Context

• The Indian government has made significant strides in developing the maritime sector, an area largely neglected by previous administrations.
• While these efforts have contributed to economic growth and improved infrastructure, the Indian shipping industry remains stagnant.
• Several structural challenges, including financial constraints, regulatory hurdles, and tax disparities, continue to hinder its competitiveness.

An Analysis of Progress Under Sagarmala and Stagnation in the Shipping Industry

• Progress Under Sagarmala
  • The Sagarmala Programme, launched to enhance India’s maritime infrastructure, has made significant progress.
  • As of September 2024, 839 projects requiring an investment of ₹5.8 lakh crore have been outlined, with 241 projects (₹1.22 lakh crore) completed, 234 projects (₹1.8 lakh crore) under implementation, and 364 projects (₹2.78 lakh crore) in various stages of development.
  • The programme has focused on port modernization (₹2.91 lakh crore), port connectivity (₹2.06 lakh crore), port-led industrialisation (₹55.8 thousand crore), and coastal community development.
  • The impact of these initiatives is evident in India’s economic growth, with GDP increasing from ₹153 trillion in 2016-17 to ₹272 trillion in 2022-23, despite setbacks due to the COVID-19 pandemic.
  • Similarly, India’s EXIM trade grew from $66 billion in 2016-17 to $116 billion in 2022, reflecting a 77% cumulative increase.
  • The government has set ambitious targets, aiming to achieve a $5 trillion economy by 2027 and a $7 trillion economy by 2030, with exports projected to reach $2 trillion by 2030.
• Stagnation in the Shipping Industry
  • Despite the progress in port infrastructure, the Indian shipping industry has not experienced commensurate growth.
  • Cargo handled at major ports has only increased marginally from 1,071.76 million tons in 2016-17 to 1,249.99 million tons in 2020-21, an annual growth rate of just 2.85%.
  • More concerning is the decline in the number of vessels handled at ports, which dropped from 21,655 in 2016-17 to 20,371 in 2020-21—a 5.93% decrease.
  • Additionally, the Indian-registered fleet has grown at a slow pace, increasing from 1,313 ships in 2016-17 to 1,526 in 2024.
  • While the average age of the Indian fleet has improved from 26 years to 21 years due to recent acquisitions, India’s global ship ownership ranking has slipped from 17th to 19th.
  • This decline indicates that investments in port infrastructure alone have not translated into a stronger domestic shipping sector.
  • Indian shipping companies continue to lose market share to foreign-flag vessels in EXIM trade and to rail and road transport for domestic cargo movement.

Challenges Hindering the Shipping Industry

• Capital Constraints and High Borrowing Costs
  • Indian shipping companies face high borrowing costs, short loan tenures, and strict collateral requirements.
  • Unlike foreign counterparts, Indian shipowners cannot use ships as collateral, making financing difficult.
  • Additionally, lenders do not fully understand the cyclical nature of the industry, leading to rigid loan restructuring policies.
• Unfavourable Tax Policies
  • Indian-flagged ships are subject to 5% IGST on purchase price, a tax not imposed on foreign vessels operating in Indian waters.
  • Moreover, Indian shipowners must deduct TDS on seafarers' salaries, whereas foreign vessels employing Indian seafarers do not have to.
  • These disparities make Indian vessels significantly less competitive.
• Shipbuilding Challenges
  • India’s shipbuilding industry suffers from inadequate infrastructure, high input costs (especially steel), dependence on imports for spare parts, and delays in vessel deliveries.
  • Additionally, customs duties on imported machinery increase production costs, while a lack of skilled workforce reduces efficiency.
  • These issues discourage shipowners from investing in Indian shipyards.
• Competition from Foreign-Flagged Vessels
  • Foreign-flagged vessels, often registered in tax havens, enjoy easier access to capital, lower borrowing costs, and lenient regulations.
  • Their ownership structures allow them to operate with minimal regulatory oversight, making them far more competitive than Indian-flagged ships.

Policy Measures and Recent Government Initiatives

• Maritime Development Fund (MDF)
  • A ₹25,000 crore fund aimed at improving access to capital for shipowners.
  • However, only 49% of this fund will come from the government, with the rest dependent on major ports, raising concerns about its sustainability.
• Infrastructure Status for Large Vessels: This status allows shipping companies to access benefits similar to those in other infrastructure sectors.
• Customs Duty Exemption on Shipbuilding Spares: The government has extended this exemption for another 10 years.
• Revamped Financial Assistance Policy
  • This includes credit incentives for shipbreaking and an extension of the tonnage tax scheme to inland vessels.
  • While these initiatives are steps in the right direction, they may not be sufficient given the capital-intensive nature of the shipping and shipbuilding sectors.
  • Additionally, clarity is needed on how the ₹25,000 crore MDF will be mobilized and distributed over the coming years.

The Way Forward: The Need for Comprehensive Reforms

• Long-Term Financing at Competitive Interest Rates: The industry requires loan tenures of 7-10 years with lower interest rates to facilitate ship acquisition and modernization.
• Expansion of Shipbuilding Infrastructure: India must invest in new shipyards and modernise existing ones to build large vessels and reduce dependence on imports.
• Tax Reforms to Level the Playing Field: Removing IGST on ship purchases and exempting Indian seafarers from TDS requirements will improve competitiveness.
• Encouraging External Commercial Borrowings (ECBs): If strategically utilised, ECBs could help bridge the funding gap in the maritime sector.
• Investment in Green Technology: To meet global emissions reduction targets, India must promote eco-friendly shipbuilding and retrofitting of existing vessels.

Conclusion

• While the Sagarmala Programme has significantly improved India’s maritime infrastructure, its benefits have not translated into proportional growth in the shipping industry.
• Structural challenges, including capital constraints, tax disparities, and shipbuilding inefficiencies, continue to limit India’s competitiveness.
• Only by addressing these critical challenges can the nation fully leverage its maritime potential and strengthen its position in international trade.