Financial Daily from THE HINDU group of publications
Tuesday, Feb 05, 2002
Logistics - Shipping
Shipping: In troubled waters
THE year that rolled by was yet another difficult one for the shipping industry, because of the government's unhelpful attitude towards one of the most vital sectors, compounded by the not-so-satisfactory situation on the international shipping front.
The Baltic Freight Index, which was as high as 1,700 in 2000, has now dropped to around 860. The tanker rate too plummeted, though the slide has not been so sharp. The charter rates for container ships also dropped. The average charter rates for 2,500 TEU capacity geared ship dropped 12.4 per cent in 2001 over 2000 and, according to the UK-based Drewry Shipping Consultant, the fall this year might be even more, around 19 per cent.
But, then, it would be wrong to attribute the decline to the September 11 events in the US. The signs of a slowdown in the US economy has been growing from the beginning of 2001, and the terrorist attacks in the US and subsequent developments only accentuated the process with serious repercussions on international shipping. For a while, many major ports, particularly in the US, were closed; marine insurers rushed to slap war risk premiums over a large area and vessels of many flags were intercepted by the US military personnel in pursuit of terrorists and, above all, the port situation in many countries deteriorated, the trade volume dipped and so did container traffic.
The world port throughput grew last year at 4.4 per cent the lowest since containerisation started some three decades ago. The ratio of port throughput to container trade volume remained steady at 3.3 to 1, according to Drewry. The average revenue per TEU dropped 8.2 per cent to $1,300, considered a marked fall.
Nearly 13 per cent of the shipping tonnage has been flagged out (that is, the shipping companies save the public sector Shipping Corporation of India have started registering their flags in offshore registries such as Panama, Liberia or Singapore) and, if the present situation continues, the figure will only rise. The reason is simple. By flagging out tonnage, the shipowners avoid paying the hefty taxes they would have otherwise paid had they registered the same tonnage under the Indian flag. By flagging out, they generate more revenue and post a higher return on their investments as they are not required to pay any tax (or very little). Also, under offshore registries, the operation cost on crew complement is low.
One, therefore, feels sorry for SCI which, being a state-owned organisation, is yet to flag out its tonnage. But it is only a matter of time before it is compelled to flag out, particularly the new acquisitions. Perhaps, it is waiting for a strategic partner, which is expected to emerge on the scene once the government's proposed partial divestment of its stake in the public sector shipping company is through.
The total tonnage of shipping continues to stagnate at around seven million GRT (in fact, it has now declined to less than seven million GRT from more than seven million GRT a few years ago) and the share of the national lines in the country's total sea-borne trade drops to less than 30 per cent. It was 30 per cent in 1999-2000, 31 per cent in 1998-99 and 33 per cent before that and 41 per cent in 1988. The trend, thus, is unmistakable. Sector-wise break-up shows that nearly 85 per cent each of general and dry bulk cargo is carried by the foreign flag, while the figure for petroleum products is around 45 per cent.
The sea-going vessels engaged in overseas trade, totalling 6.38 million GRT, account for the bulk of the country's total shipping tonnage and the offshore supply vessels (OSVs) and coastal vessels the balance 0.69 million GRT. Of the sea-going vessels, the dry bulk carriers account for nearly 38 per cent of the total tonnage, crude tankers at 32.5 per cent, and product tankers 15 per cent. The other vessels include OBOs (three), LPG carriers (seven), acid carriers (seven), general cargo vessels (29) and cellular vessels (10).
Nearly 87 per cent of the total world tonnage pay zero to 2 per cent tax, while in India the corporate tax is as much as 30 per cent. Indian shipping supports a large number of ancillary industries. For every 100 employed in shipping, about 500-600 people get employed in ancillary industries.
Indian crew employed on foreign flag vessels are not required to pay income-tax while the same benefit is not extended to Indian seafarers employed in Indian vessels. As a result, the Indian shipowners cannot retain good people. Retention is possible but only at a high cost, which makes it even more uncompetitive. The declining share of the Indian bottoms in the country's sea-borne trade only confirms the huge outgo of foreign exchange by way of freight payments to foreign shipowners.
The gross earnings of the shipping industry in 1999-2000 amounted to Rs 5,700 crore, of which the net foreign exchange inflow was Rs 3,500 crore. The country's total foreign trade in 1999-2000 was Rs 366,000 crore, of which freight represented Rs 29,000 crore. In 2000-01, shipping earnings constituted about 3.2 per cent of the total export earnings and 68 per cent of the net foreign exchange earnings/savings, amounting to Rs 4,674 crore.
According to one estimate, the developing countries have a logistics component of 8 per cent of the delivered costs of goods against 4.1 per cent of the developed countries. The implication is that India as a nation is progressively losing control over its logistics costs, particularly in critical areas such as energy sources.
The Working Group on Shipping for the Tenth Plan has suggested the acquisitions of 156 vessels of various types and capacities (both new and second-hand) in the next five years at an estimated investment of Rs 15,000 crores ($3.35 billion). By 2007, the Shipping Bill is estimated to be about $10 billion. The bulk of this amount will go to foreign shipping, unless the Indian tonnage is substantial.
Recognising that the Indian shipping companies have been hamstrung by the lack of incentives and duty exemptions on consumables, higher corporate tax liabilities, adverse capital market and poor investors perception, the Working Group has identified policy initiatives such as simplification of procedures of ship acquisition, export industry status for shipping, support to cosatal shipping and continuation of the present LNG transportation policy.
It is not that the shipowners too have been asking for the moon all these years. The demands include the framing of a national shipping policy, introduction of the tonnage tax, higher depreciation, income-tax relief for the seafarers and according infrastructure status to the shipping industry.
It will be rash to presume that the powers-that-be in Delhi are unaware of import of all these demands. But, then, awareness is one thing and taking necessary action in support of the demands is another.
In a government where the shipping minister is changed every other day, it is not difficult to guess the level of importance attached to the Shipping Ministry, which is a specialised and complex one requiring certain amount skill to run it.
The bulk of the allocations of the Ministry goes to the port sector, leaving a paltry amount for the promotion of shipping.
Interestingly, the Finance Minister once worked as the joint secreatry in the then Surface Transport Ministry. He was even on the board of SCI for some time.
Which means the problems facing the shipping industry, in general, and SCI, in particular, are not entirely unknown to him. Strangely, repeated appeals of the shipowners for some reliefs have so far gone unheeded.
The present Director-General of Shipping once expressed the view that he was looking forward to the day when he would see at least five MPs take up the case for the country's shipping industry on the floor of the Lok Sabha.
Sadly, his dream remains unfulfilled. In such a milieu, it will be too much for the shipping industry to expect anything substantial from the powers-that-be, no matter how loud the shipowners cry for help.
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