Why India needs to build Ships?

With India at the threshold of becoming the world’s third largest economy, we need to begin thinking about a economically critical and strategically important sector- ‘ships’. Discussions about this sector often center on the logistics and efficiency of ports, which is undeniably important. However, ships are equally vital, not only for economic but also for strategic reasons.

It is essential to recognize that the building, ownership, and flagging of ships are interconnected yet distinct issues. A vessel can be constructed in one country, owned by another, and registered under the flag of a third.

India owns only 1526 ships with a capacity of 13.75 million gross tonnage (GT) as of December 2023. Even among these, just 487 vessels are used for overseas trade. In terms of carrying capacity of ships, India’s share in ship ownership is mere 1.2%, compared to 17.8% of Greece, followed by 12.8% of China and 10.8% of Japan. Additionally, only 0.77% of ships across the world are registered under the Indian flag. Liberia, Panama, Marshall Islands, Hong Kong and Singapore are the top 5 flags of registration.

India has virtually no presence in shipbuilding, holding a mere 0.07% of the global market share. In contrast, China dominates the industry with 46.6% of shipbuilding measured by gross tonnage, followed by South Korea at 29.2% and Japan at 17.2%. Together, these three countries account for 93% of global shipbuilding. In addition, China has a near monopoly in container manufacturing.

As a result of all this, about 95% of our international cargo is transported on foreign ships, which means a significant forex outflow- $75 billion was spent on sea freight charges alone to foreign companies in 2022-23 and this figure is expected to exceed $100 billion soon. It is clear from this data that India’s inadequacy in this space is not only a drag on the economy but is also a major geo-strategic risk.

In this article, we focus on how to address the shipbuilding issue. The biggest constraint facing the shipping industry is financing. A ship usually lasts for about 25-30 years. While the building costs are financed upfront, the returns take a long time to materialize. Hence, what is needed is long term finance at competitive interest rates. However, Indian shipbuilders currently face a substantial cost disadvantage.

One key reason for this is that ships are not included in the harmonized list of infrastructure, i.e., they are not classified as infrastructure. As a result, shipbuilders are unable to access long-term financing options from both domestic and foreign sources. Similarly, NBFCs are allowed to raise money from ECBs for infrastructure, but currently cannot do so for ships. Even funding from institutions like the National Bank for Financing Infrastructure and Development (NaBFID), India Infrastructure Finance Company Limited (IIFCL) and National Investment and Infrastructure Fund (NIIF) are not available. Oddly, shipyards were granted infrastructure status in 2016 only, but ships were explicitly not included. Granting infrastructure status only to shipyards is not sufficient as they cannot get enough orders.

The Rangarajan Commission, established in 2001, had already recommended including ships in the infrastructure list. More recently, the Standing Committee on Transport, Tourism and Culture also recommended extending infrastructure status, currently granted to shipyards, to ships. Yet, this did not change our enshrined land-locked view of what constitutes infrastructure.

The problem of not being classified as infrastructure goes beyond just maturity and interest rates. Discussions with various stakeholders revealed that the key reason why banks are reluctant to give long term loans to this sector is the exclusion of vessels from the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. The Section 31(d) of SARFARESI Act states that “The provision of this Act does not apply to the creation of security interest in any vessel as defined in clause (55) of Section 3 of the Merchant Shipping Act, 1958”. Since they are explicitly excluded, ships cannot be mortgaged as they are not classified as assets that can be auctioned in the event of a default, obviously making the banks uncomfortable in funding ship purchases.

Irony is that India possesses almost all essential components for becoming a shipbuilding powerhouse. India is one of the few countries in the world capable of designing and building nuclear submarines and aircraft carriers. Additionally, the country boasts skilled workforce needed for this industry. India ranks third among seafarers-supplying nation with a share of 10-12 percent. Meanwhile, the three dominant shipbuilding nations of China, Japan and South Korea currently face declining demographics. Given that shipbuilding is a physically demanding activity, it presents an opportunity for India’s young workers.

The harmonized list of infrastructure is an evolving document. In recent years, we have added affordable rental housing complex, energy system, railway rolling stock to the list. The time has come to add ships to this list. Second, we need to address the issue of exclusion of vessels in SARFARESI Act. Of course, there are other things that would need to be addressed as well such as creation of Indian-owned and India-based Protection and Indemnity (P&I) entity etc. to take lead in shipbuilding.

Ship-building not only presents a big economic opportunity, but is also an important strategic asset. We will further explore this issue in subsequent articles, where we will discuss ship ownership and flagging.

Sanyal and Arora are Member and Joint Director, Economic Advisory Council to the PM.