The roll out of a Cabinet-backed subsidy scheme for local shipping companies will sweeten the deal for the privatisation of Shipping Corporation of India Ltd (SCI) and help boost the valuation of the national carrier.
The subsidy support to local fleet owners is also an indication that the government will not allow the private buyer of Shipping Corporation to re-flag the ships to tax friendly nations as the scheme links access to Indian cargo to investment in Indian ships with the aim to grow the Indian tonnage.
In fact, the subsidy scheme will render as undesirable any plans by the private owner of Shipping Corporation to flag out the ships as it diminishes the competitive disadvantage faced by Indian ships compared to foreign ships.
One of the three groups shortlisted by the government to bid for Shipping Corporation told BusinessLine in February that “freedom and flexibility on the flag should be left to the new owner”.
Shipping Corporation’s valuation is expected to go up by at least 5 per cent in the wake of the Cabinet approval to the subsidy scheme, according to an industry executive.
While this may fetch a slightly better value to the government’s stake during privatisation, the new owner would be able to recover a part of the money paid for the acquisition through the subsidy support from the government.
Despite the prevalence of tonnage tax that reduces the tax outgo of shipping companies, the operating costs of Indian ships are “much higher” compared to foreign ships as Indian flagged ships have to mandatorily engage Indian nationals as crew and comply with Indian taxation and corporate laws.
“The foreign voyage cost of operation of an Indian vessel is higher by around 20per cent. This difference in operating costs arises on account of higher costs of debt funds, shorter tenure of loans, taxation on wages of Indian seafarers engaged on Indian ships, IGST on import of ships, blocked GST tax credits, discriminatory GST on Indian ships providing services between two Indian ports, all of which are not applicable to foreign ships providing similar services,” the Cabinet noted while approving the subsidy scheme.
Hence, importing a shipping service by an Indian charterer is cheaper than contracting the services of a local shipping company.
A policy to promote the growth of the Indian shipping industry is also necessary because having a bigger national fleet would provide economic, commercial, and strategic advantages to India. A strong and diverse indigenous shipping fleet will not only lead to foreign exchange savings on account of freight bill payments made to foreign shipping companies – pegged at $53 billion in FY19 – but would also reduce excessive dependence on foreign ships for transporting India’s critical cargoes.
The other benefits of a larger Indian fleet include increase in training opportunities for Indian seafarers, increased employment for Indian seafarers, increase in collection of various taxes, development of ancillary industries, and improved ability to borrow funds from banks.
The subsidy support linked to the Indian flag will also help thwart criticism over privatisation of Shipping Corporation.
“If building Indian flag tonnage is the goal then why privatise SCI in the first place and sell it to foreigners,” said an industry source. “Why not encourage Indians to buy state of art new ships to dominate international trade instead of being overtly concerned about a very miniscule segment of ever diminishing PSU cargo,” he said.