14-03-2016

India: Local demand boost to shipbuilders

shipbuilders

It’s not always that one sees India’s annual Economic Survey devoting generous space to the shipping sector. This time, it did. The budget presented by finance minister Arun Jaitley on 29 February followed up on the Economic Survey with an announcement on service tax that bolsters the ability of local shipowners to compete with global counterparts.

CENVAT credit/refund of taxes and duties paid on input consumables, services and capital goods was not available so far on the transportation of cargo on Indian flag ships, leading to a cost disadvantage compared with foreign ships.

The budget removed this disparity by allowing Indian shipowners to avail input tax credits.

India’s fleet strength stands at 1,246 ships with dead weight tonnage (DWT) of 15.37 million (10.45 million gross tonnage, or GT), and state-owned Shipping Corp. of India Ltd (SCI) having the largest share of around 36%. Of this, around 369 ships with 13.65 million DWT (8.94 million GT) cater to overseas trade and the rest exclusively to coastal trade. Despite having one of the largest merchant shipping fleets among developing countries, India’s share in total world DWT is less than 1%.

The survey noted that there has been a sharp decline in the share of Indian ships in the carriage of India’s overseas trade from about 40% in the late 1980s to 7.45% in 2014-15. The Indian fleet is also ageing, with the average age increasing from 15 years in 1999 to 17.89 years as of 31 December 2015 (42.42% of the fleet is over 20 years old and 12.43% is in the 15-19 years group). Therefore, there is an urgent need to increase India’s shipping fleet. With asset prices currently at historical lows, the time is right to acquire new-generation ships to replace ageing ones.

The survey also offered some suggestions to boost the sector, including the need for cheaper finance and longer tenure funds to replace India’s ageing shipping fleet and take advantage of the low asset prices prevailing globally.

At least, the survey said, the issue of longer-tenure loans to the sector could be urgently addressed. An institutional mechanism can also help the sector in acquiring assets at the right time.

That India was seeking to capture a large share of its fleet replacement requirement worth a few billions of dollars within the country and boost its Make in India initiative became evident when the shipping ministry moved a proposal making it mandatory for government departments/agencies and state-run fleet owners to order all their ships from India from 2025.

That’s when a 10-year financial aid scheme to local shipbuilders approved by the Indian cabinet ends. The state aid, to take effect from 1 April 2016, will entitle Indian shipyards to get extra money on each ship they build to neutralize the cost disadvantages they face on account of local taxes and high cost of working capital while competing with global yards to get orders.

During the 10-year period, local yards will also have a so-called right of first refusal on ship purchases and ship repairs of government departments/agencies and state-owned firms. This facility allows local yards to clinch state-funded contracts/works, if they are not the lowest bidder, by matching the lowest price quoted by overseas entities in public auctions.

To remove the apprehensions in the minds of fleet owners on the ability of local yards to construct ships on time, the government linked the disbursement of state aid to a delivery time-frame—within three years of signing the contract.

This timeline, though, is not applicable to the construction of specialized ships such as liquefied natural gas and liquefied petroleum gas carriers and high-end offshore oil drilling and production platforms.

Ten years is a reasonable time for local yards to shape up though the end of the aid scheme could throw up considerable uncertainties for some shipbuilders. This is probably what the ministry is trying to address by proposing that government departments/agencies and state-run shipping firms should order all their ships from India from 2025 by following the same right of first refusal rule so that local yards have a steady flow of ship orders.

Shipping Corp. has protested this plan and has asked for the exclusion of commercial vessels from its purview. Being a commercial entity, Shipping Corp. says it would be unviable to run a ship if it is constructed and delivered late on two counts—construction delays raise the ship price, besides resulting in opportunity loss for its owner.

To be sure, not all Indian yards are known to jump delivery schedules.

Also, Shipping Corp. cannot be viewed in the same light as other government departments/agencies whose ship requirements are not meant for commercial use.

Two years ago, the ministry tried to tweak a cargo support policy currently applicable to Indian fleet owners—both state-owned and private—for moving cargo on local routes. It came up with a proposal that only ships that are manufactured and registered in India would be given first preference for moving cargo on local routes. If that was not possible, then only will other categories get preference for transporting the cargo.

This was also an attempt to nudge fleet owners to order their ships from India, but it was deferred following protests from local shipowners seeking time to adjust to the new rule.

Moreover, the requirement for Indian fleet dedicated exclusively to move cargo such as coal, petroleum products, steel, cement, fertilizers and foodgrain on local routes will surge by 2025 as the government takes steps to ship them by sea instead of by rail or road to save thousands of crores on logistics costs and make industries competitive.

A low-cost fund, currently being discussed within the government, to help local fleet owners buy ships, could be linked to ordering ships locally.

Most bulk carriers and tankers, which make up a large portion of the Indian fleet involved in export-import trade, are built at overseas yards in Japan, South Korea and China. Some see a silver lining in this whole exercise—that of making top global yards in South Korea and Japan set up new facilities in India or by taking over or investing in existing yards to capture India’s huge shipbuilding market.

There are a few Indian yards that are in financial distress and could be ideal candidates for such opportunities. Foreign direct investment (FDI) is permitted in shipbuilding.

Could this be Prime Minister Narendra Modi’s sleight of hand on one of the pillars of his Make in India initiative which, incidentally, addresses the goal of creating employment for both skilled and unskilled workers?

Source: Livemint

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