The World Trade Organization, in its World Trade Report 2021, has defined "economic resilience" as the ability of a system, including households, firms, and governments, to prevent and prepare for, cope with and recover from, shocks. The said report has also highlighted in detail about the role of international trade with respect to economic resilience. In this piece, we attempt to highlight long-term priorities that may be considered as far as the Indian economy is concerned, against the backdrop of the adverse supply shock of drastic increase in shipping rates.
Data made available by the report indicates that the Baltic global container freight index, which meandered between 1,500 to 2,000 two years prior to the pandemic, sharply surged to 4,500 levels by January 2021. Lack of availability of container and a lack of long-term contracts are the two most-cited reasons for increase in freight rates. The shortage of shipping containers is yet another symptom of the havoc that the pandemic has wrought on international supply chains, particularly in North American and European regions.
Firstly, the adverse impact of the COVID-19 pandemic on logistics resulted in congestion at ports, also exacerbated by a mismatch in import-export volumes. Secondly, the conflict between Russia and Ukraine has led to challenges on the financial as well as logistical front for shipping companies. While the former includes withdrawal of insurance cover and blockage of SWIFT, the latter includes closure of shipping activities in the northern Black Sea, stranded containers and congestion at transshipment ports and non-acceptance of goods by shipping lines for Russian ports.
This is further accentuated by the recent lockdown in Shanghai as a result of a surge in COVID-19 cases. While acknowledging it is not an easy fix, it is time that we repositioned our strategy to combat rising instances of unforeseen events that have exacerbated trade movement, such as the Suez Canal blockage.
Notwithstanding the above, a bright spot for the Indian economy has been the surge in merchandise exports during 2021-22 to reach an all-time-high of about $418 billion. Further, this growth has been broadbased with non-petroleum exports registering an increase of about 33 percent over the corresponding period of the preceding year. This marks the beginning of India assuming a much greater role in world trade as well as enhancing contribution to global value chains. Thus, it is also an apt time to propel India’s shipping sector, which is a vital component of international logistics with strong backward linkages with ancillary services and employment.
A vital contributor to the achievements in exports during the last decade has been the Indian pharmaceutical sector. Pharma exports have registered growth of 103 percent, rising from Rs 90,415 crore in 2013-14 to Rs 1,83,422 crore in 2021-22. Since the advent of COVID, India has indeed lived up to its tag of ‘pharmacy of the world’ by achieving an export turnover of $24.1 billion in 2021-22. All of this was achieved despite frequent lockdowns, global supply chain disruptions including the shortages of containers and increase in freight charges.
To curb the dependency on imports with a vision to achieve Aatmanirbharta (self-reliance), we have seen the introduction of Production-Linnked Incentive (PLI) schemes in various sectors including pharmaceuticals. However, we also need to shed light on how we can prepare our domestic shipping industry towards achieving self-reliance by tackling conventional problems and streamlining them, while achieving further milestones in exports.
Sea freight is often regarded as a less costly and more environmentally friendly choice than air freight. However, in reality the opposite might be just as true — sea freight can be unpredictable owing to several reasons as mentioned above, also resulting in an increased period of transit. Delayed end-point logistics may also have an adverse impact on the quality of goods with limited shelf-life. Further, delayed shipments also come under threat with respect to losing relevance to importers or losing orders to competing nations.
India is blessed with a coastline of about 7,517 km, endowed with 12 major and 205 minor ports. India’s merchant marine fleet comprises an estimated 1500 vessels (foreign-bound and coastal operations combined). However, the review of maritime transport (2021) of the United Nations Conference on Trade and Development ranks India 19th globally. While 95 percent of India’s foreign trade by volume is catered to by marine transport, about 92 percent of the same is carried through foreign flagged vessels.
Further, India accounts for an estimated 1.25 percent of total global deadweight tonnage (DWT), which is a measure of the amount of weight a ship can carry, including the weight of the loaded cargo, fuel, ballast water, fresh water, crew, provisions, passengers, and excludes the weight of the ship. Also, it is also estimated that about $75 billion is paid annually as seaborne freight to foreign shipping companies, out of a total of $85 billion. This speaks volumes of the strides that can be made in promoting domestic value-addition in this space.
The main factors affecting the competitiveness of Indian shipping include cost of finance, tax regime and the age profile of Indian flag merchant shipping vessels. To enhance competitiveness, the government has been proactive in its measures that, inter alia, include the policy of shipbuilding financial assistance up to 20 percent of contract price to Indian shipyards with a budgetary outlay of Rs 4,000 crore, which is found to be on par with global practices by experts; revised criteria for Right of First Refusal, that is, contractual right of first opportunity in chartering of vessels through tender process to Indian-built and flagged vessels, followed by foreign-built but Indian flagged ones, and lastly to Indian-built but foreign-flagged.
This is also supplemented with a subsidy of Rs 1,624 crore to Indian shipping companies in global tenders floated by ministries and Central Public Sector Enterprises (CPSEs) to encourage entrepreneurs to register ships under the Indian flag. As required by international law, every ship needs to be registered in a country (‘flag state’), to whose law and regulation it shall be subject to. It is also learnt that infrastructure expansion of ship-repair units by Cochin Shipyard Limited is underway at Kochi, Mumbai, Kolkata and the Andaman & Nicobar Islands.
Furthermore, recently under the Sagarmala plan for port-led development, it is also noteworthy that 735 projects have been added, taking the total tally to 1,537 projects at a cost of Rs 6.5 trillion. Estimated savings of Rs 9,600 crore by way of potential freight of 340 million tonne (MT) through coastal shipping by 2024-25 is also foreseen. These interventions personify the serious intent in promoting this mode with least-carbon footprint.
All such steps shall enable removal of supply-chain constraints by invoking more competition between shipping lines by supporting small/medium players who are less generally favoured, to boost overall volumes and efficiency and giving them preferential berths. Recent trade agreements with UAE and Australia present India with further opportunities for a larger role in global supply chains.
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The report of the committee on development of avenues for ship acquisition, financing and leasing from International Financial Services Centres (IFSC) in India has given a comprehensive overview of the domestic as well as global scenario along with long-term recommendations. It rightly points out that, towards propelling Aatmanirbharta in the shipping sector, there needs to be a comprehensive ramp-up of the entire ecosystem including technology, insurance, arbitration and dispute resolution, training and management, maritime finance and commercial skilling. Here, India is well-poised to rise to the occasion, given our well-qualified workforce, that finds acclaim world-over.
It is time to rub off the established global strength of the Indian services sector combined with a renewed focus on the manufacturing sector to the shipping sector — which is an adequate blend of both sectors. Given the geopolitical scenario of the day, and the strategic position of India, the waves of benefit would also reach other shores in our regional neighborhood, encompassing the Middle East and Africa to our west, and southern and South East Asia to the east, to begin with. The ongoing crises must be seen as a bedrock to lay the foundation to scale, and the interventions of the Government are indeed steps in the right direction. Undoubtedly, our ship has set sail in its journey of realising its true potential.
About the authors: Venkat Hariharan Asha is Deputy Director, Department of Pharmaceuticals (under the Union Ministry of Chemicals and Fertilisers); Alex Chapman is an industry consultant.