Merits of Cabotage Law relaxation on coastal shipping in India; how situation can be improved

October 9, 2019 3:42 PM

Operating costs for Indian shippers are about 20% higher than for foreign lines because of the higher cost of funding, fuel, training costs, wages tax, GST, etc.

ship, shipping, cabotage law, supreme court, india shipyards, dockyardsIn May 2018, the government of India finally relaxed the Cabotage laws enabling the foreign-flagged vessels to carry coastal cargo in India.
  • Suresh Sharma

Since decades there has been a debate about the relaxation of Cabotage Law in India. It has often been referred to law to protect India’s domestic coastal shipping businesses from foreign competition by heavily taxing imports. It is estimated that India would save 283 Million USD through the diversion of 5% of cargo from the road along with a reduction in pollutants by 6% and tons of savings in fuel. India’s transportation sector relies heavily on petroleum as its chief energy source, thereby depleting the country’s oil resources. As per estimates, the operating costs for Indian shippers are about 20% higher than for foreign lines because of the higher cost of funding, fuel, training costs, wages tax, GST, etc. Foreign flagged ships that operate in Indian waters benefit from lower costs in the country of registration, allowing them to offer tariffs much lower than their Indian counterparts. 

On a number of times since 1992, the Government of India has been under pressure to relax Cabotage laws in order to ease congestion in major ports and allow container foreign-flagged vessels to transship container cargoes or operate coastal feeder services. Between 1992 and 1997 foreign shipping establishments were allowed to function feeder services using container and lash ships. It was hoped that this moderation of Cabotage rules would promote greater investment in the hub ports. When this failed to materialize, the relaxation of Cabotage was restricted to a 5 year period. 

Once again in 2005, the Indian Government temporarily relaxed Cabotage to allow feeder services and transshipment to and fro JNPT/Mumbai Port and any other port in the country. Congestion at both Chennai and JNPT port, both candidates for hub port status, has led to industry lobbying for Cabotage relaxation for most of the past decade. Those favoring relaxation claims that existing infrastructure and shipping licensed under India’s Cabotage regime are not up to the task of expanding feeder services along east and west coasts as Chennai and JNPT hubs develop. 

In May 2018, the government of India finally relaxed the Cabotage laws enabling the foreign-flagged vessels to carry coastal cargo in India. The international trade world has acknowledged it as an encouraging move in a direction to increase coastal shipping in India. The Government cited that reform shall dramatically increase the attractiveness of Indian ports as direct ports of call for ocean carriers. With the change, effective immediately, foreign carriers can transport laden export-import containers for transshipment and empty containers for repositioning between Indian ports without any specific permission or license. The supporters of the move say that until now, this market remained a fiefdom of Indian registered cargo ships. 

In spite of the positive progress, there has been a continuous debate over the effects of relaxation of Cabotage policy between pro-reform groups and opponents — led primarily by members of the Indian National Ship-owners Association (INSA) — who argue that private operated minor ports have gained more of the benefits than their publicly-run counterparts. Minor ports have the benefit of unregulated tariffs and superior infrastructure, whereas government-owned major ports have been handicapped by tariff regulations and reasonably lower efficiency and competence. 

The opponents of the move complain that even though the government has focused on easing the coastal shipping industry but little emphasis has been given to the concern of existing domestic players like Domestic port trusts and Indian ship-owners who cannot relate in any way with the government’s view that move to relax Cabotage rules would help the Indian coastal shipping industry. Most existing domestic stakeholders have accused the government to have given away to the pressure of foreign Cabotage syndicates and that now there is a risk of foreign-flag vessels driving Indian ship owners to losses. 

What needs to be done 

Firstly, the Government should remove taxes on marine fuels and the benefit to the economy from such a step would be manifold compared with the revenue loss for the government. Roughly estimating, the government will have to relinquish revenue of around Rs 56 crores annually but the expected surge in export-import cargo handling operations will amass direct and indirect profits of more than Rs 700 crores. 

Secondly, another major concern has been the availability of cargo. The current Indian Coastal Cargo mainly consists of petrol, oil lubricants (POL), iron ore, pallets etc besides coal and fertilizers which are primarily for the use of Public Sector Undertakings. But there is a momentous potential for fresh cargo by an alluring modal shift from road/rail to marine highways. Towards the western coast, these could include industrial and finished products like steel, tiles, car cement and also marble, fertilizers, and food grains. And, towards the eastern coast, these could include bulk and minerals like silica, bauxite, manganese, and limestone, also cars and engineering good from the south. For containerized cargo, the market scope for coastal shipping including the international feeder operations is assessed to be around $500 million in value with a volume of 1.3 million TEU every year and with an annual growth of over 20%. 

Lastly, the logistics cost should be cut down substantially in India to make the trade competitive and for the purpose, there is a need for greater investment in coastal shipping and strengthening infrastructure for inland transport of cargo. 

The author is an advocate at the Supreme Court of India & National Company Law Tribunal. Views expressed are the author’s personal.

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