Trade experts expect tangible gains only over a long term, with both threats and opportunities being present if India looks at developing a shipping line of global repute.
With the Red Sea crisis hurting world trade, India’s manufacturers and exporters are feeling the pain of soaring shipping and insurance costs. The situation has renewed the demand from some quarters that the country build a shipping line of global repute to protect domestic businesses.
A lot of experts have highlighted the need for the country to have its own shipping line. It will make India a serious trading partner at the global level, and help the country save on logistics costs. When a global crisis like the present one inflates logistics prices, experts say, a government-owned or public-private shipping line can help keep transportation prices stable, helping manufacturers and exporters. Other gains are likely, too, from a shipping line as the country becomes a bigger exporter.
Ajay Sahai, DG & CEO, Federation of Indian Export Organisations (FIEO), says India’s outward remittance on transport services is increasing with the rise in exports. “We remitted around $84 billion on transport service charges. This is likely to touch $200 billion by 2030 on the back of $1 trillion exports. A 25% share by an Indian shipping line can help us save $50 billion annually which is a huge sum,” he says.
Freight rates have been on an upward trajectory because of the Red Sea crisis, jumping by as much as 600% at some places, stated a PTI report. Kolkata to Rotterdam freight has increased from $500 to $4,000 due to the crisis, the report added.
Sahai explains that while the demand for a shipping line has always been there, an urgency has set in now to take a call on this aspect. Drawing a parallel with container manufacturing, he says that the government’s initiative to facilitate such manufacturing has made us more self-reliant. A similar focus in shipping will hold the industry in good stead. “The private sector should be encouraged to develop such shipping lines. It will help reduce arm twisting by foreign shipping lines, particularly for MSMEs,” he states.
An example of state-owned shipping companies in another part of the world gives an idea of how beneficial such a move can be. China COSCO Shipping Corporation Limited and China Merchants Group are two prominent examples. The companies have helped China secure a dominant position in the global maritime supply chain, according to a 2020 analysis done by the Center for Strategic and International Studies. Chinese companies control “the world’s second-largest shipping fleet by gross tons” and constructed “over a third of the world’s vessels in 2019”, it said. The move helped to give Chinese companies a strategic buffer from volatile market forces, it added.
Such shipping giants have contributed to their respective economies by facilitating seamless shipment of goods and helping to create more efficient supply chains in the process.
When a global crisis like the present one inflates logistics prices, experts say, a government-owned or public-private shipping line can help keep transportation prices stable, helping manufacturers and exporters.
In contrast, the Shipping Corporation of India (SCI) is the biggest shipping company of India by fleet size. But its ageing fleet of 59 ships is not adequate to handle India’s growing trade needs. It has not purchased a ship for more than six years, show reports. The government is in the process of divesting SCI.
Tread with caution
Experts, however, question whether such a move will really help the industry in any way. Atul Gupta, Partner, Deloitte India, is of the view that trade shakeups do happen from time to time. “There is a Red Sea crisis, earlier there was the Panama Canal that got closed. Suez Canal was also shut around 1973 and shipping again could not go through that route which led to an escalation of shipping costs. So this will happen. And this is exactly why businesses have risks. It is a momentary risk — it will not continue for years to come,” he says, playing down the argument that a shipping line can absorb risk-fuelled price rise.
India might not have any competitive advantage at all in setting up such an entity, he says.
Other experts from the trade fraternity agree, saying that a shipping line will be run on a commercial basis. So it need not necessarily mean Indian exporters will get a better deal from it than from global shippers. They see tangible gains from a domestic shipping line coming in only over a long term.
Independent trade expert Manasvi Srivastava says such a service will not lead to a prompt change for exporters by reducing freight rates. “It's not necessary that this will ensure a better deal for exporters. The shipping line will operate as per the market. If other players are charging more, an Indian shipping line will also charge more. But yes, it can add to the competition and that can lead to a moderation of rates eventually,” he states.
The investment to set up a shipping line would be sizeable. Srivastava estimates that building a big container ship would cost no less than $100 million. “It could even go up to $200 million and would take a few years. But before making a beginning, I think there should be a thorough market analysis taking into account the trends of international trade. Jumping into such a venture just because we have been paying so much freight does not make sense. Because it would be a heavy drain of resources along with an opportunity cost of capital if the shipping line generates losses or is insufficiently profitable,” he says.
What can work
There is one relevant area in which India can take a lead if it embarks on building its own shipping line. The United Nations Conference on Trade and Development (UNCTAD), in its review of Maritime Transport 2023, called for a “just and equitable transition” to a decarbonised shipping industry. The shipping sector, whose greenhouse gas emissions have risen 20% over the last decade, operates an ageing fleet that runs almost exclusively on fossil fuels, the report added.
Alluding to such findings, Srivastava states that there is both a difficulty and an opportunity here if India decides to set up shipping infrastructure or a shipping line. “If such a company is started, it would have less of a sunk cost. For other shipping companies, changing 800 ships to a sustainable model will mean more spending. On the other hand, we are beginning with a clean slate. So it may be a late-mover advantage that we can build sustainable shipping,” he says.
If the aim is to be an alternative to China in global manufacturing, building our shipping sector would be a step forward in turning the trade dynamics towards the country’s favour.
But experts say the promoters of such a venture would have to future-proof the venture so that money is not invested in technology that gets outdated soon. Moreover, they add, the cost of making something sustainable or environment-friendly is huge.
Vandana Singh, Director of Global Corporate Key Account Management, Saudia Cargo, says the recent crisis in the Red Sea shows that it is important to have a strong shipping line that offers high-quality, sustainable and safe services. “Such an initiative will give a fillip to India’s dominance over supply chains and a boost to its plan to become a $7-trillion economy. It will add a major impetus to sustainability as well as the ‘atma nirbharta’ plank and will lead towards holistic growth for the economy,” she says.
Major trading nation
Given India’s aspirations of becoming a major trading nation, a domestic shipping line can add significant advantages to fulfilling this ambition. After all, if the aim is to be an alternative to China in global manufacturing, building our shipping sector would be a step forward in turning the trade dynamics towards the country’s favour.
Srivastava says that countries that are prominent trading hubs such as China, Germany and South Korea have shipping lines that are on the list of top 10. “We are nowhere in that pecking order. So probably there is a case that we should be up there because those are the slots that we are trying to occupy in the world economy. We would like to be compatible with a China or a South Korea,” he says.
FIEO’s Sahai reiterates that a shipping line will offer a level playing field to exporters instead of making them dependent on foreign carriers. Such a decision assumes greater significance now in the light of global crises and India wanting to be a manufacturing and export hub. “The road map for such a shipping line is being deliberated. We have been requesting it for a long time, especially since India’s share in global trade is increasing. Now, in the light of the recent crisis such as the one in the Red Sea and the Russia-Ukraine war, developing our own global shipping line becomes even more imperative,” he adds.
https://economictimes.indiatimes.com/small-biz/trade/exports/insights/red-sea-crisis-puts-spotlight-on-building-an-indian-shipping-line-but-can-it-really-help/articleshow/107710002.cms
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