India needs to step up investment in its shipping sector

India continues to have a smaller share in the international shipping sector and has been forced to become a net importer of shipping services especially ship finance, a new report shows.

This is despite the fact that the country has a large coastline, growing domestic market and international seaborne trade, deep-rooted maritime traditions, and skilled seafarers.

The report, Ship Acquisition, Financing and Leasing (SAFAL), was submitted to the International Financial Services Centres Authority (IFSCA) on 28 October 2021 by the Committee for Development Avenues for Ship Acquisition, Financing and Leasing from the International Financial Services Centres (IFSC).

The committee is constituted by IFSCA on 24 June 2021 under the chairpersonship of Vandana Aggarwal with representatives from the Government of India, Gujarat Maritime Board, industry and finance experts, and academicians.

Shipping is essential to India. Nearly half of India’s border is covered by sea, with a coastline of about 7,517 km, with 12 major and 205 minor ports. India is also strategically located on the world’s shipping routes. The Ministry of Shipping has estimated that about 95% of India’s goods trade by volume and 70% by value is done through maritime transport.

India has significant exposure to maritime freight rate. Seaborne freight is estimated to be $85 billion annually. The share of Indian ships in carrying India’s export-import cargo was about 6.53% in FY 2019-20. Each year India is estimated to pay about $75 billion seaborne freight to foreign shipping companies. India is thus well placed to step up its investment in the shipping industry, the report found.

As explained, the committee carried out a 360-degree examination of the existing legal and regulatory regime in IFSC in India for ship acquisition, financing, and leasing, comparing it with those of global top-ranking marine hubs.

It developed financial models to gauge the gap in costs, including capital and operating costs and tax costs, of doing this business in IFSC and these hubs. It has also identified bottlenecks to the realization of India’s shipping sector’s growth story.

Furthermore, it held extensive stakeholder consultations towards working out the changes required for seeding a robust SAFAL regime at India-IFSC. To this end, it also holistically considered the supportive links of shipbuilding, flagging, operating, and repairs and recycling the shipping value chain. The focus remained on enabling cost-effective and competitive delivery of shipping services on ships owned and leased from India-offshore IFSC which is on par with overseas competitors.

The committee presented the critical and necessary changes required to bring this greenfield venture to India IFSC. These cover legal and regulatory domains, direct and indirect taxes, ship finance, and ease of doing business drawing upon global best practices.

The report provides useful recommendations for realizing the true transformational potential of India’s shipping industry. It finds that the time is opportune for imparting a brand value to Indian-flagged vessels. This can be done by carving out a share in global cross trades, securing gainful transactions for India’s marketplace, promoting decarbonization and greening of the blue oceans, and leveraging India-IFSC Maritime for achieving the Maritime India Vision 2030 and beyond.

Essentially, the committee has found that the concept of IFSC, conceived for financial services, should be naturally extended to SAFAL products and services, including ancillaries. This may entail notifying vessel leasing or operating lease of any equipment as a ‘financial product’ to enable ship leasing entities to set up a unit in IFSC.

It has proposed the introduction of a new category of ‘Indian IFSC-controlled tonnage’ with global benchmarking of regulation, tonnage tax and other tax and seafarer regimes, besides overcoming pricing and other limitations of the existing ROFR regime for the import of bulk cargoes.

Direct and indirect tax changes have been proposed based on the competitive gaps identified through the financial models developed for India-IFSC.