In the end, it was Prime Minister Narendra Modi and his ‘Make in India’ initiative that tilted the scales for the cabinet to sign off on a long pending policy, much to the relief of India’s beleaguered shipbuilders.
That the shipbuilding policy took 17 months for cabinet approval after finance minister Arun Jaitley announced it in his budget speech on 10 July 2014 by itself shows the many hurdles it faced.
The main features of the policy includes granting financial assistance to shipbuilders—both state-owned and private—on each ship they build, irrespective of the size and type, scaling down the quantum by three percentage points every three years, starting with 20% in the first three years, 17% in the next three, 14% for the subsequent three years and 11% in the 10th year. The aid will be given on contract or fair price, whichever is lower. The government has set aside Rs.4,000 crore to implement the scheme over 10 years.
The financial assistance will be given only after the ship is built and handed over to the buyer. This condition was included to provide an incentive to yards to build ships on time, a problem that has bothered fleet owners while ordering ships in India.
The policy also gives a so-called right of first refusal to Indian shipyards for government purchases. It means that even if they are not the lowest bidder, an Indian yard can match the lowest foreign bid and secure the contract. The cabinet has further granted infrastructure status to the shipbuilding and ship repair industry, with attendant tax benefits. The inputs used in ship manufacturing and repair have been exempted from customs and central excise duties. Earlier, ships could be imported at almost negligible rates of basic customs duty (BCD) and nil rates of countervailing duty (CVD), but the inputs used in ship manufacturing and repair attracted normal rates of BCD and CVD. It put the Indian shipyards at a cost disadvantage while building vessels for the domestic market.
It was one of the main reasons why Indian fleet owners chose to place orders for new ships at global yards. The change in the tax treatment of inputs used in ship manufacturing could spur local shipowners to order more vessels at local yards at a time when the government has announced a plan to grow the country’s shipping fleet fourfold—from 10.3 million tonnes (mt) to 43 mt by 2019.
In a separate but related development, the government is altering a cargo support policy by giving first preference to ships that are manufactured and registered in India to move cargo on local routes. This will create a reliable market for local shipbuilders by providing an incentive to the purchase of ships manufactured by Indian shipyards. Earlier, such preference was given to Indian-registered ships but not necessarily built in India.
Viewed in totality, these are generous doses of support intended to counter the cost disadvantages faced by Indian shipbuilders, compared with larger rivals in Japan, South Korea and China.
Indian shipbuilders carry a minimum cost disadvantage of about 32-37% on the price of a typical ship, in case of sales targeted at international and domestic buyers, respectively, according to audit and consulting firm KPMG India Pvt. Ltd.
Indian shipyards are often outbid by Chinese and Korean shipyards due to cost differentials arising from the lack of support for the industry in India.
Indian shipyards currently pay an interest of 13-14% on capital expenditure and working capital loans for purchasing raw materials and other inputs as against the around 4-6% in countries such as China and South Korea. The differential interest cost imposes a significant burden on Indian-built ships.
Korea, China and Japan have pursued a mix of fiscal and non-fiscal incentives to encourage growth and development of their shipbuilding industries.
That government support plays a big role in the performance of the shipbuilding industry is amply demonstrated by a subsidy scheme for Indian shipyards that ended in August 2007 after a five-year run.
India’s ranking among major shipbuilders rose from the 10th position (0.4% market share) in 2006, to 5th (1.1% market share) in 2009. Thereafter, India’s ranking has steadily declined and, in 2014, it was ranked at the 11th position (0.6% market share). The withdrawal of the subsidy scheme and the collapse of the market after 2008 played a role in the decline.
In the past two years, three of India’s private yards—ABG Shipyard Ltd, Bharati Shipyard Ltd and Pipavav Defence and Offshore Engineering Co. Ltd—had to go for corporate debt restructuring with a clutch of banks as tardy cash flows and the lack of new orders strained their ability to repay loans.
India is looking to achieve a 5% share of the global shipbuilding market by 2020, according to a target set by the shipping ministry.
Unlike his predecessors, Modi has taken a keen personal interest in India’s maritime sector, particularly shipbuilding, and has on a number of occasions articulated the country’s ambition to emerge bigger in this industry.
The prime minister has also harped on the benefits accruing from a vibrant shipbuilding industry to India’s economy and its gross domestic product (GDP), including its potential to generate a large number of low-skilled jobs for the poorest of the poor.
On a visit to South Korea in May, Modi visited the main yard in Ulsan of Hyundai Heavy Industries Co. Ltd, the world’s biggest shipbuilder.
India also lobbied at the diplomatic level with the South Korean government to help Indian yards, both state-owned and private, sign technical collaboration pacts for building at least three liquefied natural gas tankers locally for use by state-owned GAIL (India) Ltd.
With the government giving its full backing to the industry as part of a larger plan to boost manufacturing, it’s time for shipbuilders to start delivering. In that sense, the next 10 years would be critical in deciding whether Indian yards can make it to the big league or not.
Source: Live Mint