New Privatisation Policy: Why The Shipping Ministry Wanted To Stay Strategic

The shipping ministry claims “neglected sector” needs “strategic” tag. Not everybody agrees.

(Source: BloombergQuint)
(Source: BloombergQuint)

India’s shipping ministry—led by minister Mansukh Mandaviya—made a strong case for the sector to be tagged as “strategic” under the Narendra Modi government’s new privatisation policy.

The ministry was one of seven departments that asked to be kept on the strategic sectors list and submitted a comprehensive report making its case, show documents accessed by BloombergQuint. The case was argued out in a July 24 communication, which included a 30-page report titled ‘Shipping As A Strategic Sector For India And Strategic Importance of SCI’. The response was approved by Mandaviya.

In the strategic sectors, the government wants to keep a “bare minimum presence”, while in other sectors all units may be considered for privatisation.

The documents are part of a series of communications between the finance ministry’s Department of Investment And Public Asset Management and different ministries starting July 2020, which culminated in a cabinet note dated Jan. 23. These documents were accessed by BloombergQuint through the Right to Information Act, 2005.

Queries sent to Mandaviya’s office on March 19 remained unanswered. DIPAM officials declined to comment and queries emailed remained unanswered.

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What The Shipping Ministry Argued

The ministry argued that shipping has been “neglected” even though 80-90% of India’s trade by volume is handled by it, across the country’s 7,500 km-long coast line.

It said the global economic crisis of 2008 aggravated troubles in the shipping sector which is “very capital intensive, involving long gestation periods” with low profit margins. Indian shipping companies haven’t been able to grow due to the “perceived higher risk profile”, impacting their ability to borrow funds, the ministry said. The fact that shipping does not enjoy “infrastructure status” has added to the sector’s woes, it said.

New Privatisation Policy: Why The Shipping Ministry Wanted To Stay Strategic

Limited Private Interest

To press the government to keep shipping units under its control, the ministry also cited limited private interest. There has been no foreign direct investment in the sector over the past two decades, it said, adding that 100% FDI was allowed in the sector in 2001.

“100% FDI in ports and shipping is allowed under both government and automatic route for over last two decades. However, not a single global shipping company has used the option to invest and start a shipping company in the country. Foreign shipowners don’t need to come to India to carry Indian cargo when they can access the same cargo based in Singapore and Dubai,” the shipping ministry said.

Higher risk, lower returns and “unfavourable tax structure and operating conditions” have kept foreign investors away, the ministry said.

New Privatisation Policy: Why The Shipping Ministry Wanted To Stay Strategic

Need Government Support

Painting a grim picture, the shipping ministry said any significant growth in the industry “is unlikely to happen in the near short term without government ownership”.

It listed out private shipping firms that have recently gone into bankruptcy or liquidation, including Tag Offshore, Varun Shipping, Mercator Shipping, Great Offshore Ltd., India Steamship Ltd., Arya Shipping, Tidewater India Ltd., among others. Leaving shipping to be completely driven by the private sector has major risks for the economy, the ministry stated.

It would be imperative to encourage the strategy of state-owned tonnage for the time being “until the Indian shipping sector comes of age to be able to do without government ownership”, the ministry submitted.

New Privatisation Policy: Why The Shipping Ministry Wanted To Stay Strategic

Pushing Back Against SCI Divestment

The shipping ministry also pushed back against the divestment of The Shipping Corporation of India Ltd., which was approved in November 2019. The government is looking to shed around 64% stake in SCI, which has a fleet of 59 vessels, and received multiple bids earlier this month.

The ministry cited the importance of SCI for energy and national security—two of the five factors which the government listed for delineating strategic sectors—while opposing its privatisation.

New Privatisation Policy: Why The Shipping Ministry Wanted To Stay Strategic

The ministry said it’s important that a certain amount of Indian tonnage of merchant ships is owned by the government, which is the model followed by most maritime nations. It used China as an example, saying that the neighboring nation has three state-owned shipping firms which have 11% share of the global tonnage compared to India’s share of only about 1%.

However, DIPAM, in its final cabinet note dated Jan. 23, rebutted some of these concerns. The industrial policy of China and other countries is different from that of India, it said. “Major industries in China are under direct or indirect control of the government whereas India has adopted a liberalised industrial policy where private enterprises are allowed in almost every sector,” it said.

Arguments ‘Weak’

Anand Sharma, director at Mantrana Maritime Advisory, was of the view that the arguments presented by the shipping ministry were weak, particularly in arguing that SCI supports offshore installations of ONGC Ltd., the fleet of the Indian Navy and state-owned oil refineries.

"SCI with its current fleet of tankers, bulkers, etc. can only act as shipping company. It can in no way act as a second line of defence as the Indian Navy has its own specialised multi-purpose fleet. SCI fleet in present form is redundant to support the navy or other strategic activities," Sharma said.

He added that while SCI is supplying essentials such as food, water or oil to ONGC platforms, rest of the specialised work like exploration is being already done by multinational companies.

We don’t have the expertise to do underwater repair or construction works, deep water diving or offer support for explorations. Making shipping strategic without allocating any strategic role defeats the purpose, (leaving the sector) neither able to compete in marketplace nor add any strategic value. Shipping needn’t be strategic and can be opened up for private players.
Anand Sharma, Director, Mantrana Maritime Advisory

Hemant Bhattbhatt, chief executive at HMSA Consultancy Services LLP, however, said irrespective of the nature of ownership, the shipping business is unviable in India for multiple reasons, including government policies.

One such policy is the tonnage tax regime in place, which makes the operating cost expensive for Indian ships compared to foreign peers, along with the goods and services tax which is levied only on Indian services but not on foreign services.

Under the tonnage tax rules, shipping companies are charged based on their cargo-carrying capacity. But there are a different set of rules for foreign flag ships that carry goods to and from India. They are charged a fixed presumptive tax of 7.5%, which in some cases is lower than that of Indian flag ships, without requiring any need to submit proofs, Bhattbhatt said.

Ramesh Singhal, director at i-maritime Consultancy Pvt., said though the government should keep some of the SCI’s fleet under its control for catering to national or global emergencies, he termed the arguments against SCI’s disinvestment as “lame”.

“For SCI, there are 10 people on shore whereas the global average is 2-4. It’s a fat organisation. There is no denying that a part of its fleet may be national but as a going concern it’s an unviable entity, yielding little returns to the government,” Singhal said.

Singhal added the shipping ministry’s attempt to use China as an example is misguided. China’s shipping industry is the cheapest in the world as it enjoys economies of scale but India’s state-owned shipping industry has survived based on perks that it enjoys, rather than being globally-competitive, he said. “India matching China in its shipping business–that phase is over. India can never get into shipbuilding like China and Japan from here on,” Singhal said.