India's impending status as the world's third-largest economy necessitates attention to the crucial ship sector. While port efficiency is vital, the focus on shipbuilding is equally imperative. India lags significantly in ship ownership and building, resulting in heavy reliance on foreign vessels and substantial forex outflow. Financial constraints, including limited access to long-term financing, hinder progress. Addressing issues like ship classification as infrastructure and amending relevant acts is crucial. India's potential in shipbuilding, supported by skilled labor and global trends, underscores the need for policy changes to bolster this strategic and economic asset.
By Sanjeev Sanyal & Aakanksha Arora
With India on the threshold of becoming the world’s third largest economy, we need to begin thinking about a economically critical and strategically important sector — ships. Discussions about this sector often centre on the logistics and efficiency of ports, which is undeniably important. However, ships are equally vital, not only for economic but also for strategic reasons.
It is essential to recognise that the building, ownership, and flagging of ships are interconnected yet distinct issues. In this article, we focus on how to address the shipbuilding issue. A vessel can be constructed in one country, owned by another, and registered under the flag of a third.
India owns only 1,526 ships with a capacity of 13.75 million gross tonnage as of December 2023. Even among these, just 487 vessels are used for overseas trade. In terms of carrying capacity of ships, India’s share in ship ownership is a mere 1.2%, compared to 17.8% of Greece, followed by 12.8% of China, and 10.8% of Japan. Additionally, only 0.77% of ships across the world are registered under the Indian flag. Liberia, Panama, Marshall Islands, Hong Kong, and Singapore are the top five flags of registration.
India has virtually no presence in shipbuilding, holding a mere 0.07% of the global market share. In contrast, China dominates the industry with 46.6% of shipbuilding measured by gross tonnage, followed by South Korea at 29.2%, and Japan at 17.2%. Together, these three countries account for 93% of global shipbuilding. In addition, China has a near monopoly in container manufacturing.
As a result of all this, about 95% of our international cargo is transported on foreign ships, which means a significant forex outflow of $75 billion was spent on sea freight charges alone to foreign companies in 2022-23. And this figure is expected to exceed $100 billion soon. It is clear from this data that India’s inadequacy in this space is not only a drag on the economy but is also a major geo-strategic risk.
The biggest constraint facing the shipping industry is financing. A ship usually lasts for about 25-30 years. While the building costs are financed upfront, the returns take a long time to materialise. Hence, what is needed is long-term finance at competitive interest rates. However, Indian shipbuilders currently face a substantial cost disadvantage.
One key reason for this is that ships are not included in the harmonised list of infrastructure, i.e., they are not classified as infrastructure. As a result, shipbuilders are unable to access long-term financing options from both domestic and foreign sources. Similarly, non-banking financial companies are allowed to raise money from external commercial borrowings for infrastructure, but currently cannot do so for ships. Even funding from institutions like the National Bank for Financing Infrastructure and Development, India Infrastructure Finance Company Limited, and National Investment and Infrastructure Fund are not available. Oddly, shipyards were granted infrastructure status as recently as 2016, but ships were explicitly not included. Granting infrastructure status only to shipyards is not sufficient as they cannot get enough orders.
The Rangarajan Commission, established in 2001, had already recommended including ships in the infrastructure list. More recently, the Standing Committee on Transport, Tourism and Culture also recommended extending infrastructure status, currently granted to shipyards, to ships. Yet, this did not change our enshrined landlocked view of what constitutes infrastructure.
The problem of not being classified as infrastructure goes beyond just maturity and interest rates. Discussions with various stakeholders revealed that the key reason why banks are reluctant to give long-term loans to this sector is the exclusion of vessels from the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
Section 31(d) of the SARFARESI Act states: “The provision of this Act does not apply to the creation of security interest in any vessel as defined in clause (55) of Section 3 of the Merchant Shipping Act, 1958.” Since they are explicitly excluded, ships cannot be mortgaged as they are not classified as assets that can be auctioned in the event of a default, obviously making the banks uncomfortable in funding ship purchases.
The irony is that India possesses almost all essential components for becoming a shipbuilding powerhouse. India is one of the few countries in the world that is capable of designing and building nuclear submarines and aircraft carriers. Additionally, it boasts a skilled workforce that is needed for this industry. India ranks third among seafarers-supplying nation with a share of 10-12%.
Meanwhile, the three dominant shipbuilding nations of China, Japan, and South Korea currently face declining demographics. Given that shipbuilding is a physically demanding activity, it presents an opportunity for India’s young workers.
The harmonised list of infrastructure is an evolving document. In recent years, we have added affordable rental housing complex, energy system, and railway rolling stock to the list. The time has come to add ships to this list. Second, we need to address the issue of exclusion of vessels in SARFARESI Act. Of course, there are other things that would need to be addressed as well such as the creation of Indian-owned and India-based protection and indemnity entity, etc. to take lead in shipbuilding.
Ship-building not only presents a big economic opportunity, but it is also an important strategic asset. We will further explore this issue in subsequent articles, where we will discuss ship ownership and flagging.
The authors are member and joint director, EAC-PM, respectively.
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