Cabotage Policy in Development of Coastal Shipping

Coastal shipping has a significant role to play in supporting Indian economy to achieve this ambitious target. Maritime transport is an essential infrastructure for socio-economic development of the country, with carriage by sea constituting approximately 95 per cent of India’s international trade by volume, and 68 per cent by value.

Despite having a great Maritime tradition and a long coastline of about 7517 km studded with 13 major and 185 Non-Major (Minor / Intermediate) ports, the potential of coastal shipping has not yet been fully exploited in India.

Costal Shipping Share in Cargo Movement
Modal share of inland cargo movement at present in India by coastal shipping merely 7 per cent as about 50-55 per cent of the freight traffic is carried by road, 30-35 per cent is by rail.

Cabotage Role in Coastal Shipping Development
Cabotage policy has an important bearing on the coastal shipping of a country. The potential growth of coastal shipping can be effectively tapped if suitable policy measures are adopted to improve commodity traffic through coastal vessels, at competitive costs.

Under Indian Cabotage Regulations, movement of coastal trade is reserved for Indian flag vessels and operation of foreign vessels in Indian waters is restricted. The Indian National Ship Owners’ Association (INSA) considers the absence of absolute cabotage the major reason for low investments in coastal shipping and strongly opposethe move of relaxing the cabotage law arguing that this will not give a level playing groundfor Indian bottoms.

With relaxation in Cabotage laws for container vessels and lash barges to attract foreign mainline vessels and decontrol of freight and passenger fares to promote coastal trade, the stringent Cabotage regulations are now being liberalized.

Though Cabotage regulations are implemented to provide safe, reliable and cost-effective transportation options to shippers and assure maritime capability, the complete relaxation or repeal of such regulations could threaten domestic tonnage by opening the door for carriage of coastal cargo by foreign flag vessels.

Cabotage Relaxation at Vallarpadam Facility
The September 2012 cabinet decision on the cabotage relaxation at Vallarpadam facility was for only the foreign-owned & foreign-registered container ships out or in out or in through the international container trans-shipment terminal, or ICTT, run by Dubai’s DP World at Vallarpadam in Cochin port on the country’s western coast.

The primary objective of relaxation in the cabotage policy is for ICTT, Vallarpadam, to attract cargo destined for Indian ports, which are presently being transshipped at Colombo and other foreign ports. This initiative is expected to promote transshipment of Indian cargo from ICTT, Vallarpadam, and reduce dependence on nearby foreign ports. The relaxation in cabotage law is for a limited period of three years after which it will be reviewed by the government.

But almost more than a year in passing the relaxation, none of the global container shipping lines has come forward to take advantage of this policy change.

The lukewarm response from the shipping lines, though, hasn’t deterred more Indian ports such as Mundra port and Pipavav port in Gujarat, the container terminal at Vizag port in Andhra Pradesh and the upcoming Vizhinjam port in Kerala from seeking similar exemptions from the cabotage law.

Prakash Tulsiani, Managing Director, APM Terminals Pipavav, articulates that such relaxation in cabotage law to other Indian Ports will help the trade in India with larger vessels calling on Indian Ports - the economies of scale that will make their way back to the importer/exporter and make them more competitive vis-a-vis other countries. Indian exports and imports will not spend time idling at transhipment ports abroad. Instead more frequent and direct services will emerge and make Indian importers and exporters more competitive on their delivery schedules.

He also believes that continuing with cabotage law is that we end up protecting an Indian flagged fleet of container vessels which are even less than 20 having 2000 TEUs capacity and presently serves a negligible amount of India’s containerised trade. Given the scale that shipping fleets across the world are augmenting their capacities with 18,000 TEU vessels. The current Indian flagged fleet is outdated and will continue to require state patronage at the expense of the entire Import Export Trade of India.

Now the shipping ministry has decided not allowing cabatoge relaxation other than Vallarpadam facility by saying that relaxing cobatoge at the Vallarpadam facility was not helped the growrh of trans-shipment containers, which was the main aim behind passing the law by the cabinet in 2012.

It is true that the global economy, which is slowly picking itself up after one of the worst recessions, hasn’t helped the cause much. It also took the government machinery more than six months to sort out procedural issues relating to cabotage relaxation and trans-shipment of containers.

All the procedures are now in place, but the container carriers haven’t reciprocated as expected by starting hub and feeder services. The container carriers had earlier argued that the cabotage rule was a major factor that discouraged mainline foreign vessels from calling at Vallarpadam and hindered the growth of the trans-shipment business.

The cabinet decision was taken at a time when maritime nations were tightening their cabotage law to support local fleet-owners. Indian fleet-owners running container ships were totally opposed to the move, arguing that the growth of India’s coastal fleet was hampered by multiple taxes.

India introduced a new tax exclusively for its shipping industry from 2004 based on the cargo-carrying capacity of ships in place of corporate tax. The tonnage tax cut the tax incidence of shipping firms to just 1-2 per cent of their income, compared with the corporate tax rate of 33.9 per cent.

Still, Indian shipowners are required to pay a dozen other taxes, which negate the benefits accruing from tonnage tax. This explains why foreign fleet-owners are reluctant to invest and register ships in India, where 100 per cent foreign direct investment (FDI) in shipping is permitted through the automatic route.

Foreign shipowners not constrained by these taxes have managed to take away a big share of India’s local business.