The origin of the Indian National Shipowners’ Association (INSA) dates back to pre-independence times. It is a premier industry body representing the interests, growth aspirations and grievances of the domestic shipping industry. Anil Devli, CEO of INSA, explains the position of the local industry and what factors stunt the growth potential, in a chat with R N Bhaskar and Pankaj Joshi.
What is the reason for lacklustre growth of Indian shipping companies?
There is this theory that Indian shipping sector is not growing because Indian companies are not competitive, which is totally erroneous. The fact is that Indian shipping companies are growing and competing well, but mostly outside India. But when the same companies seek to work within India, they become less competitive. One primary reason for the same is the taxation structure.
If an Indian company purchases and brings a ship for business in India, there is an Integrated Goods and Services Tax (IGST) levy of 5 per cent on the asset value.
The same vessel, when owned by a non-Indian entity, does not attract this levy. You can appreciate that 5 per cent additional cost on an asset which itself costs USD 40-50 million means $2 million additional cost, or Rs 14 crore. If you were to spread this amount over a span of 20 years and 350 days working annually, it means that the break-even point is Rs 20,000 higher on daily basis.
Then you must also understand that loan funding will not cover the tax portion of the investment. So the owner would normally have to put up to 20 per cent of the asset value and get the rest financed, here he got to put up 25 per cent which is a significant difference. Then he has to compete against a vessel owned by an overseas buyer, not registered in India and bidding for the same business. We have made a representation for a level playing field – either IGST applies universally on any vessel seeking to do business in India or even Indian vessels are exempt. For the record, Goods and Service Tax (GST) is not applicable anywhere on international transport, be it by sea or air.
Is there any other constraint on the investment side for local companies?
There is another strong constraint which is funding. Today, what this sector needs is a dedicated funding agency for ship acquisition. Such agencies were available earlier – in the mid-seventies. At that time, we had SDFC and then SCICI took over from there till the mid-nineties and did an excellent job. It was subsequently subsumed into ICICI, which later on became ICICI Bank.
The extinction of developmental financial institutions have had an adverse side effect on the evolution of our banking and finance sector. The policy of long-term finance has been lost, as has been the ability to evaluate projects from that viewpoint. So in the absence of such funding options, the next borrowing option is a bank, where the rate would be higher and the tenure would be shorter. Both of then again add up to greater cash flow requirements, and again drive up the break-even point. International shipping companies, accessing finance from Oslo or Singapore, get money for 10-15 years and rates are typically 100-150 basis points above the LIBOR. Now you look at the Indian company, getting finance for six years and cost around 12 per cent, and realise the difference.
Take both the factors into account and see how the shipowners’ business bidding rate is pushed upwards. We need a financial institution which would look at ships and even beyond to shipyards, basically the ecosystem as a whole. Incidentally, even our shipyards suffer from the taxation part. Local shipyards pay lower taxes on overseas orders because such orders have export status. So you have the situation where Indian companies place orders in Korea or Sri Lanka, while Indian shipyards predominantly work on orders from other countries. It is not that India cannot build boats, but we do it for others.
There has been a recent amendment in the Cabotage law. Can you explain the rationale there?
Since May 21 this year, the new law has suspended the provision which earlier required overseas players to obtain a licence (from the DG Shipping) for coastal shipping operations, or operations between Indian ports. So a local registered shipping company providing employment, having bought insurance in India (at higher rates), and paying direct and indirect taxes would have to compete for coastal shipping business against a shipping company that is not incorporated here, not having an Indian flag vessel, not providing employment to Indians. This amendment is essentially against the basic tenet of cabotage, which says that local transport should be done by locals. The aim of cabotage is protection of the local market rights of national flag vessels.
The aegis of this ruling was in the relaxation of cabotage laws for RoRo and cruise ship vessels. When this relaxation was mooted, we had no issues because firstly there was no local capacity in these segments which could be under threat and secondly we appreciated that boosting those segments would help coastal development with a lot of beneficial ripple effects.
Then someone in the power corridors extended this logic to all containers, fertiliser cargo and all kinds of agri-produce. The logic given was that, for many years, the local industry had not grown much and this had some adverse effect on coastal shipping as well. As we have discussed, the non-growth of domestic players is a fallacy. This reasoning is therefore specious at best. Local players’ growth in coastal shipping is limited, since it is hampered by bad economics. There was this paranoia that India was losing transhipment business to Colombo, that our cargo was getting routed through Colombo. Now there are two aspects to redressing this paranoia.
First is that cargo, like water and human beings, seeks the shortest, quickest and most efficient way to move from one point to another. Therefore a cargo being shipped from Kochi would rather go through Colombo than through Mumbai or Nhava Sheva. Secondly, Colombo is located in open sea, on the main traffic corridor with vessels constantly passing through, and there is much better connectivity. So Colombo is a proper option for transhipment, just like Singapore, Emirates, Heathrow etc would be for long-distance flight passengers. Economics is and will always be a driver, and this is something our policies must acknowledge sooner or later.
Are the domestic companies competitive on the operations cost front? If not, then why so?
No they are not. Like in any vehicle, shipping operations involve four major costs – crew remuneration, fuel cost, maintenance and the finance cost. We have already seen the dissonance on the finance cost. Now let us look at the crew remuneration. Whatever the local shipping company can offer to the crew member would be in sync with overseas players, till the time the 30 per cent TDS component kicks in. Even getting the status of an NRI would take a minimum of six months and the resultant lower take-home pay in the interim puts the job on an Indian ship below par, unless the wages offered are 40 per cent above the international employers, which makes the take-home pay at par.
Second is the fuel expense. You would be aware that fuel in India is among the most expensive worldwide. If you were to look at Sri Lanka, the same fuel costs $50 less compared to Mumbai or Kochi or Chennai. In Rotterdam, it would be $40 cheaper, in Singapore maybe $45. The irony is that Indian ships fuelling in Sri Lanka get the fuel supplied by Indian Oil Corporation Lanka, a subsidiary of IOC. They still sell it cheaper because the incidence of local taxes is not as high there. We all know our taxation structure on fuel is extremely high.
In a nutshell, these are the issues constraining growth and these need to be addressed. India has a maritime tradition – be it building boats, trade relations with other nations across shipping routes, or even riverine transportation. Once these issues are addressed, the entire ecosystem – ships with Indian flags and local shipbuilding – will take off. An integrated approach is needed, which appreciates the following aspects of maritime activity – employment generation, revenue to the state, local economy booster and catalyst for coastal development.