The World Trade Organization defined “economic resilience” in its 2021 World Trade Report as the ability of a system, including households, businesses and governments, to prevent, prepare to deal with and recover from shocks. The said report has also extensively highlighted the role of international trade in economic resilience. In this article, we attempt to highlight long-term priorities that might be considered for the Indian economy given the adverse supply shock from drastic increases in shipping rates.
Data provided by the report shows that the global Baltic Sea container freight index, which had fluctuated between 1,500 and 2,000 two years before the pandemic, has risen sharply to 4,500 by January 2021. Lack of availability of containers and lack of long-term contracts are the two most frequently cited reasons for increasing freight rates. The shortage of shipping containers is another symptom of the chaos the pandemic has wreaked on international supply chains, particularly in North American and European regions.
First, the adverse logistical impact of the COVID-19 pandemic led to congestion in ports, which was also exacerbated by a mismatch between import and export volumes. Second, the conflict between Russia and Ukraine has created challenges on both the financial and logistical fronts for shipping companies. While the former includes the withdrawal of insurance coverage and the blocking of SWIFT, the latter includes the closure of shipping activities in the northern Black Sea, stranded containers and congestion at transshipment ports, and shipping companies’ failure to accept goods for Russian ports.
This is compounded by the recent lockdown in Shanghai following a surge in COVID-19 cases. While we recognize that this is not an easy fix, it is time we repositioned our strategy to combat the increasing instances of unforeseen events that have exacerbated trade movements, such as the Suez Canal blockade.
Notwithstanding, one bright spot for the Indian economy was the surge in goods exports in 2021-22 to an all-time high of about $418 billion. Moreover, this growth was broad-based, with non-petroleum exports posting an increase of about 33 percent over the corresponding period last year. This marks the beginning of India’s much larger role in world trade as well as an increased contribution to global value chains. Hence, it is also an opportune time to advance India’s shipping sector, which is an integral part of international logistics with strong backward interdependencies with ancillary services and employment.
The Indian pharmaceutical sector has been an important contributor to the export successes of the last decade. Pharmaceutical exports grew 103 per cent, rising from Rs.90,415 crore in 2013-14 to Rs.1,83,422 crore in 2021-22. Indeed, since the emergence of COVID, India has lived up to its label as the “pharmacy of the world” by generating US$24.1 billion in export sales in 2021-22. All of this has been achieved despite frequent lockdowns, global supply chain disruptions, including container shortages and freight cost increases.
To curb dependency on imports with the vision to achieve Aatmanirbharta (self-reliance), we have seen the introduction of Production-Linked Incentive (PLI) programs in various sectors including pharmaceuticals. However, we also need to look at how we can prepare our domestic shipping industry to achieve self-sufficiency by addressing and streamlining traditional issues, while also achieving further export milestones.
Sea freight is often seen as cheaper and more environmentally friendly than air freight. In reality, however, the exact opposite could be true – sea freight can be unpredictable for several reasons mentioned above, which also results in longer transit time. Delayed end-point logistics can also negatively impact the quality of goods with a limited shelf life. In addition, late deliveries also threaten in relation to the loss of relevance for importers or the loss of orders from competing nations.
India is blessed with a coastline of approximately 7,517 km endowed with 12 major and 205 minor ports. India’s merchant fleet is estimated at 1500 vessels (foreign and coastal combined). However, the United Nations Conference on Trade and Development’s Maritime Transport Review (2021) ranks India 19th in the world. While 95 per cent of India’s foreign trade volume is carried by sea, about 92 per cent of it is carried by foreign-flagged ships .
In addition, India accounts for an estimated 1.25 percent of the total global deadweight tonnage (DWT), which is a measure of the weight a ship can carry, including the weight of loaded cargo, fuel, ballast water, fresh water, crew , provisions, passengers and excludes the weight of the ship. In addition, it is estimated that approximately US$75 billion is paid annually to foreign shipping companies as ocean freight, out of a total of US$85 billion. This speaks volumes about the progress that can be made in promoting domestic value creation in this area.
The main factors affecting the competitiveness of Indian shipping include the cost of financing, the tax regime and the age profile of Indian flag merchant vessels. In a bid to improve competitiveness, the government has taken proactive measures which include the policy of providing shipbuilding financial support of up to 20 per cent of the contract price to Indian shipyards with a budget expenditure of Rs 4,000 crore, which is proving to be on par with global practices by experts; revised criteria for first refusal, i.e. contractual first refusal in chartering ships through tendering processes for Indian-built and Indian-flagged ships, followed by foreign-built but Indian-flagged ships and finally for Indian-built but foreign-flagged ships moving ships marked.
This is also complemented by a Rs 1,624 crore subsidy to Indian shipping companies in global tenders by government departments and Central Public Sector Enterprises (CPSEs) to encourage entrepreneurs to register Indian flag vessels. Under international law, every ship must be registered in a country (“flag state”) to whose laws and regulations it is subject. It was also learned that Cochin Shipyard Limited’s infrastructure development of ship repair units in Kochi, Mumbai, Kolkata and Andaman and Nicobar Islands is underway.
Furthermore, it is notable that recently 735 projects were added under the Sagarmala Port-led Development Plan, bringing the total to 1,537 projects at a cost of Rs 6.5 trillion. Estimated savings of Rs 9,600 crore from potential cargo of 340 million tonnes (MT) by coastal shipping by 2024-25 are also projected. These interventions embody a serious intention to promote this mode with the lowest carbon footprint.
All these steps are intended to enable the removal of supply chain constraints by creating more competition between shipping companies by supporting small/medium-sized players who are generally less favored in order to increase overall volume and efficiency and grant them preferred berths . Recent trade deals with the United Arab Emirates and Australia offer further opportunities for India to play a larger role in global supply chains.
The report of the Committee on Developing Pathways for Acquisition, Financing and Leasing of Ships from International Financial Services Centers (IFSC) in India has provided a comprehensive overview of the national and global scenario as well as long-term recommendations. It rightly points out that promoting Aatmanirbharta in the maritime sector requires a comprehensive build-up of the entire ecosystem, including technology, insurance, arbitration and dispute resolution, training and management, maritime finance and commercial skills. Here India is well equipped to face the situation given its highly skilled workforce which is recognized worldwide.
It is time to offload the established global strength of India’s services sector, coupled with a renewed focus on manufacturing, to the shipping sector – which is an appropriate mix of both sectors. Given the geopolitical scenario of the day and India’s strategic position, ripples of benefit would also reach other shores in our regional neighborhood, including the Middle East and Africa to the west, and South and Southeast Asia to the east to begin with. The ongoing crises must be seen as a basis for laying the groundwork for scaling, and government interventions are indeed steps in the right direction. Undoubtedly, our ship has set sail to fulfill its true potential.
About the authors: Venkat Hariharan Asha is Deputy Director of the Department of Medicines (under the Union Ministry of Chemicals and Fertilizers); Alex Chapman is an industry consultant.