare the rates for the purpose of calculating the quantum of subsidy, as the scheme is benchmarked to the lowest rate quoted by the overseas owner.

India’s shipping industry is not competitive due to the lack of a level playing field compared to international players.
Added to the problem is the fact that, with a number of direct and indirect taxes, the cost of operating Indian ships can become very high, almost 20% more versus a foreign owner.

On top of this, Indian ships are required under law to hire only Indian nationals as crew.
“As compared to foreign vessel owners, Indian owners have to pay higher salaries to compensate for taxes borne by the seafarers (almost 20% to 30%),” said Capt Bhargava.

He agreed that the subsidy did not accommodate such differences, and hence “it has been a long pending plea with the government to give nonresidential Indian status to seafarers, even while sailing on Indian coastal waters to level the playing field”.

Although the measure will further increase government imports carried on Indian flags, the impact may be marginal as the policy excludes all vessels more than 20 years of age, he said. “For the younger tonnage, employment is anyway not an issue globally.”

The Narendra Modi-led cabinet believes that by linking access to cargo owned by state-run firms to investment in Indian ships, more government imports would be carried on India-flagged ships, which will help arrest the declining share of Indian ships in the country’s export-import cargo.
But India’s fleet comprises a meagre 1.2% of the world fleet in terms of capacity, despite having a 7,500-km long coastline.

Considering the fact that shipping is a capital-intensive business, Capt Bhargava agreed that “it may be a challenge for Indian vessel owners to add to their fleet, especially since the industry is still out of infrastructure status and raising funds with banks will have a loan tenure of maximum seven to eight years only”.

While the scheme may promise some gold for Indian shipowners, the argument that foreign shipowners would flag ships in India using the 100% foreign direct investment route to secure Indian state-owned cargo contracts, gradually boosting Indian tonnage, does not carry weight.

They will be subjected to the same taxation and corporate laws to which the Indian owners are now subjected. Also there is the risk of the five-year timeframe of the subsidy scheme.

Yet the Indian cabinet stressed that “a strong and diverse indigenous shipping fleet will not only lead to foreign exchange savings on account of freight bill payments made to foreign shipping companies but would also reduce excessive dependence on foreign ships for transporting India’s critical cargoes.”

Additionally, the scheme is likely to lead to an increase in training opportunities and employment for Indian seafarers, an increase in the collection of various taxes, development of ancillary industries and improved ability to borrow funds from banks.

Source: Lloyd’s List