India, with a long coastline of 7,516.5 km—a rich reserve of engineering skills and ever alluring coastal trade prospects—makes an ideal centre for a vibrant shipbuilding industry. Unfortunately, in the past three decades when the focus of shipbuilding activity gradually shifted from Europe to Asia due to high cost, India failed to cash in. Japan, which wore the shipbuilding crown for a good number of years, lost it to South Korea for reasons that earlier saw the emasculation of the industry in Europe. China got into the act a little later, but it did not take much time to start breathing down the neck of the other two Asian countries. What is important is that between the three countries, they have a share of close to 80 per cent of the world shipbuilding capacity.
South Korea and China – Japan is becoming increasingly focused on high tech vessels – have come to dominate the industry due largely to generous subsidy and other incentives made available by the government. Unlike in India where the government thought it was wise to withdraw the 30 per cent subsidy to shipbuilders in August 2007 after a five-year run, shipyards in South Korea and China remain beneficiaries of official patronage in more ways than one. Ideally, an industry should be able to manage without subsidy, which could cause distortions in fiscal management and become an issue among trading nations. But the shipbuilding industry, a highly labour-intensive enterprise that lacks a level-playing field on the global platform, is a different proposition altogether. Moreover, the world being awash with surplus vessels, shipyards particularly in China and South Korea in their bid to win new orders are giving attractive discounts.
In a situation like this, Indian shipyards, left to fend for themselves in the last five years, have seen their share of the global order book slip from 1.3 per cent to less than 0.1 per cent. Exactly the opposite happened when they were recipients of a subsidy of 30 per cent. Our shipyards came into the reckoning of offshore shipping companies for vessel procurement when subsidy improved their global competitiveness. At the same time, many groups contemplated building new yards. While a couple proposals to build shipyards came to fruition, the others became non-starters. Promoters thought investments would turn sour in a no-subsidy situation. Denied of a level-playing field, Indian shipyards, according to industry officials, are subject to a cost disadvantage of 30 per cent to as much as 50 per cent vis-a-vis their peers in other Asian countries. Give it a few years, Vietnam will be another Asian country to boast of a solid shipbuilding industry and this is to happen with bountiful government support.
The shipping and shipbuilding industries never had it so bad in 25 years as oversupply of vessels and the sorry state of Baltic Dry Index, an industry benchmark of shipping costs of dry bulk cargoes, will bear it out. A major victim of the 2008-09 recession, the two conjoined industries continue to suffer because of the Euro zone crisis, a fall in Chinese economic growth, the slow recovery of the US economy and the World Trade Organisation’s pessimism about international trade outlook. Take the case of China where in the first nine months of 2012 shipyards suffered a loss of 46.9 per cent in new ship orders to 15.41 million deadweight tonnage (DWT is a measure of how much weight a ship is carrying or can safely carry) year on year. In the same period, the completion volume of Chinese shipbuilding fell 18.5 per cent to 41.58 million DWT. At its peak, the Chinese shipbuilding industry had 3,400 companies. But with new ship orders hard to come by and equally difficult to execute orders because of financing issues, companies have started going out of business. Whatever way one looks at, China has too many shipyards for any foreseeable future.
Is not now then the right time for New Delhi to offer incentives to local shipyards? What they find encouraging is that the shipping ministry, undaunted by lukewarm response of the government to its past pleading for extending help to shipyards, has once again sought introduction of “about 15 per cent subsidy on the price of ships.” The ministry says the subsidy restoration, albeit at half the discontinued rate, could be used as a lever to promote indigenisation of industries supplying equipment and parts to shipbuilders. Without denying the merits of the ministry suggested conditionality that “at least 50 per cent of materials and components” must be procured domestically, it will be fair if this requirement for claiming subsidy is introduced prospectively.
There is a chicken and egg syndrome here as we have seen earlier in the case of the automobile industry. The ministry admits that our shipbuilding industry is in an “embryonic stage.” It is only when the industry has acquired a critical mass that ancillaries will come up in strength. At this point, shipyards are overwhelmingly dependent on equipment and component imports. Our shipyards are enthused by the ministry recommendation that coastal movement of cargoes should be the preserve of locally built and Indian flag vessels. As of now, Indian flag vessels, irrespective of whether these are built here or abroad, could ferry cargoes along coastal routes. Let local shipyards get this shot in the arm to realise their potential.