India: Cabotage Policies In India: India's Growing Role In International Trade

Written by Mustafa Motiwala, Avinav Mukherjee and Nihal Shaikh

Marine transport in India has evolved considerably over the past few years to become an integral component of India's economic development. Fuelled by the strong growth of its domestic industry, India is rapidly cementing a position as a key player in the maritime sector globally.

The country's focus on strengthening the domestic maritime industry, and its role in supporting broader economic goals, is highlighted in the National Maritime Agenda (the Agenda) developed by the Indian Ministry of Shipping and Transport. Among other things, a key objective of the Agenda is for India's total foreign trade to account for 5% of global market share by the year 2020. This target is in line with the present Government's wider policy of economic reforms, including the recently released Foreign Trade Policy that, along with a range of reforms of export policy and procedure, includes a commitment to nearly double exports by 2020 to $900 billion (see here).

Traditionally the movement of goods by sea in India has reflected relatively higher total annual imports compared to total exports (data here). In terms of its Balance of Trade (total exports less total imports) India has recorded an average trade deficit of USD -1997.94 Million from 1957 until 2015 with a total trade deficit of USD -10,406.20 Million as at May of 2015 (data here).

It is apparent that coastal shipping will be integral to the growth of the Indian economy generally and, specifically, the achievement of the nation's ambitious trade targets.

The current position on Cabotage in India:

Cabotage refers to shipping along coastal routes between foreign sea ports, and also to the restriction on the operation of vessels between sea ports within a particular country.

The Indian Cabotage rules are  contained in Sections 406 and407 under Part XIV of the Merchant Shipping Act 1958 (the Act). In summary, pursuant to these Sections only Indian flagged vessels or vessels chartered by an Indian citizen or company, operating under a licence granted by the Director General of Shipping (Director General), can carry cargo from one Indian port to another Indian port. Foreign flagged vessels are permitted to carry cargo only if Indian flagged vessels are not available.

Three distinct types of license may be granted by the Director General:

  • A general licence;
  • A licence for the whole or any part of the coasting trade of India; or
  • A licence for a specified period or voyage

When granting a licence the Director General has the power to prescribe a specified period of validity and licence conditions.

It is important to note that these Sections do not provide for an absolute Cabotage regime since the discretionary powers granted therein are limited to of the provision of licenses by the Director General to Indian vessels with the caveat that the carriage of cargo by foreign vessels is permissible in certain circumstances where an Indian flagged vessel is not available.

Is there an appetite for a change in the rules?

Industry bodies such as the Indian National Shipowner's Association (INSA) have suggested that the absence of a regime that supports absolute Cabotage in India is a major reason for low investment in coastal shipping.

Consequently INSA has opposed any relaxation of current Cabotage law by arguing that this move would potentially undermine the position of the domestic shipping industry in coastal trading.

However, recent economic reforms have triggered a high rate of economic growth in India in which has, in turn, significantly increased demand for the transportation of goods. At demand is mostly serviced by rail and/or road transport systems with shipping transport servicing merely 8 - 9% of total current demand.

In coastal shipping, the passage of goods in both directions is not equal. This leads to imbalance; the cargo movement pattern is dependent on the production and availability of goods, demand and the distance separating production centres from the points of destination of those goods.

As the cargo carrying capacity of ships is several times greater than that rail and road transport, coastal shipping offers the benefit of relatively lower transport, operation and logistics costs. However, given the shortage of coastal shipping services by Indian companies,  there is mounting pressure to allow foreign-registered ships to carry cargo on coastal routes, for example from Indian textile entrepreneurs who argue that the current Cabotage restrictions hamper the transportation of raw materials by sea, thus pushing up textile transportation costs.

There is also mounting support for a more relaxed approach to Cabotage to facilitate greater transhipment through Indian ports. Currently, over 27.4% of India's export/import cargo is transshipped at foreign ports. Shipping lines from Colombo are free to feeder in and/or out the containers to any Indian ports without any hindrance. This has made Colombo the preferred hub port in the region and even means that Indian ports are losing out to ports like Dubai and Singapore when it comes to transhipment.

The suggested need for a more relaxed approach to Cabotage regulation in order to facilitate greater transhipment through Indian ports was summarised by the Director General of Shipping himself who recently made a recommendation in the draft Coastal Shipping Policy that "a nuanced approach towards trans-shipment cargo would require opening it up to foreign flags in order to boost containerisation and the requisite infrastructure and practices".

Many argue that the Cabotage restrictions are also adversely affecting the growth of one of India's finest transhipment terminals, the International Container Transhipment Terminal (ICTT) at Vallarpadam in Cochin.  The ICTT has been subject to more relaxed cabotage rules but many feel that more such ports are now required and that more reform is needed along similar lines.

The Future of Coastal Shipping in India:

In its opposition of any proposed relaxation of Cabotage in India, INSA has argued that foreign liners (who would invariably benefit from the relaxation of regulation of their participation) are motivated by short term interests and that Indian shipping companies are better equipped to meet the expected increase in demand for more feeders. It is suggested that that any relaxation of Cabotage rules could hamper the growth of Indian coastal shipping.

Indian shipping companies are, however, unlikely to have sufficient vessels to meet the country's growing coastal shipping demands which would require the domestic industry to somehow dramatically increasing its volume of container ships.

As a result, many argue that relaxation of existing Cabotage restrictions would help to promote the shipping trade in India.

It appears that the solution to this quandary is likely to come from seeking a balanced solution; the Indian government reportedly plans to seek a relaxation of the Cabotage rules whilst avoiding undue hardship to the Indian shipping sector, possibly by providing tax incentives to them. In the context of India's wide-spread economic reforms, such a move could form the next step in sustainably expanding India's role in International Trade.

This update is authored by Clasis Law, Clyde & Co's associated firm in India

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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