'Exim trade needs major capacity growth'
— S. Hajara, CMD, Shipping Corporation of India Ltd
The nearly 5-decade-old SCIL is the only shipping company
operating break-bulk service, international container service, liquid/dry bulk
service, and has contributed immensely to the growth of the exim trade. Madhu
Chittora in conversation with S. Hajara
How important is national maritime development programme
for the shipping industry?
In today's global, liberal scenario it is international trade which drives the
growth of any national economy and in turn, global economy. Also, if the
country's economy is growing at 9 per cent, exim trade usually grows at three
times the country's economic growth, that means, growing almost at 27 per cent.
In India, we are talking of our growth rate of 8+ per cent. The prime minister
is talking of growth rate to be enhanced to 10 per cent; that means exim trade
has to grow phenomenally. Exim trade can't grow unless there is major escalation
in maritime capacity and infrastructure. These include ports, ship building and
shipping. National Maritime Development Programme from the department of
shipping, ministry of shipping, road transport and highways are related to the
development of maritime sector.
What are the problems plaguing the industry?
Indian shipping, particularly, in mid-80s, used to carry more than 40 per cent
of exim trade. Today, that has dropped to 12 per cent. Because the trade has
been growing well over 20 per cent, both exports and imports, but shipping is
not growing at this pace. This is because, unfortunately, the shipping industry
doesn't have level playing field. Of the foreign shipping tonnage, about 90-95
per cent is in territories like Panama, Bahamas, Cyprus and Singapore -- these
are one kind of territory, or so-called maritime countries like UK, Greece
provide facilitative taxation for their shipping industry.
All over the world the shipping industry pays the rate of tax from 0.5 per cent
to 1 per cent, but in India, the industry pays tax at the rate of more than 9
per cent. When tonnage tax was introduced four years back, we thought that we
have got what we wanted, because tonnage tax is only 0.5 per cent to 1 per cent
or around 1.5 per cent. Unfortunately, budget after budget some tax or the other
(whether it is fringe benefit tax, withholding tax or service tax) is
introduced. Tonnage tax is based on the concept of ring-fencing, that is, all
income (generated by shipping companies) can be ring-fenced under tonnage tax.
However, in India we have a unique case, where profit generated out of sale and
purchase of vessel is not ring-fenced under tonnage tax. We have to pay
corporate tax or MAT on that. Similarly in the case of interest we earn on the
reserve we carry for future acquisition of tonnage, we pay corporate tax.
Tonnage tax implies that whatever is the so-called book profit, at least 20 per
cent of that has to be invested into acquisition of tonnage. New investment can
only happen at a particular time when the ship building scenario is good and
rates are not highest. Till then we should be allowed to carry these reserves
forward. Such reserves may be to the tune of Rs 2000 crore for the shipping
industry as a whole. These reserves will generate some interest income (till
they are used for acquisition of ships). But unfortunately that interest income
is not ring-fenced under tonnage tax.
There is some kind of premium needed for the Indian flag for carrying India's
cargo. Because even if you give level playing field, ship owners in Dubai or
Singapore with their Dubai or Panamanian flag, can access Indian cargo with
equal ease. Then why will they bother to come to India. To avoid this there has
to be some premium for Indian flags for carrying Indian cargo.
What do you think of FDI in shipping sector?
Shipping is one area where GoI's policy of 100 per cent FDI has completely
failed. Any foreign ship-owner can come and set shop in India. There is no
requirement of partnering with Indian companies unlike in case of Dubai and
other countries. Foreign companies are allowed to set up 100 per cent subsidiary
without having any Indian partner, but no one has come; because no level playing
field exists. Unless, we do these two things -provide shipping a level playing
field and provide some premium to Indian flags for carrying Indian cargo, we
can't envisage these $20 billion being invested. That means the Indian flag with
carriage of Indian cargo stands the risk of getting marginalised.
What about phasing out of single hull tankers?
Single hull tankers have to be phased out by 2010. In SCI we may be having less
than 25 per cent or so of our crude tanker with single hull. A lot of Indian
tankers, 40 per cent or so, is single hull, and will get scrapped by 2010. The
exim trade which is half-a-billion tonne is expected to increase to one billion
tonne by 2011, and then to two billion tonnes by 2014 or 2015. To maintain this
share, the Indian fleet should go up to 20 million GT from the current 9 million
GT in the next 5 to 7 years. That means it's a net addition of 11 million GT.
During this period single hull as well as very old tonnage will get scrapped, so
this will be another four million GT. So you have to add 50 million GT needing
an investment of about $20 billion, which will not come in unless the industry
is given a complete level playing field.
How will freight rates behave in coming days?
I believe that prospect is very good. For the dry bulk freight rates are very
high and they will continue to remain high. China's steel production is slated
to go up to 700 million and then one trillion, which means huge movement of iron
ore. Power generation is getting escalated in India, which means movement of
coal. Enhancement of steel production capacity means large movement of coking
coal. Due to all these factors I think dry bulk movement will remain firm, and
the age profile of dry bulk is the highest amongst tankers, containers and
coastal shipping segments.
In dry bulk, a lot of tonnage will be phased out. Dry bulk tonnage is not being
phased out today because of a tight market. In the near future some ships have
to be scrapped as around 40 per cent of ships are nearly more than 20 years old.
This will also improve the demand supply situation which is in favour of ship
owners. Around 53 per cent of the current fleet is on order for dry bulk. But
due to scrapping and expected huge growth in dry bulk movement, dry bulk rates
will remain firm.
As far as tankers are concerned, the rates have come down over the last couple
of years. Nevertheless, for strategic reasons, despite high fuel price, we are
not slowing down the import of crude. Energy requirement is not governed just by
the price as economy can't grow without energy. That is why I don't think tanker
rates will go down further.
With respect to container segment, there is manufacturing boom in China, India,
so liner trade is growing fast and this is the fastest growing trade in
shipping. All over the world the liner trade is growing at the rate of 10 per
cent, whereas in India it is growing at the rate of 14 per cent and is expected
to grow at the rate of 18 per cent. Despite 50-odd percentages of vessels are on
order, I think a lot of consolidation amongst lines will take place. Because of
the high movement of general cargo (liner cargo), container rates will remain
stable. Therefore, I think the overall prospect for shipping companies is going
to be bright.
[May 19-25, 2008]