The local shipping industry was caught off guard when the government recently amended the right of first refusal (RoFR) policy, giving top priority to ships built in India to avail the benefit in moving cargo for state-owned entities and removing the preference given to Indian flag vessels. Bharat Sheth, Deputy Chairman and Managing Director of Great Eastern Shipping, India’s biggest private ocean carrier, explains why he believes the change will not help the cause of Indian shipbuilding in a conversation with BusinessLine .
This policy has come straight out of the blue.
It says that Indian built ships would get first priority in moving cargo for state-owned entities. I don’t think anybody in the local shipping industry has an issue with that except that it should be applied prospectively.
Why is prospective application of the policy so important?
The preamble of the policy is with a view to enhance future employment, income generation, etc. If the government now say that it wants to give preference to a ship which was built in India ten years ago, how is that going to help Indian shipbuilding?
Are there ships built in India that are still operational and can participate in tenders?
There are some smaller vessels, mainly in the offshore and dredging segments. There are even some bigger ships, but they are very few. You are coming out with a policy because the government says we want to support Make in India. Nobody is against that, but Make in India by definition is prospective, it can’t be retrospective. If you have built ten years ago, how is it going to create future generation of income or employment.
The way they have worded the policy of February 13, it does not say prospectively. Hence, ships that were built in India in the past would get priority, If you have built a ship ten years ago and it is trading in India or anywhere else in the world, it would be given top priority. You may not even have placed the order originally, but just happened to buy the ship in the second-hand market. How does that encourage future Make in India?
That aside, what is the big picture emerging from this policy change?
I think, first you have to ask yourself the question: in a world where there is significant surplus shipbuilding capacity, is this the right policy to follow?
India must play to its competitive strengths, what’s the point of playing to non-competitive strengths. Nobody seems to understand this fundamental point.
In an industry where top nations in the world have huge surplus capacity and that surplus capacity has led to some of the most prominent yards in the world going belly-up and the government has had to come in and bail them out.
Do you think that the intent is flawed?
People have got to think through. I’m sure there are certain areas where Make in India may make a lot of sense. When they brought in 5 per cent IGST on import of ships, the idea was to give a level-playing field and make it attractive to build ships in India. Has anybody built ships in India after that?
But, let us say the government in its wisdom still wants to do it; then do it prospectively. Nobody in the industry will say a ship built in India under such a policy should not get a level of priority.
As it is proposed with retrospective effect, the new policy will impair the shipping industry without helping the shipbuilding industry. So, net-net you are a loser. No benefit for yards, while destroying value in shipping.
Looks like Indian shipping is not a priority for the government…
To say that we don’t need an Indian shipping industry is just shocking. I can’t think of a single maritime nation with this volume of trade - we have got a billion tonne of trade a year roughly- taking such a position. Security is one big argument why every nation should have its own national fleet, but we are a trading nation and we don’t need to own ships? Countries like China, Korea and Japan are going all out to control more of their cargo through Free-on-Board (FOB) policy in order to build a national fleet.
It is often said that RoFR has led to higher freight rates?
By definition, RoFR is a Right of First Refusal. It means the Indian ship has to match the lowest rate quoted by a foreign owner in a tender. In matching, the Indian ship cannot be even one Cent more expensive. How can this result in higher freight rates? This is again a policy which helps the industry in India, at no extra cost to the customers. Who benefits from the removal of such a policy? No one. In fact, we have data to show that whenever there is no Indian ship participating in a tender, the foreign ship charged a higher rate.
And remember that when the Indian ship matches the RoFR, it is despite all the operational and regulatory disadvantages of the Indian flag.
The new policy also treats ships owned by Indians and those in-chartered by Indians equally…
You own a ship, employ Indians, pay taxes in India and somebody has in-chartered a foreign ship and both are treated equally. This is a ridiculous situation. You cannot treat ownership equal to in-chartering.
It will encourage foreign employment at the cost of Indian employment.
Every other country is tightening its regulations on foreign tonnage deployed on the coast. I can’t deploy my ship on the Chinese coast, China does about 800-900 mt of trade on the coast; our total trade is equivalent to China’s coastal trade, I can’t trade on the Chinese coast. However, any foreign flag ship can carry cargo on the Indian coast.
That’s how they build fleets. India is just not bothered. Everybody else is trying to bring in greater and greater restrictions. Instead of asking for reciprocity, we are going in the opposite direction – we are opening-up while other economies are shutting down market access.