RAILWAYS SHOULD COORDINATE WITH SHIPPING INDUSTRY & PORTS

Needed Coordination Between Railway, Shipping and Ports.

To gain global advantage in export import traffic and to achieve global dominance India needs much more improvement in shipping, port and railways facility to gain a competitive edge over other countries. Presently, the international trade is dominated by the Chinese industry, and this dominance has not been achieved just like that, rather it has been the result of very consistent effort in last two decades to improve the productivity in all respects, including logistic. Although, India has started moving in the same path and trying to emerge as a global power, it has to achieve many milestones, before it is reckoned as a major power. The Indian industries have to suffer more than10 to 12 percent extra cost in the logistic, which make them slightly disadvantageous to other competitors, and becomes a major hindrance. It is anticipated that, if India were able to curtail those costs, it would be able to compete in a more dominant manner. No doubt India has started a massive program of improving its infrastructure facilities and there has been attempts to improve road, rail, port, shipping etc the results are yet to be visible. Though the national highways are improving, this is not true of connectivity to all sources and destinations. It is expected that the recent introduction of competition into railway container transport will gradually improve services. However, the traditional monopoly of railway freight services and internal container depots results in inordinate delays and costs that are not acceptable to importers. The turnaround time in major ports of India and movement of cargo between ships and source/destination within India is still plagued by monopolistic bureaucratic structures with little accountability and incentives for efficient service delivery to the exporter/importer. Due to these bottlenecks we find that total traffic handled by thirteen major ports in India (227 million tonnes) was much below than a single port in Europe at Rottardam (288 million tonnes in 1996-97). No doubt we have to see these models and try to develop our infrastructure facility in such manner that we emerge as a global hub for international trade and get the location benefits of India being located on east – west trade route.

It may be noted that the logistic cost, which include transportation, storage and distribution cost is very high in India as transportation cost is very high. Its share in total cost in developed countries come to be 5.21%, worldwide it is 6.21% whereas in India it was 10.32% in 1997 and it increased to 11.4% in 2000. In contrast, China is very competitive in manufacturing cost as its labour and logistic cost is very low. In India at every stage the traders have to bear the extra cost as all component of international trade i.e. shipping, port and railways charge extra amount as these services are much costlier than the developed countries. For instance at any port the cost is dependent on ship turn round time, pre berth waiting time, percentage idle time of berth to time at working berth, output per ship berth day, berth throughput rate, berth occupancy rate etc and since India perform low on these measures traders have to pay much higher charge. The purpose of this article is to see how our international trade is increasing year after year and how our shipping industry, port and railways are interlinked, adjusted and improving and what kind of capacity constraints we are facing. For this we will analyze the growth of international trade, and then we will evaluate the working of shipping industry and see what is the position of Indian shipping industry, how our ports work, particularly the major ports and ultimately we will see how the Indian Railways is catering to this kind of traffic.

India’s Foreign Trade

With the growing influence of global development on the Indian economy, according to ‘Economic Survey 2007-08, its integration was reflected by the trade openness indicator, the trade to GDP ratio, which increased from 22.5% of GDP in 2000-01 to 34.8% of GDP in 2006-07. India’s merchandise exports and imports (in US$, on customs basis) grew by 22.6 per cent and 24.5 per cent respectively in 2006-07, recording the lowest gap between growth rates after 2002- 03. Petroleum products (59.3 per cent) and engineering goods (38.1 per cent) were the fastest growing exports. The perceptible increase in share of petroleum products in total exports reflected India’s enhanced refining capacity and higher POL prices. The rising share of engineering goods reflected improved competitiveness. The value of POL imports increased by 30 per cent, with volume increasing by 13.8 per cent and prices by 12.1 per cent in 2006-07(Economic Survey, 2007-08). Both exports and imports growth were very robust in the pre-recession period (before August 2008), but turned negative in the post recession period (after 2008). Due to recession the growth of export has become negative. However, this may be treated as temporary stage. Once the economy revises, the export is bound to increase.

The major drivers of export growth were petroleum products, engineering goods and gems and jewellery. Machinery and instruments, transport equipment and manufactures of metals have sustained the growth of engineering exports. There has been growth in import particularly, non-POL item imports implying strong industrial demand by the manufacturing sector and for export activity.

A comparison of the commodity-wise growth of major exports to the United States, European Union and rest of the world provides a better idea of the impact of economic slowdown and rupee appreciation. Manufactured exports to the United States decelerated sharply in 2006-07 because of demand slowdown while dollar depreciation was an additional factor in 2007-08. The slowdown of exports to the European Union was marginal because both factors were absent. In contrast, there was a marginal acceleration in manufactured exports to the rest of the world in the first half of 2007-08. India’s exports of textiles, leather & manufactures and handicrafts to US performed poorly in 2006-07, even though the rupee depreciated marginally. However, exports of all subcategories, including engineering goods and chemicals, have decelerated in the first half of 2007-08. In the case of EU, the sharp deceleration in textiles and poor performance in handicrafts were substantially offset by reasonable growth in other manufactures in 2006-07 and the first half of 2007-08. Leather and leather manufactures exports have performed well overall and to EU and other countries, while showing a decline in the case of United States. Thus, there seems to be a greater correlation between the demand in partner country and the bilateral exchange rate, on the one hand, and India’s bilateral exports at a disaggregated level, on the other, than is visible for total Indian exports to the world (Economic Survey, 2007-08).

According to the World Trade Organization (WTO) statistics, world merchandise trade growth at 8 per cent in real (i.e. constant price) terms in 2006 was higher than the 6.5 per cent growth in 2005. The growth of merchandise trade in 2006 was the second highest since 2000 and well above the average annual growth of the last decade (1996- 2006). Growth of world demand for exports accelerated to 8 per cent in 2006 from 6.5 per cent in 2005, pulled up by a sharp acceleration of European imports to 7 per cent (from 4 per cent). However, import growth in United States, which is one of the most important markets for Indian exports, decelerated from 6 per cent in 2005 to 5.5 percent in 2006.

Merchandise trade by regions/ countries

(Annual growth at constant prices – percent)

	Exports			Imports
	2004	2005	2006	2004	2005	2006
World	10.0	6.5	8.0	-	-	-
United States	8.5	8.0	10.5	11.0	6.0	5.5
Europe	7.0	4.0	7.5	7.0	4.0	7.0
Asia	15.5	11.5	13.5	14.5	8.0	8.5
Japan	13.5	5.0	10.0	6.5	2.0	2.0
China	24.0	25.0	22.0	21.5	11.5	16.5
India	15.5	20.5	11.5	16.0	20.5	12.0
South and Central America	13.0	8.0	2.0	18.5	14.0	10.5
Commonwealth of Independent States (CIS)	12.0	3.5	3.0	16.0	18.0	20.0
Africa and Middle East	8.0	5.0	1.0	14.0	13.0	8.5

Source: WTO

The Foreign Trade Policy (2004-09), announced by the Government in August 2004, had visualized a doubling of India’s merchandise trade in five years. With an enabling policy framework and concerted efforts by the Government for facilitating a favourable environment for international trade, exports have nearly tripled between 2001-02 and 2006-07. India’s merchandise exports (in US dollar terms and on customs basis), which have grown continuously at more than 20 per cent since 2002-03, posted 22.6 per cent growth in 2006-07. The export target pf US $ 75 billion set for the year 2005-05 has progressively increased under the policy to US $ 160 billion for 2007-08. As compared to the targets, the actual export performance exceeded year after year. During 2008-09, it reached to $168.7 billion with a growth of 3.6 per cent despite global recession.

Export performance was dominated by volume growth till 2002-03. There was a reversal of this trend in 2003-04, with increasing contribution of higher unit value in export performance. Subsequent years witnessed a surge in exports both in terms of volume and unit value with a relatively higher growth of volume. Export volume increased mainly due to items like crude materials, machinery and transport equipment, and mineral fuels and lubricants (Economic Survey, 2007-08).

Performance Of The Foreign Trade Sector

(Annual percent change)

Years	Export growth		Import growth
	Value (in US$)	Volume	Value (in US$)	Volume
1990-00	7.7	10.6	8.3	12.4
1990-95	8.1	10.9	4.6	12.9
1995-00	7.3	10.2	12.0	11.9
2000-01	21.0	23.9	1.7	-1.0
2001-02	-1.6	3.7	1.7	5.0
2002-03	20.3	21.7	19.4	9.5
2003-04	21.1	6.0	27.3	20.9
2004-05	30.8	17.6	42.7	14.7
2005-06	23.4	11.8	33.8	48.2
2006-07	22.6	15.8	24.5	24.1
2007-08 Apr-Dec.	21.6		25.9

Source: DGCI&S. Kolkata

Growth of the unit value index of exports, decelerated in the late 1990s and early 2000s to reach a negative value of -1 percent in 2001-02. Since then it has accelerated smartly to average a growth of 8.6 per cent per annum during 2003- 04 to 2006-07. In contrast, the growth rate of the unit value index of imports has fluctuated wildly since 2000-01 partly due to fluctuations in the global prices of oil and other commodities and partly due to unit value changes in machinery and transport equipment and chemicals and related products.Though the quantum/volume of imports has shown a rising trend since 2000-01, the 48.2 per cent growth in 2005-06 was way above this trend. This was due to a rise in imports of machinery and transport equipment needed for industrial activity and infrastructure development and imports of food items, particularly cereals, to meet domestic supply shortages.

India’s share in world merchandise exports, after remaining unchanged at 0.8 per cent between 2003 and 2004, reached 1 per cent in 2005 and 2006 and then improved to 10% in 2007 and 2008. The increase in China’s share of world exports between 2001 and 2008 at 5.1 percentage points is one-half of the total increase in the share of developing countries over this period. However China’s export growth rate which was above 25 per cent in this decade till 2007 moderated to 17.3 per cent in 2008, while India continued to grow at around 21 per cent during 2006 to 2008. Brazil and Russia with higher value of exports than India in absolute terms registered higher growth than India in 2008. (Economic Survey 2008-09)

Export Growth And Share In World Exports Of Select Countries

Country	Value US $ Billion 2008	Growth Rate (%)				Share of World Export				Change In Share 2008/2000
		CAGR 2000-2005	2006	2007	2008	2000	2006	2007	2008
1 China	1429	25.0	27.2	25.6	17.3	3.9	8.0	8.8	9.1	5.1
2. Hong Kong	363	7.5	9.5	8.7	5.3	3.2	2.6	2.5	2.3	-0.9
3.Malaysia	210	7.5	14.0	9.6	19.1	1.5	1.3	1.3	1.3	-0.2
4.Indonesia	148	5.9	19.0	14.7	24.4	1.0	0.9	0.9	0.9	-0.1
5.Thailand	173	9.8	18.7	17.0	12.9	1.1	1.1	1.1	1.1	0.0
6.Singapore	338	10.8	18.4	18.4	13.0	2.2	2.2	2.2	2.1	0.0
7.India	176	18.6	21.3	21.3	20.7	0.7	1.1	1.1	1.1	0.4
8.Brazil	198	16.5	16.3	16.6	23.2	0.9	1.1	1.2	1.3	0.4
9. Mexico	292	5.2	17.1	8.6	7.3	2.6	2.1	2.0	1.8	-0.8
10Russia	512	18.2	24.7	16.9	44.3	1.7	2.5	2.6	3.2	1.6
11.Korea	422	10.5	14.4	14.1	13.6	2.7	2.7	2.7	2.7	0.0
12.Developing Countries	6052	16.5	22.7	14.7	21.1	26.0	36.0	36.2	38.4	12.4
13.World	15776	10.4	16.0	16.0	14.3	100	100	100	100	0.0

Source: Economic Survey 2008-09 – PP-14Z

The simple average growth of India’s exports from 2000 to 2006 was 19.3 per cent per annum. The growth of 29.8 per cent in 2005 was above the trend, due to a rise in the export of refined petroleum products and textiles and clothing in the year of dismantling of the quotas. Though the 14.5 per cent growth in January-June 2007 is below the trend, the Directorate General of Commercial Intelligence and Statistics (DGCI&S) data indicates a 20.3 per cent growth for January-December 2007.

India’s Merchandise Imports

Merchandise imports grew by 35.4 percent to US$ 251 billion in 2007-08 due to the high growth of 39.4 per cent of POL and 33.6 percent of non-POL. POL import growth was due to both volume growth by 11.6 per cent and increase in import price of the Indian crude oil import basket by 27.3 per cent. While the price of Indian crude basket continued to be lower than the Brent price, the rise in Brent price at 28.3 per cent was higher than the rise in price of the Indian crude import basket. Non-POL import growth was due to increase in growing needs for industrial activity and as inputs for exports.

In the current year (April-December 2007) import growth at 25.9 per cent by value was primarily due to the growth in non-POL imports at 31.9 per cent. Gold and silver imports grew by 29.3 per cent and non-POL non-bullion imports by 33 per cent. The former was due to higher domestic demand both to meet festive demand and pick up in gems and jewellery exports and the latter due to the growing demand by the industrial sector. POL import volume growth was subdued at 9.3 per cent in April-October 2007(Economic Survey, 2007-08).

In the import sector since India is a deficit country in POL it constitute a major part (31%). Pearls, precious and semi-precious stones, Capital goods (machinery and transport equipment) chemicals, fertilizer, cereal like sugar, dal etc. are other items which remains in the list of import.

Trade Composition

The composition of exports shows a perceptible shift in this decade from light manufactures to heavy manufactures and petroleum crude and products. The share of textiles and ready-made garments (RMG) has fallen dramatically by 11.1 percentage points in 2006-07 over 2000-01 followed by gems and jewellery, leather and leather manufactures and handicrafts. Share of engineering goods and petro products has increased by 7.6 percentage points and 10.7 percentage points, respectively. The share of primary products has declined somewhat with the decline in share of exports from agricultural and allied sector being partly offset by a rise in the share of ores and minerals by 2.8 percentage points. The share of chemicals, including petrochemicals, has increased marginally. The share of petroleum crude and products has risen further to 18 per cent in the first half of 2007-08 from 15 per cent in 2006-07. Engineering goods’ share also maintained a rising trend in 2007-08. Mainly petroleum products with 59.3 per cent growth and engineering goods with 38.1 per cent growth drove export growth in 2006-07. The perceptible increase in the share of petroleum products in total exports reflected not only the rise in POL prices but also India’s enhanced refining capacity. The rising share of engineering goods reflected India’s revival of heavy manufactures. Induced by strong international demand and higher prices, exports of ores and minerals, after growing at a compound annual growth rate (CAGR) of 50 per cent in the first half of this decade, moderated to 12.6 per cent in 2006-07.

Commodity Composition Of Exports

Commodity Group	Share (per cent)					CAGR 2000-01 to 2004-05	Growth rate (per cent)
	2000-01	2005-06	2006-07	April-Sep.			2005-06	2006-07	April-Sep.
				2006-07	2007-08				2006-07	2007-08
I. Primary products	16.0	15.4	15.1	13.5	13.4	16.9	18.6	19.8	18.5	16.7
Agriculture & allied	14.0	10.2	10.3	9.5	9.3	9.0	19.8	23.5	24.7	15.1
Ores & minerals	2.0	5.2	4.8	4.0	4.1	49.9	17.4	12.6	6.0	20.6
II. Manufactured goods	78.8	7.2	68.6	68.4	67.4	15.3	19.6	16.9	18.1	15.9
Textile incl. RMG	23.6	14.5	12.5	12.9	11.1	4.3	20.4	5.7	33.5	1.2
Gems & jewellery	16.6	15.1	12.6	12.7	13.0	16.8	12.8	2.9	-0.6	20.4
Engineering goods	15.7	20.7	23.3	28.8	23.5	25.4	23.4	38.1	48.1	21.2
Chemical & related products	10.4	11.6	11.2	11.1	10.4	21.7	17.3	19.1	28.4	10.2
Leather & leather Manufactures	4.4	2.6	2.4	2.4	2.3	5.5	11.1	12.1	7.7	12.7
Handicrafts (Incl. carpet handmade)	2.8	1.2	1.1	1.1	0.8	-5.3	30.3	4.1	5.2	-14.5
III. Petroleum, crude & products (including coal)	4.3	11.5	1.5	16.5	17.9	38.7	66.2	59.3	106.2	27.6
Total exports	100	100	100	100	100	17.0	23.4	22.6	27.3	17.6

Source: DGCI&S, Growth rate in US dollar terms.

Import

The composition of imports showed much less change than that of exports. POL continues to be the single major item of import with its share stabilizing at the 30-31 per cent level. The share of capital goods imports shows the sharpest rise of about 4.9 percentage points in 2006-07 over 2000-01 due to a 3.7 percentage point rise in the share of transport equipment and 1.6 percentage point rise in the share of non-electrical machinery (excluding machine tools). It has, however, plateaued at 13 per cent in the first half of 2007-08. The greatest decline is in the import share of pearls and precious and semi-precious stones, reflecting the fall in export share of gems and jewellery. Imports of gold and silver have been at around 8 per cent though it has increased to 10 per cent in the first half of 2007-08. Share of electronic goods imports has increased to 9 per cent, while food and allied imports show a marginal fall in share due to the fall in the share of edible oils, though import of cereals has shot up in 2006-07 from a negligible level. With the rise in crude oil prices, growth in POL imports continued to be high in 2006-07 though it moderated in the first half of this fiscal(Economic Survey, 2007-08).

Commodity Composition Of Imports

Commodity Group	Share (per cent)					CAGR 2000-01 to 2004-05	Growth rate (per cent)
	2000-01	2005-06	2006-07	April-Sep.			2005-06	2006-07	April-Sep.
				2006-07	2007-08				2006-07	2007-08
Food & allied products	3.3	2.5	2.9	2.3	2.2	24.3	-4.7	42.4	-5.8	26.6
1. Cereals	0.0	0.0	0.7	0.1	0.1	16.1	36.8	3589.6	803.8	-55.5
2. Pulses	0.2	0.4	0.5	0.3	0.5	38.0	41.3	53.8	9.6	92.8
3. Edible oils	2.6	1.4	1.1	1.2	1.2	17.2	-17.9	4.2	11.8	32.9
Fuel (of which)	33.5	32.1	33.2	36.3	33.6	18.5	44.8	29.0	39.8	18.0
4. POL	31.3	29.5	30.8	33.8	31.6	17.5	47.3	30.0	41.2	16.9
Fertilizers	1.3	1.3	1.6	1.7	1.9	17.2	59.4	52.4	54.4	48.2
Capital goods (of which)	10.5	15.8	15.4	13.1	13.2	28.9	62.5	21.8	44.3	28.3
5. Machinery except electrical & machine tool	5.9	7.4	7.5	8.1	8.2	26.2	49.0	24.9	39.5	28.3
6. Electrical machinery	1.0	1.0	1.1	1.1	1.1	25.6	25.9	30.3	37.9	28.6
7. Transport equipment	1.4	5.9	5.1	2.1	2.5	57.7	104.2	6.8	55.7	51.2
Others (of which)	46.3	43.7	43.8	37.8	40.4	23.5	21.1	24.6	-2.8	36.4
8. Chemicals	5.9	5.7	5.2	5.6	5.2	23.6	23.2	14.1	13.2	19.8
9. Pearls, precious & semi precious stones	9.6	6.1	4.0	4.1	4.2	18.3	-3.1	-18.0	-32.8	30.6
10. Gold & silver	9.3	7.6	7.9	7.7	10.3	24.5	1.5	29.4	-3.1	71.0
11. Electronic goods	7.0	8.9	8.6	9.0	8.9	29.9	32.5	20.6	34.0	26.2
Grand total	100	100	100	100	100	222	33.8	24.5	23.5	27.7

A comparison of the commodity-wise growth of major exports to the United States, the European Union and other countries shows the effect of a U.S. slowdown on India’s exports of both primary and manufactured exports in past few years.
The effects can be seen most clearly in exports of manufactured goods, which decelerated sharply to the United States and marginally to the European Union.

It may be noted that India exportable surplus engineering goods, chemical products, leather and leather product, handicraft, textiles, carpets, gems and jewellery. Machinery and electrical machinery, agricultural products like tea, cotton etc. and there may be some variation year wise or region wise. But by and large these products are going to be exported year after year.

INTERRELATIONSHIP BETWEEN FOREIGN TRADE, SHIPPING AND PORTS

It would be interesting to understand interrelationship between foreign trade, shipping and ports. Globally shipping logistic has undergone fundamental changes. Port development is governed by these changes. The basic issues influencing the global port sector are increasing ship size, consolidation of shipping lines, global shipping routes and port operators, and the emergence of specialized ports. Major ports in India need to explore the challenges and opportunities that have emerged in the context of these trends.

Ship sizes are increasing. AS opposed to 1980, when only 20% of global container traffic was moved through ships of more than 2000 TEU capacity, in 2005, nearly these larger ships handled 70%. As ship size continue to increase, economies of scale benefit container trade, leading to lower costs. This in turn attracts more container traffic. In addition, where container movement was earlier restricted to only value added goods, it is now spilling over to commodities. Increasing productisation of commodities has provided further impetus for containerization. India, with a container penetration of only 47% (vis a vis the word average of 60%), should explore opportunities in the expanding container trade.

Over the years, a global trunk route, the east west-shipping route, has emerged. The consolidation of global shipping routes has led to the concentration of shipping activities around the east-west route. Of the 90 biggest ports in the world, only 12 are located more than 500km away from the main trunk route. A hub and spoke arrangement is evolving, with feeder services coming up on the trunk route. This trunk route passes through the southern tip of India. Given that almost 40% of container traffic moves around the east- west line and nearly 26% of world container traffic moves within Asia, it is important that a strong hub port is developed in southern India (Sinha, Sanjay 2005).

Another important trend is consolidation of shipping lines, resulting in greater bargaining power Vis – a - Vis ports. Consequently there would be higher demand on performance of the ports in terms of lower cost and improved service quality. A parallel development has been the shrinking of margins in shipping. Given that the margin on the terminal side is far higher, this would prompt a move on the part of shipping operators toward entry into terminal operations. Hence in the year to come, ship liners would increase investment in port terminals.

Port operators are also undergoing consolidation. Today, five major port operators- Hutchinson, PSA, PMP, P&O, and Eurogate control almost 40% of the market. In the face of the greater consolidation, these major operators are establishing more terminals. As a result, while earlier there was little control at the either end of the cargo movement, today operators control both ends. Delivering door-to-door logistic services could extend the resulting deficiencies. In addition, there is increased specialization in the port sector. More and more ports are getting identified with one particular type of cargo. For instance, Singapore port has been branded as a ‘container port’. In this scenario of branding, most of the container movement in the region tends to sway towards the port.

Also, most of the inland investments in industry and in infrastructure come up around the port. A win- win situation ensues, for both the port and inland industry. While the ports create services, the inland industries benefits and provide more demand to the local port. This trend of specialization highlights the scope for horizontal consolidation by major Indian ports. For instance, today JNPT handles a significant part of India’s container traffic and caters to western and northern hinterland. Kandla also caters significantly to the same hinterland for containers as well as POL. Instead of competing with each other and setting up both POL and container facilities at each port, proper networking and consolidation could lead to a focused effort. In this case, JNPT would concentrate on setting up only container terminal while Kandla would focus on POL facilities. This would provide the ports with substantial bargaining powers vis-a-vis liners and market.

Major ports in India could also explore other strategic imperatives. These ports could develop long term business plans to tackle the loss of cargo share to minor ports. A long-term plan is required for resource mobilization for investment in capacity. New areas like cruise tourism and value added services could also be capitalized upon. Operational efficiency has to be improved upon through asset optimization. A greater focus on accountability and managing cost is required. The major ports should undertake activity based costing, where insufficiently non-remunerative activities could be outsourced. Regulating guidelines could help in the dominance of the port sector. A common ‘rate of return method’ could be adopted for both port trust and terminals. The regulator should incentives port trusts to maintain activities based cost. Regulator could also focus on the reduction of cross-subsidies, which could compel major ports to cut down costs (Sinha, Sanjay 2005).

Shipping Industry

Internationally shipping is a very peculiar kind of industry with several features, which cannot be understood by seeing other modes of transportation or by analyzing their economics. Hence, it would be interesting to understand, first the basic economics of the shipping industry. The Demand for ships depends on:

a) World economic position: Shipping serves as a catalyst for trade. Performance of the economy bears a direct impact on the shipping business as it determines the volume of seaborne trade. A boom in economy automatically gives a fillip to the export / import of nations whereas a sluggish economy would mean less of world trade. Thus shipping industry follows the world economic cycle.

b) Regional Disparity: The endowment of natural resources is scattered in the world. While one region may be poor in certain resources, it may be rich in some others. For e.g. IndiaMiddle East is rich in oil, it has to import most of its grain requirements. Besides natural resources, the final products may be produced in one country while consumed in some other. In case of China, most of the industries are export oriented. Because of these regional imbalances, there arises a need to transport cargo from the region of surplus to the region of deficit, thus lending demand to the shipping industry. doesn’t have sufficient oil resources but is rich in iron ore. Similarly while

c) Political events: These events greatly affect the oil tanker business because of the concentration of the oil supplies with few select countries.

d) Natural disasters: Events like hurricanes can also lead to soaring freight rates due to sudden spurt in demand for oil, an event seen after Katrina in US as it led to destruction of domestic oil production and refining facility leading to increased imports and thus greater demand for tankers.

The Supply of ships depends on

a) Fleet size

b) Scrapping of vessels

c) Order book position and Capacity for Shipbuilding: New ships can be built only if there are slots available with shipbuilding yards

d) Fleet productivity: Due to increased productivity of vessels, higher volumes can be carried by same amount of shipping tonnage

The freight rates are determined by the demand-supply dynamics. When the existing fleet is not able to meet the demand for tonnage, new ships are ordered. Depending on the size and the specification of the ship, it takes 18-24 months to build the ships. Hence, till such time that new ships do not come in, the freight rates are high and as the tonnage additions happen, freight rates fall.

Expanding Shipbuilding

The global trade requirements are continuously improving in favour of bigger vessels and, therefore, the need to have international size shipyards. As of June 2005, Korea has 40% of market share in shipbuilding followed by Japan with 34% and China with 15%. However, KoreaIndia is way behind with only eight yards. This number is also a bit misleading as only yards — Cochin Shipyard Ltd (CSL) and Hindustan Shipyard Ltd (HSL) — are capable of building average and above average size of ocean-going merchant vessels. (Cygnus Quarterly Report on Indian Shipping Industry-July-Sept 2005) has only 14 shipyards but they are much bigger in size compared to that of the Japanese or Chinese yards.

Choppy revenue streams

The revenue earning of shipping companies tends to be lumpy rather than smooth due to volatility in freight rates. Thus, it has been observed that these companies have some years of supernormal profits and some years of losses.

Capital Intensive

Ships, as an asset class, are very capital intensive and on average vessels constitute almost 90% of the fixed assets of a shipping company. Depending on the size and specifications, the cost of a new ship may range between US $20 Mn and US $300 Mn. For e.g. a VLCC can cost as high as 180 Mn USD, similarly an LNG ship costs around US $250 Mn. This capital-intensive nature raises the entry barriers into the industry.

Pricing Power

As there are a number of large players in certain segments, typically no one company has a dominating market position to allow it to exert significant pricing power. Besides, shipping is a highly commoditised product. Several factors (client demands, stevedoring, port terminal requirements, insurance clauses etc.) favor a degree of standardization, thereby lowering switching costs for customers.

Regulatory requirements

Besides, regulations lay down by the Flag state (country in which ships are registered), the shipping companies have to comply with international regulations laid down by International Maritime Organization (IMO), in case they cater to overseas trade. For e.g. due to environmental issues, IMO has stipulated phasing out of Single hull tankers by 2010.

Ways of Deployment

Several contract types have evolved to enable shipowners, their operators and customers to do business These can be classified into three broad categories: Bareboat, Time Charter, and Voyage Charter.

• Bareboat Charter cum Demise (BBCD): Under this charter, the charterer is the deemed owner of the ship and therefore is responsible for crewing, managing and employing the ship, but does not have title of the ship. The owner receives a fixed rate of hire during the period of the charter. At the end of the charter, the charterer has an option to buy the ship. This is essentially a finance lease of ship.

• Time Charter: ‘Time charter’ is hiring of the ship for a specific period of time. The shipowner receives a fixed rate of hire per day from the charterer. This provides the owner with a stable cash flow over the agreed period of time. As the hire charges are determined in the beginning and remain constant throughout the charter period, the shipowner is sheltered from adverse swings in the freight rates. However, the owner is not able to take advantage of higher spot rate, if freight rates rise. In time charter, the shipowner is responsible for providing the crew and also for the operating expenses like crew cost, consumables, lubricants and spare parts, maintenance & repair of the ship etc. while the charterer bears the voyage expenses such as port and canal dues, bunkers etc. besides the voyage insurance charges. The charterer also has commercial control over the ship.

• Voyage Charter: As against time charter, voyage charter means that whole or part of a ship is hired at ‘spot rate’ for a single voyage or for multiple voyages. The spot rate of charter is defined as the prevailing market rate and is expressed in terms of rate/tonne per day. When the contract is for a part of the vessel, the contract is known as ‘space charter’. In voyage charter, the shipowner is not only responsible for providing the crew and meeting the operating expenses, but also has to incur voyage expenses like port dues, fuel cost, canal charges etc. As the freight rates are on ‘spot’ basis, the business model becomes high risk-high return. Even though the general spot rates are lower, the shipowner may get some opportunities to earn higher rates if a particular type of ship is not available or a particular region faces a shortage of ships. In case of an increasing freight rate scenario, the company that has majority of its ships on voyage charter will benefit more and vice versa. To mitigate the risk in the spot market freight rate movements, many a times the charterer and the shipowners enter into Freight Futures Agreements (FFA) and also do derivative trading. FFA is an over-the counter agreement for fixing of the freight in advance for a specified voyage that has not yet taken place. A variant of voyage charter is Contract of Affreightment (CoA). In this contract, the shipowner/ operator agrees to transport a quantity of a particular cargo over a given period of time at agreed intervals. This arrangement saves the shipper the hassles of renegotiation for each cargo movement and gives the owner/operator the flexibility on where the fleet can trade.

As the rates for different types of contract differ, it is the effective deployment of vessels using a mix of the above types of contracts, which helps shipping companies to register a healthy bottom-line. Most of the shipping companies place some number of their ships in the spot market i.e. voyage charter, which is open to freight rate fluctuations while certain number of ships might be given away on time charter / BBCD basis.

Ship Financing

Since ships are very liquid assets these can be bought and sold very easily in the international markets. Ships constitute nearly 90% of the fixed asset of shipping companies and are often financed through debts, which could be as high as 80-90% of the total cost. Internationally, there are specialized ship financing institutions viz. KfW (world’s second largest ship lender), HSH Nordbank AG (world’s largest ship mortgage lender), First Ship Lease of USA (leasing company focusing exclusively on the maritime industry), Credit Agricole Indosuez of France etc. These institutions have to take a call on the high risks inherent to the unique features of the industry like volatility of the freight rates, international markets and mobile assets. There are multiple financing structures and products available such as syndicated lending, insurance, enhanced financing, securitization, various leasing structures, etc. which can be used for financing acquisition of vessels.

In India, although there is no specialized ship financing institutions, banks and financial institutions like ICICI Bank, State Bank of India, IDBI Bank, IL&FS are major financers to the shipping industry. However, due to the inherent cyclicality of the business and absence of effective mortgage foreclosure norms, these financers are not ready to finance to the extent of 80-90% of the asset value and the rates offered are also on the higher side. Shipping companies also raise funds through external commercial borrowings (ECBs), as they have a natural hedge against foreign exchange earning (shipping companies which have foreign exchange earning are permitted to raise ECBs subject to a maximum of US $200 Mn).

Tonnage tax

About 85-90% of global shipping tonnage is taxed as per tonnage taxation or other low tax schemes. Till 2004, Indian shipping companies were taxed as per corporate tax rate, which proved to be disadvantageous, and rendered them uncompetitive. While under corporate tax rates (33.66%), the effective tax burden on shipping companies was around 14% of their profit before tax (PBT), under tonnage taxation the effective tax burden reduces to around 1-2% of PBT. This prompted many Indian shipping companies to acquire ships under the subsidiary companies set up outside the country. With a view to bring the Indian Shipping companies at a level playing field, the Government of India (GoI) introduced Tonnage Taxation in 2004. Since the implementation of tonnage taxation, the Indian Shipping Industry has set aside an amount of Rs.1300 Cr in tonnage reserve. The tonnage reserve going forward will help in Indian tonnage addition.

Age Profile: Does vessel age affect efficiency?

The answer to the question is affirmative in most cases. However, equally important is the level of maintenance of the ship in deciding its efficiency. Ships are subject to corrosion caused by seawater, weather, cargo handling etc. Thus higher age of fleet has implications in the form of greater operating expenses, lower charter rates, greater risk of accidents etc. According to international practice, all ships over 17 years, if they have to continue in service, must be overhauled and redeployed. Even after that they can serve only upto the age of 25. Internationally, the average age for retiring ships is 22 years. Across the world, Container ships are the youngest. This is due to the fact that, containerization as a preferred option has become popular in past decade. Hence, a large number of such vessels have hit the market in the recent years.

Vessel Flags

The country whose flag a vessel flies is known as its ‘flag state’. As per international ship registry system a ship owned by a shipowner of a particular country can fly the flag of a different country. In such a case the vessel would be guided by the rules and regulations of the flag state. While it is the shipping company that has primary responsibility for the safe operation of its ships and the safety and welfare of its crew, the flag state plays a critical role with regard to the safety of life at sea and the protection of the marine environment. The flag state has overall responsibility of the implementation and enforcement of international maritime regulations laid by International Maritime Organization (IMO). The flag state also ensures that the vessels flying its flag follow the guidelines of the intergovernmental bodies like International Labour Organization (ILO), International Oil Pollution Compensation (IOPC) Fund etc. Also the flag state is responsible for monitoring the activities of the visiting foreign vessels. The track record of the flag state of a vessel can affect the performance of the shipping company directly. For e.g. ships flying a flag whose vessels have shown higher than average levels of non-compliance during port state control inspections, are generally subject to special port state control targeting and thus greater numbers of inspections. For the compliant ship operator, this can mean unnecessary delays, plus greater potential for charterers’ penalties.

Flag of Convenience (FOC)

Flags of countries viz. Panama, Liberia, Bahamas, Bermuda, Malta, Cyprus etc. are examples of FOC (also known as open registries). Earlier the FOC’s had a negative connotation attached to them as many a times FOCs did not follow the international safety regulations for their vessels and the minimum working conditions for the crew. But still many shipowners chose to register under the FOC because of favourable tax environment (in most cases 0% tax). But today even shipowners with the best quality ships complying with all IMO regulations also register their vessels in these FOC’s for the tax benefits. Around 70% of the world fleet is registered with the FOCs, with Panama leading the pack with 22% (2005) of the world’s cargo carrying fleet registered with it. For most maritime nations, the fleet registered under open registries is between 50-85% whereas in case of India the figure stands at around 8%. The reason for this is that under Indian Merchant Shipping Act, all ships of Indian shipping companies have to be registered in India. The only way to take advantage of a benign foreign tax regime is to set up a subsidiary in foreign countries and then use the flag of that country.

Productivity of Vessels

The productivity of shipping vessels is measured in terms of tonnes per DWT and tonne-miles per DWT. The world productivity in terms of tonnes per DWT and tonne-miles carried per DWT has increased over the years. This is because of the economic surge of the Asian countries and their increased participation in global trade both as importers and exporters coupled with newer ships of better technology enabling shorter haulage periods.

Trend In Economic Performance - Performance Of World Economy

Global trade is a prime driver of the shipping industry. A correlation study between the world GDP change and the world trade change for the period 1992-2004 reveals a correlation coefficient of 0.7. The negative growth in world merchandise exports in 2001 can be attributed to the economic recession seen in US (due to the 9/11 terror strikes) and other big economies of the world. With the world economy picking up in 2002 onwards, the world merchandise exports have shown a growth trend. The exports clocked a phenomenal growth rate of 9% in terms of volume in 2004. One of the main reasons for this is the surge of China.

The world seaborne trade has registered a CAGR of 3.71% in the period 1995-2005. The seaborne trade stood at 6758.3 Mn tonnes of loaded goods as on January 1, 2005. As can be seen, the developing countries of Asia have the largest share of around 29%, whereas the share of North America has been declining over the years. The share of Europe has been around 20% of the world trade.

Trade Development Cycle (TDC): Economies go through three distinct phases of development in terms of their trade volumes growth rate. These are

Phase 1: Pre – Industrialization phase (slow growth rate stage)

Phase 2: Industrialization phase (rapid growth rate stage)

Phase 3: Post – Industrialization phase (moderate growth rate stage)

The industrialization phase is the transition phase which is associated with galloping consumption of raw materials like iron ore, coal, non metal minerals etc. and therefore accompanied with increasing prominence in world seaborne trade. As the economy matures and enters into the post industrialization phase, it begins to slow down. Today China and India are in the phase 2 of TDC and hence their growing prominence in world economy. But in case of China the issue being raised is, ‘how far from or how close to phase 3 of TDC is it?’ Though a difficult question, the answer to this will decide as to going forward by what magnitude will the world seaborne trade grow?

China Factor: Chinese economy grew exponentially in 1990s. From a miniscule 2% share in the world seaborne imports in 1999, China achieved a 10% share by 2004. It accounted for a 48% share in the growth of seaborne trade in the period 1998-2004. While the world imports grew at the rate of 1.5% per annum in the period 1998-2004, the Chinese imports registered an average growth of 24% per annum in this period. Two main commodities have dominated its imports growth: iron ore and crude oil. China accounts for 20% of the world dry bulk trade with iron ore imports dominating its dry bulk trade volumes. It is the largest importer of iron ore and meets its demand mainly from Australia, Brazil and India. Iron ore imports grew at the rate of CAGR of 33% in the period 2002-2005. The phenomenal growth in the iron ore demand is due to the accelerated industrialization process, which in turn is driven by its strong increase in fixed investments. An indicator of this fact is that its steel production has more than trebled from 102 Mn tonnes in 1998 to 349 Mn tonnes in 2005. In 2005, China accounted for more than 31% of the total world steel consumption and production. The Chinese dominance in steel production continued in 2006, with an output of approximately 421 Mn tonnes. China’s oil demand has also increased over the years. In 2005, it was the 2nd largest crude oil importer and 3rd largest oil consumer in the world. Crude oil imports grew at a CAGR of 24% in the period 2002- 2005. As in case of imports, the Chinese exports have also grown reaching 400 Mn tonnes in 2005 of which 128 Mn tonnes is containerized cargo.

Shipping Industry in India

The Indian shipping industry consists of about 616 ships, with a total capacity of 6.62 million tons Gross Registered Tonnage (GRT). Of these, about 258 ships are engaged in overseas trade and the rest ply inland routes. After a period of decline, both tonnage and fleet size have grown recently, with the addition of 56 ships — tugs, survey vessels, towing vessels as well as pilot vessels — belonging to ports and maritime boards. At present, India ranks 17th among maritime nations in terms of GRT.

India's overseas trade has been growing at an annualized rate of 6.8 per cent since 1984-85. There are about 55 shipping companies in the sector, of which 19 deal exclusively in coastal trade, and 29 are engaged in overseas trade. The rest operate in both types of trade. A few major players dominate the sector. Of these, the state-owned Shipping Corporation of India (SCI), and the private sector Great Eastern Shipping have mixed fleets. Essar Shipping focuses on the energy trade and mainly operates tankers. Chowgule Shipping and Varun Shipping are two other large companies in the sector. Varun Shipping operates mainly in wet, dry bulk, gas and chemical transport sectors and Chowgule moves bulk cargoes like iron ore, grain, coal, fertilizers etc.

The share of Indian companies in the country’s overseas trade is only 30 per cent in terms of volume, and only 12 per cent of the total overseas shipping bill of about $5 billion. This is due to the fact that Indian companies have a negligible share in the trade of high value goods like general cargo and containers.

Major Players

Shipping Corporation Of India

Shipping Corporation of India (SCI) is India’s premier shipping company with a diversified fleet of 87 ships. SCI has continuously registered profitability, dominant market share, and valuable fleet and real estate base. The company’s performance has been sound in spite of the cyclical nature of the industry. It’s not only the size but also the well-diversified fleet, which gives SCI an edge over other shipping majors. SCI has diversified into almost all areas of shipping services and its fleet includes ten different types of vessels, i.e., dry cargo vessels, cellular container vessels, bulk carriers, crude carriers, product carriers, combination carriers, LPG / ammonia carriers, phosphoric acid / chemical carriers, offshore supply vessels and passenger – cum cargo vessels. Till 2002 SCI’s tankers constituted the captive fleet of the Indian oil industry, which is now withdrawn.

Great Eastern Shipping Ltd.

From a diversified entity with multiple lines of business, GE Shipping (GES) is transforming itself into a focused energy transportation and services company. Recent strategic initiatives of the company aim at improving ROI in a business characterized by low profitability and high capital intensity. GES has exited its non-core lines of business to concentrate its energies in what it know best - shipping. In the last few years, the company has successfully leveraged on its modern fleet and changing industry trends to transform itself into a global shipping company from an India-centric company. Its relatively nascent offshore unit grew substantially making the company India’s largest provider of integrated off shore support services.

Varun Shipping

Varun Shipping is emerging as another shipping company. The company’s acquisition of a second Aframax tanker ‘Amba Bhakti’ and ninth LPG Carrier ‘Maharishi Mahatreya’ during 2005 improved operating. The company also acquired two LPG carriers in 2006. After this acquisition, the group had 11 LPG Carriers, which make it the owner of 77% of the country’s total LPG tonnage and the second largest owner globally of the mid-sized fully refrigerated LPG carrier fleet. The company’s fleet of Aframax crude carriers is likely to benefit from the firming of freight rates in this sector for vessels operating in the US Gulf and Caribbean area where the company’s vessels are currently trading. The freight rates in the product tanker markets have also gone up recently and are likely to remain firm.

Essar Shipping Ltd (ESL)

ESL provides integrated logistics solutions through a diversified fleet of vessels, storage facilities and supply chain management services. It operates in three segments: Energy Transportation Group (ETG), Integrated Coastal Transport Group (ICTG) and Terminalling Group (TG). ETG provides sea transportation management services to players in the energy industry, such as Chevron Texaco, Exxon Mobil, BPCL, HPCL and BP. ICTG provides supply chain management services for the sea transportation of bulk cargo and refined products. ICTG, divided into bulk carrier, product carrier and offshore supply and tugs divisions, has 27 vessels.

Fleet age of some of the Indian players

(October 1, 2005)

	SCI	GE Shipping	Essar Shipping	Mercator Lines	Varun Shipping	Tolani Shipping
Age in yrs*	16.6	14.6	17.3	16.1	20.7	13.3

Source: INSA *simple average of no. of ships as on July 1, 2006

The aging Indian fleet has been a matter of concern for the industry. With more than 44% of the fleet in terms of GT above 20 years, a very large proportion of Indian shipping vessels may be due for scrapping. Besides most tankers owned by private Indian companies are single hull, all of which have to be phased out by 2010 under India’s commitment to IMO (unless covered by Conditional Assessment Scheme discussed later). Among the large players GE shipping has a fleet, which is relatively young, but SCI, which has approximately 35% of the total Indian tonnage, has a relatively higher fleet age of 16.6 years. The capital-intensive nature of the industry is also one of the reasons due to which these shipping companies still continue to operate the aging fleet. According to some estimates, the Indian shipping industry will be required to spend about US $4 Bn on fleet renewal in the next five years. With environmental norms getting stricter, oil majors have become very particular of the quality of the vessels being used to carry POL and any lapse with regard to vessel quality attracts heavy penalty. Also with the 2010 deadline for phasing out of single hull tanker approaching, more tanker tonnage will have to be added to be compliant with regulations.

Indian Shipping Industry – Challenges

The Indian Taxation system has been onerous on the shipping companies. 90% of the world shipping companies operates under a low tax regime. As against this, Indian shipping companies till 2004 were subjected to corporate tax. In 2004, tonnage taxation was introduced in India. Though tonnage taxation is a step in the right direction (with the introduction of tonnage tax in 2004, there has been 17-18% increase in tonnage), there are 12 other taxes, which are levied on the shipping companies. The Indian shipping industry is reeling under the pressure of these dozen taxes that are imposed on it, apart from tonnage tax.

Type of Tax Rate	(Basic + Surcharge + Cess)
1 Corporate Tax on other than shipping income	33.66% (30%+10%+2%)
2 Minimum Alternate Tax on profit/loss on sale of vessels	11.22 % (10%+10%+2%)
3 Dividend Distribution Tax	14.025 % (12.5%+10%+2%)
4 Fringe Benefit Tax	As per nature of expense
5 Withholding tax liability on interest paid to foreign lenders	Depends on Double Taxation Avoidance (DTA) with respective country
6 Withholding tax liability on charter charges paid to foreign shipowners	Depends on DTA with respective country
7 Seafarer’s taxation-cost to employer	0-33.66%
8 Wealth Tax	As per applicable slab rates
9 Sales Tax/Value Added Tax (VAT) on ship supplies/spares	4-12.5%
10 Lease Tax on charter hire charges	As under VAT
11 Customs duty on Import of certain categories of ships, stores, spares and bunkers	30-40%
12 Service Tax	12.24 % (12%+2%)

All these taxes put Indian shipping companies at a cost disadvantage of 4-5% when compared to foreign shipping companies.

Shipping in India is a Central subject and is dealt by the Ministry of Shipping, Road Transport and Highways. There are more than a dozen laws to regulate the ports and shipping sector. The following table lists some of these regulations.

Major Acts governing the Indian shipping industry	Some more acts for Port & Shipping sector
The Merchant Shipping Act, 1958	The Indian Ports Act, 1908
The Inland Vessels Act, 1917	The Dock Workers (Regulation of Employment) Act, 1948
The Coasting Vessels Act, 1838	The Major Ports Trust Act, 1963
The Multi-modal Transportation of Goods Act, 1993	The Seamen’s Provident Fund Act, 1966 The Inland Waterways Authority of India Act, 1985

The Ministry regulates the functioning of the industry through its various subordinate offices, autonomous bodies, societies and associations and public sector undertakings. The National Shipping Board, a statutory body, advises the central government on shipping matters. The Directorate General of Shipping (DGS) is the main administrative authority, which issues orders and notifications on the various aspects of shipping. The Mercantile Marine Department, which comes under the administrative control of DGS, deals with the registration and survey of ships. The TRANSCHART is a wing under the Ministry responsible for making shipping arrangements for Govt./PSUs controlled cargo.

The Indian Register of Shipping is a classification society. As per Merchant Shipping Act, no Indian ship can be taken into the sea from a port or a place within or outside India except under the license granted by the DGS.

Indian shipping companies are also required to comply with the rules and regulations issued by the Ministry of Finance and Company Affairs as well as the Ministry of Commerce. Apart from the Indian regulations, the various IMO/ILO Conventions & Protocols also govern the ships plying on international routes. The multiplicity of regulations in addition to the fact that some of the rules and regulations are antiquated, make it necessary that there be consonance between Indian and international maritime requirements.

Declining Share Of Indian Shipping Tonnage In India’s Overseas Trade

In 2004-05 Indian ships carry only 13.7% of Indian seaborne trade. The domestic tonnage has not kept pace with the growth in the country’s trade. Some of the reasons for the domestic tonnage stagnation are listed below:

• Onerous tax regime
• Some of the rules and regulations under which the Indian shipping companies have to operate are antiquated. For e.g. Multi-modal Transport of Goods Act (MMTG), 1993, prescribes a documentation requirement, which is not in consonance with international requirement for multi-modal transport. Internationally, 70% of multi-modal movement happens as per FIATA (Federation Internationale des Associations de Transifaires et Assimiles) while 20-25% of the movement happens as per Combidoc, a MMTG documentation prescribed by Baltic and International Maritime Council (BIMCO). Thus, ships plying on international waters do not favour Indian flag.
• Indian ships have to necessarily be manned by Indians as per DGS guidelines. Moreover, the manning requirement/ship for Indian companies increases due to the unionized labour. This increases manpower cost. In international labour market, seafarers come at 60-70% of the cost of the Indian labour. From January 2007, the DGS has allowed the Indian shipping companies to employ 2 foreign officers per ship, thus bringing some respite.
• Borrowing cost has been comparatively high for Indian companies in the past. As a consequence of poor legal framework for mortgage foreclosure, financers keep an additional margin for the legal issues, which might arise, thereby pulling up the costs.

Declining cargo support

Indian flag till now got cargo support in terms of first right of refusal for shipment of government owned/controlled cargo. Under this system, when bids are invited by TRANSCHART for carrying government owned/controlled cargo, even if a foreign shipping company quotes the lowest bid, Indian shipowners are given the first chance of refusal to carry the cargo at this lowest bid. Thus, though there is no price preference in this system, there is cargo preference being provided to the Indian ships. But gradually this support is decreasing, as many public sector companies are demanding to make their own shipping arrangement. For e.g. in 2005, Indian Oil Corporation (IOC) was allowed to make its own shipping arrangement bypassing TRANSCHART, with the same permission being extended for one more year. The government is actively considering giving similar relaxation to other oil PSUs (BPCL and HPCL). So when government is decreasing the cargo support lent to Indian shipowners, the shipowners acutely feel the brunt of the onerous Indian regulations.

Manpower shortage

Globally there is a shortage of 10,000 officers. As per BIMCO estimates, the shortage of marine officers is likely to almost treble to 27,000 by 2015. Moreover, the flag state barriers (for e.g. On Indian flagged ships only Indian manning is allowed), lack of international experiences, cultural and language differences make it difficult for the surplus in one nation to meet the shortages of other.

The Indian shipping industry is no exception and today faces a shortage of between 500 to 700 experienced officers. Flight of quality Indian officers to foreign ships is a major concern for Indian shipowners. The reason for this exodus, being the taxation system prevalent in India. Internationally, taxation systems in most of the countries exempt Seafarer’s tax but in India seafarers are subjected to income tax. As per Indian Income Tax Act, an Indian seafarer who is employed on a foreign vessels for 183 days or more in a year is entitled to nonresident status and therefore is eligible for income tax exemption but an Indian seafarer who is employed on foreign-going Indian vessels will be entitled to such status only if he spends 183 days or more outside Indian territorial waters. Thus, taking into consideration the wage and tax differential, employment under foreign flag becomes more lucrative. The exodus of quality seafarers, especially officers to foreign ships, has an impact on the cargo and vessel maintenance, number of accidents etc. Thus, to retain talent, the Indian shipping companies have to match the take home salaries under foreign flags, thereby increasing costs.

High Port calling costs

In India, one of the major costs for shipping companies is port calling cost. For e.g. if a 16-18 box container calls at JNPT, then for 2 days it pays $18000-20000 which is equal to calling at ports like Rotterdam. In Dubai, Colombo, and Singapore, the cost for the same would be $5000, $6500 and $9000 respectively. The main reason for this is that the cost of dredging in Indian ports is recovered from the shipping companies whereas in other countries it is borne by the government.

Ports congestion and connectivity with hinterland

Due to shortage of port capacity, the ports are unable to handle additional traffic. The major ports handle about 75% of the all India port throughput, which has increased from 19.38 Mn tonnes in 1950-51 to 383.63 Mn tonnes by the end of 2004-05. The slow evacuation of cargo from the ports due to high turnaround of ships adds to congestion.

Though the average turnaround time has declined over the years, it still remains high. The drafts of Indian ports are inadequate and require intensive annual dredging. Also, Indian ports have not sufficiently invested in the equipments like cranes. This reduces the number of moves/hour for container vessels, thus reducing the productivity of the existing berths. While building new berths is capital intensive, investing in equipments is a cost effective method of increasing the efficiency of the current facilities. Most ports have inadequate road connectivity. This increases the landside cost of transportation besides adding to port evacuation time of cargo. It is crucial that connectivity of ports with the hinterland is beefed up to ensure seamless flow of the growing traffic.

Underdeveloped Coastal shipping

Poor connectivity with hinterland, stringent manning requirements, high bunker cost, and customs duty on spares increase the costs of the coastal shipping companies. The oil bunker cost of the Indian coastal vessels is higher vis-a-vis foreign vessels due to the duty that Coastal Shipping, also known as Short Sea Shipment, accounts for around 40% by volumes in US, China, Europe while in India it is only about 7% of total domestic cargo transport network. Coastal trade leads to lower pollution, lesser accidents and lower congestion and therefore is encouraged in these countries, but it also requires the vessels to call on ports frequently. The high port calling costs, the domestic vessels have to pay on oil bunker. Capital goods and spares that are imported by the coastal ships are subject to custom duty. This adds to a 15% of the landed cost of the spares and 3% of the total operational cost. This is a significant burden on the players in this segment.

All the above mentioned reasons have led to Indian companies setting up subsidiaries abroad to take advantage of the low tax regime prevalent there. As on April 1, 2006, cargo carrying ship orderbook position for India was at 1.06 Mn GT (a mere 0.68% of the world orderbook position). In order to have a buoyant and competitive shipping industry, a globally comparable fiscal and legal environment is the need of the hour.

SWOT Analysis of Indian Shipping Industry

Strength Long Coastline Huge Cargo volumes originating from India Well Trained Manpower	Weakness Low tonnage additions Unfavorable Fiscal Environment Complex documentation procedure. Poor Port Infrastructure Poor Hinterland Connectivity High Port Calling Cost Aging Fleet (in terms of % GT) Under developed Coastal Shipping Lack of general awareness about the industry
Opportunity Growing Indian Economy Growing Indian overseas cargo traffic dislocation of refineries from West to Middle East and Asia enhancing wet Developing into Transshipment hub Developing Industrial Clusters around ports Developing Logistic Clusters (SEZs) Huge Potential of State (Minor) Ports	Threats Slow down in global economy in general and Chinese Economy in particular Not sufficient investment in Indian tonnage leading to further decline in the share of bulk movements Indian Tonnage in Indian overseas trade Exodus of trained officers Over regulation of the industry

Steps taken to meet the challenges

To tackle the problem of port congestion, many ports are now identifying with one particular type of cargo. From multi-cargo, common user port, there is a move towards dedicated terminals for specific type of cargo. These ports then can be geared to meet the needs of the vessels calling there, in terms of draft and equipment requirement. For example JNPT containers terminals, Dahej LNG terminals

For improving hinterland connectivity of ports, rail and road projects are being carried out under the National Rail Vikas Yojana (NRVY) and National Highways Development Programme (NHDP) respectively. Besides these Dedicated Freight Corridor (DFC) project has been launched.

NRVY

It is a Rs.15, 000 crore project which involves strengthening the rail golden quadrilateral and its diagonals (by doubling of single lines and laying multiple lines so that freight trains can run at 100 kmph), strengthening rail connectivity to ports and development of multi-modal corridors to hinterland, construction of 4 mega bridges–2 over Ganga, 1 over Brahmaputra and Kosi river each.

NHDP

This project at the cost of US $25 Billion includes Golden Quadrilateral project (97% complete), North South–East West Corridor (completion by December 2009), 4-laning of highways (completion date March 2010).

DFC

This project at the cost of Rs. 50,000 crore, intends to segregate running of passenger and freight trains, helping in faster movement of goods at a lower cost. Phase1, which is expected to be completed by 2016, involves linking Delhi-Howrah and Delhi-Mumbai via eastern and western corridor. Both the corridors would be joined by a link between Dadri and Khurja. The feeder routes of the Western Corridor connecting ports of Gujarat is planned to be upgraded. The Phase 2 will involve connecting Mumbai-Chennai and Chennai-Howrah.

National Maritime Development Programme (NMDP) launched in December 2005, aims to increase capacity levels at ports, allocate funds for tonnage additions under Indian flag and increase investments for developing coastal shipping. Under NMDP, which is to be competed in 2011-12, 276 port projects are planned at a capital expenditure of approximately Rs. 55,804 crore with anticipated private investments to the tune of approximately Rs. 34,515 crores. In addition 111 shipping and Inland Water Transport (IWT) projects are also planned at an estimated cost of Rs. 44,535 crores.

Capital dredging is highly capital intensive and has low returns. In January 2006, the planning commission came up with a plan under which the capital dredging cost will be shared between the port trusts and government. Going forward the port dues may come down; as lower costs will need to be passed on by the port trusts to the vessels calling at these ports. Private participation in dredging is also being attracted.

To overcome the problem of manpower shortage and meet the experience matrix as stipulated by oil majors, the industry sees a need of allowing foreign officers on Indian ships. Thus, shipping industry has been lobbying hard to get a waiver on the requirement of Indian manning on Indian ships. The recent decision by the DGS, allowing two foreign officers/ship is a step in the right direction. The Ministry has also initiated a string of measures to strengthen maritime education and training. The Government has decided to develop the Indian institutes of maritime studies into a world class Indian Maritime University Private participation in maritime training has been permitted.

Also there are attempts in simplifying the complex documentation involved (e.g. under MMTG). For this purpose there are ongoing interactions between representatives of MoS, Department of Commerce (DoC), Director General of Foreign Trade and the shipping company representatives. The demands by the shipping industry to remove the 12 taxes imposed on them, remains under consideration of government. Like in other maritime nations, in India too there is Cabotage Law to support coastal shipping. Indian tonnage have the first right to coastal shipping and only when suitable domestic tonnage is not found that foreign vessels can be used for the same after taking permission of Director General of Shipping. Inspite of this, the segment has not seen much investment from the players. There are complaints by the coastal shipping companies, that the Cabotage law is not being strictly followed. As this segment is still in its nascent stage, there has to be adequate incentive for the companies to add coastal tonnage. Rationalizing the port dues and customs duties on bunker/spare will also be beneficial. There is a need to focus more on coastal shipping development plans and integrate it with the mainstream so that it develops to its full potential.

PORTS

Ports not only play a crucial role in facilitating international trade but also act as fulcrum of economic activity in their surroundings and hinterland. The country’s coastline of 7,517 km, spread over 13 States/UTs, is studded with 12 major ports and 200 (as per latest information from Maritime States) non-major ports. Of the non-major ports, about 60 are handling traffic. The total traffic carried by both the major and minor ports during 2007-08 was estimated at around 723 MT. The 12 major ports carry about three-fourths of the total traffic, with Visakhapatnam as the top traffic handler in each of the last six years. In 2008-09, the cargo handled by major ports registered growth of 20.1 per cent against 13.9 per cent in 2007-08. About 80 per cent of the total volume of ports’ traffic handled was in the form of dry and liquid bulk, with the residual consisting of general cargo, including containerized cargo.

Trends in traffic at major ports

Commodity	2005-06 M.T.	2006-07 M.T.	2007-08	2008-09	Growth (%) Over 2007-08
POL	142.1	154.3	168.7	174.4	3.4
Iron Ore	79.2	80.6	91.8	94.1	2.5
Fertilizer & Raw Materials	12.2	14.9	16.6	18.2	9.6
Foodgrains	2.1	5.0	2.2	2.2	0.0
Coal	58.8	60.0	77.5	70.6	-8.9
Vegetable Oil	3.9	3.6	3.8	4.8	26.3
-Other Liquids	10.8	10.9	8.5	11.9	40.0
Containerized Cargo	62.0	73.4	87.8	93.1	6.0
Others	52.5	61.1	62.4	61.1	-2.1
Total	423.6	463.8	519.3	530.4	2.1

Source: Department of Shipping

There was an impressive growth of 14.8 per cent per annum in container traffic during the five years ending 2007-08. Half of the world’s traded goods are containerized, and this proportion is expected to increase further. The Jawaharlal Nehru Port (JNPT), India’s largest container port, handled roughly 4.1 million TEUs in 2007-08. The annual aggregate cargo handling capacity of major ports increased from 504.75 MT per annum (MTPA) in 2006-07 to 532.07 MTPA in 2007-08. The average turnaround time increased marginally from 3.6 days to 3.9 days in 2007-08. The average output per ship berth-day improved from 9745 tonnes in 2006-07 to 10071 tonnes in 2007-08. The pre-berthing waiting time at major ports on port account, however, increased from 10.05 hours in 2006-07 to 11.40 hours in 2007- 08 and reduced to 9.59 hours in 2008-09. Significant inter-port variations in pre-berthing waiting time continued to persist.

Selected performance indicators for major ports

Name of Port	Average pre-berthing waiting Time hours - on port A/c			Average turnaround time (days)
	2006-07	2007-08	2008-09	2006-07	2007-08	2008-09
Kolkata	0.13	0.24	-1.27	3.89	4.87	4.60
Haldia Dock Complex	26.05	33.44	24.46	3.97	4.26	4.21
Mumbai	5.22	5.07	7.20	4.63	4.44	4.73
JNPT	5.45	10.20	9.84	1.67	1.85	1.96
Chennai	0.80	1.00	0.93	3.40	4.60	4.15
Cochin	0.29	1.21	1.31	2.19	1.99	2.14
Visakhapatnam	4.78	5.10	4.35	3.65	3.91	3.93
Kandla	35.28	32.64	28.08	5.46	5.13	5.20
Mormugao	19.34	18.35	11.48	4.46	4.03	3.61
Paradip	1.41	1.48	1.30	3.54	5.54	4.78
New Mangalore	1.87	1.92	0.96	3.14	3.21	3.00
Tuticorin	3.22	4.32	3.36	3.67	3.80	3.66
Ennore	0.31	0.75	0.73	1.89	2.08	2.35
All Major Ports	10.05	11.40	9.59	3.62	3.93	3.85

Source: Department of Shipping

Despite having adequate capacity and modern handling facilities, the average turnaround time of 3.85 days during 2008-09 compared with 10 hours in Hong Kong, undermines the competitiveness of Indian ports. Since ports are not adequately linked to the hinterland the evacuation of cargo is slow leading to congestion. To this end, all port trusts have set up groups with representatives from NHAI, the railways and State Governments to prepare comprehensive plans aimed at improving road-rail connectivity of ports. The NHAI has taken up port connectivity as a major component of NHDP. An efficient multi-modal system, which uses the most efficient mode of transport from origin to destination, is a prerequisite for the smooth functioning of any port. It involves coordinating rail and road networks to ensure good connectivity between ports and the hinterland.

Traditionally, most ports in the world are owned by the public sector. But privatization of port facilities and services has now gathered momentum and India is also following the global trend. To meet this requirement, the Government has already put an enabling policy framework in place. Depending on the nature of facility/ service, private operators can enter into a service contract, a management contract, a concession agreement or a divestiture to operate port services. Areas that have been opened up to the private sector on a BOT basis include construction of cargo handling berths and dry docks, container terminals and warehousing facilities and ship-repair facilities(Economic Survey2008-09-PP 244). It would be interesting to examine the performance of the major ports of India. Centre for Monitoring Indian Economy Pvt. Ltd (CMI) publishes regular data on these issues which give an idea about the changing situation of the Major Indian ports: -

1. Kandla Port

During December 2007 Kandla Port became the number one port by surpassing Visakhapatnam Port in handling overall maritime traffic in the country. Traffic handled by Kandla Port grew by 16.78 % to 58.38 lakh tonnes, occupying a 12.88 % share in the traffic of the major Indian Ports. Movement of POL products improved by 17.37% to32.03 lakh tonnes during the month.

Cumulative commodity traffic through the Kandla port during April – December 2007 was 4.77 crore tonnes, consisting an 11.42 % share in the traffic of the major Indian Ports and it was marginally lower than the same handled by the Visakhapatnam Port. Out of this cumulative traffic, POL occupied a share of.58.49 % at 2.83 crore tonnes, up by a robust 31.29 % y-o-y. The Kandla Port however recorded highest growth in maritime traffic amongst 13 major ports across the country. The port witnessed a significant rise in the movement of coal, iron ore, and fertilizer also. Although foodgrains shipped across the port shrank by 49.02 % t0 8.06 lakh tonnes the port still accounted for more than 50 % of the total food grain traffic through the major ports of the country.

Kandla Port (K P T) on the other hand, reported a significant y-o-y drop in the movement of vegetable oil, other liquid, other ore, foodgrain and containerized cargo. This drop in cargo handling was influenced by the preference of the shippers in hinterland for Mumbai ports, in spite of K P T having the lowest freight and shipping charges across the country. The prime reasons behind the Mumbai ports becoming the major substitute for the ports in Gujarat are lack of adequate shipping lines or mother vessels at the Gujarat ports, non-availability of direct connection of the existing shipping lines to important destinations, lack of regular train services at Ahmedabad I C D to Important Gujarat Port, preference for full container load (F C L), over less than container load (L C L) cargo by the Gujarat Ports, inadequate equipment available for stuffing and loading at ports, low awareness about the port facilities in Gujarat amongst the shippers and preference of the forwarders for J N P T or Mumbai port.

There have been a series of agitation by the Gandhidham Chamber of Commerce and Industry on the issue of mortgage fees, renewal of lease agreements, dredging, drop in container traffic, development and construction of new berths, improvement of roads and other infrastructure outside the port limits, release of long dwell containers, removal of monopoly for C F S operations outside Kandla Port, Allotment of land for Parking plot, under utilization of berths and congestion at the port among others. K P T, it was said, was not using over two-lakh acre of land and was incapable of creating civic amenities for more than five lakh people living on the land owned by the Centre in Kandla and adjoining towns. These shortcomings have resulted in 40% of Kandla traffic being shifted elsewhere. The under- utilization of the berth allotted to the A B G Kandla Container traffic for container traffic has created a situation, where a berth lies vacant and vessels continue to wait. The renewal of the lease agreements pertaining to salt fields and other issues have also been lying pending since 2004 and in some cases since 2001.Suspending maintenance dredging at the port for last few months have further deteriorated the situation by restricting the draft in the channel. Now this is the situation in the biggest port of India, then it indicates the priority of the country in dealing with the issue of foreign trade.

Traffic Handled at Kandla Port

Period	Quantity (000 Tonnes)	% Change over Last Period	% Share in Major Ports in India
2006-07(Apr-Mar)	52982	15.41	11.42
2006(Apr-Dec)	38356	12.48	11.39
2007(Apr-Dec)	47734	24.45	12.60
Monthly Position
Jan 2007	4829	35.65	11.45
Feb 2007	4380	22.11	11.19
Mar 2007	5399	31.17	11.94
Apr 2007	4987	46.55	12.30
May 2007	5694	41.22	13.22
Jun 2007	4830	28.49	12.26
Jul 2007	5294	32.09	12.28
Aug 2007	5072	17.14	12.67
Sep 2007	4814	16.48	12.14
Oct 2007	5810	18.52	13.06
Nov 2007	5348	11.63	11.93
Dec 2007	5838	16.78	12.88

Major Commodity Traffic at Kandla Port: April to March 2008-09.

Commodity		Period		% Variation against 2007-08
		April, 08 – March,09	April,07 – March,08
P.O.L		45539	38225	19.13
Iron Ore		129	419	-69.21
Fertilizer	Finished	5195	3916	32.66
	Raw. Mat.	298	159	87.42
Coal	Thermal	1407	935	50.48
	Coking	467	244	91.39
Container	Tonnage	2135	2617	-18.41
	TEUs	138	165	-16.36
Other Cargo		17055	18405	-7.33
Grand Total		72225	64920	11.25

KPT has an ambitious programme for port and infrastructure development at an estimated cost of Rs. 5000 crore. The programme is covered under the NMDP. As per present trend of traffic, it is expected that much more dry cargo would be handled at Kandla during the coming year as compared to present. In addition, there would be increase in coal traffic which will be around 6 million tonnes including handling at Mundra which will require strengthening of the existing facilities. The port is also planning to create berthing facilities for lighter age operations at Tuna. According to a study conducted by Gandhidham Chamber of Commerce & Industry, the traffic at Kandla Port is likely to increase substantially in a few years taking into account the setting up of new industries and addition of jetties and other infrastructure facilities. To meet demands of increase in traffic, following projects for augmentation of rail connectivity are required.

(a) Double Track broad gauge connectivity from Gandhidham to Kandla as a part of SPV of Gandhidham-Palanpur Conversion at the estimated cost of Rs. 25 crore

(b) By-pass at Gandhidham for Mundra/Bhuj Lines and providing of additional Loop lines for handling facilities at Adipur at an estimated cost of Rs. 23 crore.

(c) Provision of railways sidings from Gandhidham to Tuna (10 km) at an estimated cost of Rs. 15 crore (Planning Commission, 2006).

2. Visakhapatnam Port

Visakhapatnam Port was at the second position in cargo movement in December 2007. However, port’s performance continued to be impressive. At 57.06 lakh tonnes Visakhapatnam Port occupy a 12.59 % share in the traffic of the major Indian Ports. The above cargo was 23.35% higher than year ago level. POL products routed through the port during the month totaled 16.13 lakh tonnes, while same for iron ore was 15.99 lakh tonnes. This port was at second position in handling iron ore traffic. At 7.87 lakh tonnes of coking coal it was having highest share.

The port however retained its number one position in cumulative commodity traffic during April – December 2007 with 4.78 crore tonnes, consisting a 12.68 % share in the traffic of the major Indian Ports. The above was 17.93% higher than the same recorded a year back. The port established a national record by handling 58.3 lakh tonnes in October 2007.Out of this cumulative traffic, POL occupied a share of 29.75 % at 1.42 crore tonnes, up by 12.5 % y-o-y. Iron ore traffic at 1.36 crore tonnes, also marked an impressive growth. The port handled 80.71 lakh tonnes of coal during the same period. This port handled sizable portion of the national traffic of all categories of goods.

Traffic Handled at Visakhapatnam Port

Period	Quantity (000 Tonnes)	% Change over Last Period	% Share in Major Ports in India
2006-07(Apr-Mar)	56385	1.05	12.16
2006(Apr-Dec)	40559	-1.17	12.05
2007(Apr-Dec)	47832	17.93	12.63
Monthly Position
Jan 2007	5446	14.97	12.91
Feb 2007	4800	9.79	12.27
Mar 2007	5580	-1.26	12.34
Apr 2007	5506	49.42	13.58
May 2007	5045	4.78	11.72
Jun 2007	4651	5.42	11.81
Jul 2007	5381	28.58	12.99
Aug 2007	4962	10.64	12.40
Sep 2007	5069	10.27	12.78
Oct 2007	5830	14.49	13.10
Nov 2007	5684	21.97	12.68
Dec 2007	5706	23.35	12.59

Major Commodity Traffic at Visakhapatnam Port: April to March 2008-09.

Commodity		Period		% Variation against 2007-08
		April, 08 – March,09	April,07 – March,08
P.O.L		19758	19805	-0.23
Iron Ore		17508	18686	-6.30
Fertilizer	Finished	3408	3284	3.77
	Raw. Mat.	726	716	1.39
Coal	Thermal	3440	2895	18.82
	Coking	7561	7456	1.40
Container	Tonnage	1355	1133	19.59
	TEUs	90	71	26.76
Other Cargo		10152	10622	-4.42
Grand Total		63908	64597	-1.07

The following projects were under channel for the development of Visakhapatnam Port-

Name	Cost (Rs. Crore)	Status
Gangavaram Port Phase I Project	1700	Under Implementation
Vizag S B M Project	600	Under Implementation
Berth No. 8 & 9 Project 5 million tonnes	328	Under Implementation
Container Terminal Project	200	Under Implementation
Western Quay Berth 6 Project	50	Under Implementation
Eastern Quay Berth 9 Project	50	Under Implementation
Eastern Quay Berth 8 Project	50	Under Implementation
Multi purpose Berth in Outer Harbour Project	38	Under Implementation

The cargo traffic at this port is predominantly rail borne. Out of 56.39 MT, 36.4 MT (65%) is moved by rail from/to various places of primary and secondary area comprising states of Chhattisgarh, Jharkhand, Bihar, Uttarnchal, UP, Maharashtra, Orissa, West Bengal and Punjab. The port also serves tertiary service area of Haryana and J&K. The remaining cargo is moved by pipeline/road. The port is estimated to handle 100 MTPA traffic by 2013-14 of which 50 to 55 MTPA is expected to be rail borne. As the port is a natural choice for cargo to/from Central India, better connectivity will not only enable the port to attract additional traffic but also help the service area to trade their products with different countries. Taking into account the anticipated increase in cargo traffic to meet the demand of fertilizers, power plants and steel sector in the service areas, the following projects may be taken to improve the rail connectivity of the port:

(Continued on next post)