Maritime Development Fund & Indian Shipping Industry

Context: The Union Budget 2025 has announced Rs. 25,000 crore Maritime Development Fund for the shipping industry, among other incentives.

Relevance of the Topic:Mains: Budget- Maritime Sector; Indian Shipping Industry

Present status of Indian Shipping Industry

• Cargo handling:
  • The cargo handled at major ports has only marginally increased from 1,071.76 million tons in 2016-17 to 1,249.99 million tons in 2020-21. (Ministry of Ports, Shipping and Waterways) This is a cumulative growth of 14.26% or an annual increase of just 2.85%.
• Vessels handled: 
  • The number of vessels handled at these ports declined by 5.93%, from 21,655 vessels in 2016-17 to 20,371 in 2020-21.
• Indian-registered fleet:
  • The number of Indian-registered ships has increased from 1,313 in 2016-17 to 1,526 in September 2024 — a cumulative rise of 16.77% and an average annual growth of 2.4%.
• Gross tonnage:
  • It has grown from 11,547,576 GT in 2016-17 to 13,744,897 GT — a cumulative increase of 17.44% and an annual average growth of 2.5%.
• Aging Indian fleet:
  • Average vessel age rose to 26 years in 2022-23. However, this has now improved to 21 years, with the addition of 34 relatively younger vessels (average age of 14 years) in 2024.
• Declining Market share:
  • Indian shipping companies continue to lose market share to foreign-flag vessels in EXIM trade and to rail and road transport for domestic cargo movement.
• Global ranking:
  • India’s global ranking in ship ownership declined from 17 to 19. This decline indicates that investments in port infrastructure alone have not translated into a stronger domestic shipping sector.

Progress under Sagarmala Initiative

• As of September 2024, 839 projects requiring an investment of ₹5.8 lakh crore have been outlined, with 241 projects (₹1.22 lakh crore) completed, 234 projects (₹1.8 lakh crore) under implementation, and 364 projects (₹2.78 lakh crore) in various stages of development.
• Focus areas:
  • Port modernisation (₹2.91 lakh crore)
  • Port connectivity (₹2.06 lakh crore)
  • Port-led industrialisation (₹55.8 thousand crore)
  • Coastal community development.
• Impact of initiatives: GDP increased from ₹153 trillion in 2016-17 to ₹272 trillion in 2022-23, despite setbacks due to the COVID-19 pandemic.
• EXIM growth: India’s EXIM trade grew from $66 billion in 2016-17 to $116 billion in 2022, reflecting a 77% cumulative increase.
• Targeting Export-led growth: The government has set ambitious targets, aiming to achieve a $7 trillion economy by 2030, with exports projected to reach $2 trillion by 2030.

Sagarmala Programme: 

• Sagarmala is a flagship initiative to transform India’s maritime sector. 
• Aim: With India's extensive coastline, navigable waterways, and strategic maritime traderoutes, Sagarmala aims to:
  • Unlock the untapped potential of these resources for port-led development and coastal community upliftment.
  • Enhance the performance of the logistics sector by reducing logistics costs for both domestic and international trade.
  • Minimize the need for extensive infrastructure investments by leveraging coastal and waterway transportation, thus making logistics more efficient and improving the competitiveness of Indian exports.
• Nodal Ministry: Ministry of Ports, Shipping and Waterways.
• It has four main aspects associated with it, as given below:

• Overall set of projects are divided into 5 pillars and 24 categories as below:

Challenges faced by the Shipping Industry

• Capital Constraints and High Borrowing Costs:
  • Indian shipping companies face high borrowing costs, short loan tenures, and strict collateral requirements.
  • Unlike foreign counterparts, Indian ship-owners cannot use ships as collateral, making financing difficult.
  • Lenders do not fully understand the cyclical nature of the industry, leading to rigid loan restructuring policies.
• Unfavourable Tax Policies:
  • Indian-flagged ships are subject to 5% IGST on purchase price, a tax not imposed on foreign vessels operating in Indian waters.
  • Indian ship-owners must deduct TDS on seafarers' salaries, whereas foreign vessels employing Indian seafarers do not have to.
  • These disparities make Indian vessels significantly less competitive.
• Ship-building Challenges:
  • India spends close to $75 billion annually on leasing ships from outside.
    • Also, India owns just about 2% of the world’s total tonnage and has some 1,500 ships. 
    • With regard to shipbuilding, India currently has less than 1% share of the global market, which is dominated by China, South Korea and Japan.
  • India’s shipbuilding industry suffers from inadequate infrastructure, high input costs (especially steel), dependence on imports for spare parts, and delays in vessel deliveries. 
  • Customs duties on imported machinery increase production costs. Lack of skilled workforce reduces efficiency. These issues discourage ship-owners from investing in Indian shipyards.
• Competition from Foreign-flagged Vessels:
  • Foreign-flagged vessels, often registered in tax havens, enjoy easier access to capital, lower borrowing costs, and lenient regulations.
  • Their ownership structures allow them to operate with minimal regulatory oversight, making them far more competitive than Indian-flagged ships.

Steps Taken by the Government

• Maritime Development Fund (MDF):
  • A ₹25,000 crore fund aimed at improving access to capital for ship-owners. The government will contribute up to 49% to the fund and mobilise the rest from the private sector.
  • The fund will provide long-term and low-cost financial support for Indigenous shipbuilding and other blue water infrastructure projects. 
  • The fund aims to provide various forms of financial support, including debt, equity, viability gap funding (VGF), and buyer credit.
• Ship-building clusters:
  • Facilitating ship-building clusters help to increase the range, categories and capacity of ships.
  • This will include additional infrastructural facilities, skilling and technology to develop the entire ecosystem.
  • This will not only improve overall infrastructural and logistical support for the export sector, but also help to save a huge amount of forex remitted in dollars to foreign shipping lines.
• Infrastructure Status for Large Vessels: This status allows shipping companies to access benefits similar to those in other infrastructure sectors.
• Customs Duty Exemption on Shipbuilding Spares: The government has extended this exemption for another 10 years.
• Revamped Financial Assistance Policy: This includes credit incentives for shipbreaking and an extension of the tonnage tax scheme to inland vessels.

While these initiatives are steps in the right direction, they may not be sufficient given the capital-intensive nature of the shipping and shipbuilding sectors. Additionally, clarity is needed on how the ₹25,000 crore MDF will be mobilised and distributed over the coming years.

Way Forward

• Long-Term Financing at Competitive Interest Rates: Indian Shipping industry requires loan tenures of 7-10 years with lower interest rates to facilitate ship acquisition and modernization.
• Expansion of Shipbuilding Infrastructure: India must invest in new shipyards and modernise existing ones to build large vessels and reduce dependence on imports.
• Tax Reforms to Level the Playing Field: Removing IGST on ship purchases and exempting Indian seafarers from TDS requirements will improve competitiveness.
• Encouraging External Commercial Borrowings (ECBs): If strategically utilised, ECBs could help bridge the funding gap in the maritime sector.
• Investment in Green Technology: To meet global emissions reduction targets, India must promote eco-friendly shipbuilding and retrofitting of existing vessels.