The Union Budget appears to have met most of the shipping industry’s demands; but it has missed an opportunity to address tax disparities

Analysis of Sagarmala Project

• Infrastructure Development: The Sagarmala Programme, launched to enhance India’s maritime infrastructure, has made significant progress in modernizing ports, improving connectivity, and fostering industrial growth.
• Project Implementation: As of September 2024, 839 projects requiring an investment of ₹5.8 lakh crore have been outlined, with:
  • 241 projects (₹1.22 lakh crore) completed
  • 234 projects (₹1.8 lakh crore) under implementation
  • 364 projects (₹2.78 lakh crore) in various stages of development
• Key Focus Areas: The programme has focused on four major areas:
  • Port Modernization: ₹2.91 lakh crore allocated for upgrading ports to global standards.
  • Port Connectivity: ₹2.06 lakh crore invested in rail and road linkages to improve logistics efficiency.
  • Port-Led Industrialization: ₹55.8 thousand crore allocated to develop industrial clusters near ports.
  • Coastal Community Development: Various initiatives undertaken to enhance the livelihoods of coastal communities.
• GDP Growth: The impact of these initiatives is evident in India’s economic growth. GDP increased from ₹153 trillion in 2016-17 to ₹272 trillion in 2022-23, despite setbacks due to the COVID-19 pandemic.
• Trade Expansion: India’s EXIM trade grew from $66 billion in 2016-17 to $116 billion in 2022, reflecting a 77% cumulative increase.
• Economic Growth Targets: The government aims to achieve a $5 trillion economy by 2027. Long-term projections set a goal of a $7 trillion economy by 2030. Exports are expected to reach $2 trillion by 2030.

Enroll now for UPSC Online Course

Stagnation in the Shipping Industry

• Decline in Vessel Handling: Despite infrastructure growth, the number of vessels handled at ports declined by 5.93%, from 21,655 vessels in 2016-17 to 20,371 in 2020-21.
• Slow Fleet Expansion: The Indian-registered fleet has grown slowly, from 1,313 ships in 2016-17 to 1,526 ships in 2024.
• Global Ranking Decline: India’s global ship ownership ranking dropped from 17th to 19th, indicating that improvements in port infrastructure have not translated into a stronger domestic shipping sector.
• Foreign Competition: Indian shipping companies are losing market share to foreign-flag vessels in EXIM (Export-Import) trade, primarily due to better global competitiveness and lower operational costs.
• Alternative Transport Modes: Indian domestic cargo is increasingly moved by rail and road transport, bypassing shipping despite its cost-effectiveness and capacity for large-scale transportation.

Challenges in the Indian Shipping Industry

• High Borrowing Costs: Indian shipping companies face significant barriers in accessing affordable financing. These include high interest rates, short loan tenures, and stringent collateral requirements.
• Collateral Issues: Unlike foreign counterparts, Indian shipowners are unable to use ships as collateral for loans, which makes financing more difficult.
• Lender Misunderstanding: Banks and financial institutions often lack an understanding of the cyclical nature of the shipping industry, resulting in rigid loan restructuring policies that fail to accommodate industry-specific needs.
• IGST on Indian Ships: Indian-flagged ships face a 5% IGST on their purchase price, while foreign vessels operating in Indian waters are not subject to this tax, making domestic vessels less competitive.
• TDS on Seafarers’ Salaries: Indian shipowners must deduct Tax Deducted at Source (TDS) on the salaries of seafarers, while foreign vessels employing Indian seafarers are not required to do so.
• Impact on Competitiveness: These tax discrepancies put Indian-flagged vessels at a distinct disadvantage compared to their foreign counterparts, making it harder for them to compete both in the domestic and international markets.
• Inadequate Infrastructure: India’s shipbuilding industry faces infrastructure-related issues, which hinder its growth and competitiveness.
• High Input Costs: The industry suffers from high costs for raw materials, particularly steel, which increases production costs.
• Dependence on Imports: A heavy reliance on imports for spare parts adds to the expense and delays vessel construction.
• Customs Duties: Import duties on machinery and materials used in shipbuilding further raise production costs.
• Skilled Labor Shortage: There is a lack of a skilled workforce in shipbuilding, which hampers efficiency and productivity in Indian shipyards.
  • These challenges have led to delays in ship deliveries, discouraging shipowners from investing in Indian shipyards.
• Tax Haven Registration: Foreign-flagged vessels, often registered in tax havens, have access to more favorable financial and regulatory conditions. They benefit from lower borrowing costs, easier access to capital, and fewer regulations.
• Regulatory Loopholes: These vessels operate with minimal regulatory oversight, allowing them to maintain lower operational costs compared to Indian-flagged vessels.
  • As a result, foreign-flagged vessels are more competitive in both the domestic and international shipping markets, exacerbating the challenges faced by Indian shipping companies.
• Clarity on MDF Mobilization: The exact mechanisms for mobilizing and distributing the ₹25,000 crore Maritime Development Fund remain unclear, creating uncertainty about its impact on the industry’s growth in the coming years.

Check Out UPSC CSE Books From PW Store

Recent Government Initiatives

• Maritime Development Fund (MDF): The ₹25,000 crore Maritime Development Fund (MDF) has been established to enhance capital access for shipowners, providing financial support to modernize fleets and boost competitiveness.
  • While the government contributes 49% of the fund, the remaining 51% will come from major ports, raising concerns about the fund’s sustainability and long-term viability.
  • Questions remain about how effectively the fund will be mobilized and distributed across the industry. Ensuring steady and equitable access for all stakeholders in the shipping sector is a key challenge.
• Incentives: Granting infrastructure status to large vessels allows shipping companies to access benefits typically reserved for other infrastructure sectors, such as easier financing and tax benefits.
  • This status is expected to boost investments in large vessels, enhancing the growth and competitiveness of Indian shipping companies.
• Extension of Exemption: The government has extended the exemption from customs duties on shipbuilding spares for another 10 years.
  • This move is designed to lower the cost of shipbuilding, making it more affordable for Indian shipyards to compete in the global market.
• Credit Incentives for Shipbreaking: The government has introduced credit incentives to support shipbreaking activities, encouraging the recycling of old ships.
• Tonnage Tax Scheme Extension: The tonnage tax scheme, which benefits shipping companies based on the size of their fleet rather than profits, has been extended to inland vessels. This extension aims to boost the inland shipping sector and reduce transportation costs.

Way Forward

• Loan Tenures and Interest Rates: The shipping industry requires long-term loans with tenures of 7-10 years to facilitate the acquisition and modernization of ships. Offering loans at lower interest rates will make financing more affordable and accessible for shipowners.
• Financial Product Development: Financial institutions could develop products tailored to the cyclical nature of the industry, such as flexible loan repayment options or deferred payment schemes, to reduce the financial burden on shipping companies.
• Investment in New Shipyards: India must invest in the creation of new shipyards equipped to build large vessels, which will help reduce the country’s dependence on imported ships.
• Modernization of Existing Shipyards: Upgrading current shipyards with advanced technology and improved production capabilities can enhance their capacity to deliver ships more efficiently and at competitive prices.
• Removal of IGST on Ship Purchases: Exempting Indian-flagged vessels from the 5% IGST on their purchase price will help lower the cost of acquiring ships and make Indian ships more competitive compared to foreign-flagged vessels.
• Exemption from TDS for Indian Seafarers: Indian shipowners should be exempt from deducting TDS on seafarers’ salaries, bringing them in line with foreign vessels that employ Indian crew members without the tax burden.
• Strategic Use of ECBs: External Commercial Borrowings (ECBs) can be an effective source of funding to bridge the capital gap in the maritime sector. By attracting foreign capital, the Indian shipping industry can secure more affordable financing for fleet expansion and modernization.
• Regulatory Flexibility: The government can create a more favorable regulatory environment for ECBs, making it easier for shipping companies to tap into international financial markets for funding.
• Eco-friendly Shipbuilding: As global emissions reduction targets become stricter, India must invest in the development of eco-friendly shipbuilding practices. This includes the adoption of energy-efficient materials, renewable energy systems, and alternative fuels in new vessels.
• Retrofitting Existing Vessels: To comply with environmental regulations, Indian shipping companies can be encouraged to retrofit existing vessels with green technologies, such as exhaust gas cleaning systems (scrubbers) and energy-saving devices.

Enroll now for UPSC Online Classes

Conclusion

The Sagarmala Programme has made significant strides in enhancing India’s port infrastructure, improving connectivity, and reducing logistical costs. This has the potential to make India a global maritime hub.

Ready to boost your UPSC 2025 preparation? Join PW’s UPSC online courses today!

DOWNLOAD PDF