Indian Government Wants to Launch New Line to Lower Shipping Costs

News that India is planning to launch a new shipping company through a public partnership is being met with skepticism within the shipping and industrial community in the country. According to the story first reported by Reuters, the government of newly reelected Prime Minister Narendra Modi has been pursuing the concept for the past few months as a means of supporting the industrialization plans for India along with a goal of reducing the amount of foreign exchange being spent on shipping.

India imports about 220-250 million tons of crude oil, approximately 25 metric tons of coal, and six to seven metric tons of fertilizer each year. The Economic Times reports that shipping costs are running between $75 and $80 billion annually with the bulk of it paid for in foreign exchange. Most of the cargo is currently transported on foreign-owned ships because the growth of the Indian fleet has not kept pace with the growth in trade. They estimate as much as 93 percent of exports and nearly 40 percent of total Indian cargoes are carried on foreign ships.

Reuters citing unnamed government sources said the plan was to set up a new shipping company jointly owned by the state-owned oil and gas, and fertilizer industries, which would also support the operation with long-term 15-year contracts. The ships would be managed by the Shipping Corporation of India, which would also become an investor in the new fleet. According to the report, the plan envisions a fleet of more than 1,000 vessels over the next decade to lower the projection that shipping costs could balloon to $400 billion as Indian industrialization proceeds. The report says the goal is to cut costs by at least a third.

While India currently has a fleet of more than 1,500 vessels, many of them are older and have smaller capacities. Last year, India moved to start regulations to stop the acquisition and ongoing registry of older ships in an effort to force modernization of the fleet. Shipping Corporation of India however has challenges as a state-owned company with the plan to raise capital through privatization long stalled. Rumors are that the Modi government is now listing the privatization as one of its top goals with a plan to launch the delayed offering within the first 100 days of the new term.

The Economic Times however points out that the plan for a new shipping company has been explored before and abandoned due to a lack of clarity and challenges. In addition to the massive capital requirements, they highlight that the seller of the commodity typically arranges for transportation at the buyer’s cost. Further, they point out that to make the ships economical you need to carry cargo in both directions as it is not practical for these large bulk and oil carriers to sail for long voyages with only ballast. They questioned where the Indian fleet would get the export cargoes as they sailed back to the loading ports.

The opponents are saying instead of investing in a second shipping company, which is rumored to be planned for Modi’s home district, that they should instead invest in the Shipping Corporation of India. Reuters reports financing for the new operation would come from a $3.6 billion development fund set up by the government.