FDI in Civil Aviation – how it will help Part II - Archie D’Souza

In a report entitled India’s Experience with FDI: Role of a Game Changer prepared by ASSOCHAM in JAN 2012, there were several interesting and valid points raised on the role of FDI in the Civil Aviation sector.  Reproduced below are some of its salient features. (Although I have not quoted the report verbatim throughout, through most of the text, the words are from the report)

The study of FDI in Civil Aviation observed:
• Huge amounts of additional investments required to realize the vision of the Civil Aviation industry as suggested in Working Groups report.
• Airport Infrastructure would require an investment of about Rs.67,500 crore during the 12th Plan of which around Rs 50,000 crore is likely to be contributed by the private sector.
• Airlines in India are expected to add around 370 aircrafts worth Rs.150,000 crore.
• Decade 2000-2010 witnessed a profitless growth. The Airline Industry in India suffers from huge debt burden – close to US $ 20 billion (Estimated 2011-12).

Allowing foreign airlines to pick up stake in three major Indian Airlines (Kingfisher, Jet Airways and Spice Jet) would result in capital infusion to the tunes of:
• Promoters off loading 26% of their Equity Stake can raise approximately upto Rs. 1341 crore.
• Figure goes approximately upto Rs.2530 crore in case 49 per cent FDI is allowed.
• Equity valuation at 26% of all issued shares (promoter and non-promoter) approximately comes out to be Rs.2835 crore.
• Estimates at 49% go approximately up to Rs.5341 crore.
The amount raised can be used to address working capital requirements of the airlines.
FDI in Civil Aviation

I. Importance
The aviation industry is critical for any nation to gain from participation in the global economy. Civil Aviation in its role of a key infrastructure sector facilitates:
• Growth of other industries
• Trade - by offering a reliable and faster mode of transport services to move products and personnel across long distances
• Tourism
• Generates both direct and indirect employment opportunities

The vision for the Indian civil aviation industry for the 12th Plan period is:
“To propel India among the top five civil aviation markets in the world by providing access to safe, secure and affordable air services to everyone through an appropriate regulatory framework and by developing world class infrastructure facilities”

II. Potential
A growing middle class supplemented with rise in disposable incomes, change in lifestyles, a globalized economy all act as drivers that project a huge potential for the industry. Another way of looking at the potential of the sector is by comparing the domestic tariff of another emerging economy China. Domestic traffic in China is believed to be five times the size of India’s despite having a population just 10% larger.

Forecast of air traffic carried out for 12th plan period suggests:
• Domestic passenger throughout would grow at an average annual rate of around 12%.
• Domestic passenger throughout is expected to touch around 209 million by FY-17 from 106 million in FY-11.
• International passenger throughout is estimated to grow at an average annual rate of 8% during the 12th Plan period
• International Passengers to reach 60 million passengers by FY-17 from 38 million in FY-11.
[please read the full  report for the references]

While the report speaks about the huge investments required in various sub-sectors like Airport Infrastructure, I shall confine this discussion to FDI in airlines only and keep the other sectors for a future discussion.  According to the report the amount required for fleet expansion is US$ 43 b (INR 2.15 L cr).  To cater to the increasing international and domestic traffic airlines are expected to add around 370 aircraft to their fleet. I will not go into individual airline requirements although the report has.  Where is this money going to come from and how will the Civil Aviation Ministry’s vision be realized?  The report says that “looking at the existing financial status of the industry the achievement of set objective seems ambitious.”

Let us look at the current status and the not-too-distant past (all figures from the report).  The decade 2000-10 witnessed a profitless growth phase of the airline industry.  During the three-year period between APR 1, 2007 & MAR 31, 2010, Indian carriers incurred an accumulated loss in excess of US$ 5.2 b (INR 26,000 cr).  As per certain estimates, the airline industry in India suffers from a debt burden of close to US$ 20 b – a very huge amount by any standard.  Half of this is aircraft related and the rest for working-capital loans, payments to airport operators and fuel suppliers.  Although the report has cited high cost of operation being a cause for adversely dented financials, I don’t agree.  Irrational (competitive is the word the report uses) pricing policies has definitely played a part.

In part I of this same article, I have strongly advocated the cause of FDI in civil aviation.  Here too I wish to harp on the same issue.  I’m not in favor of any kind of government bail-out to any carrier including the public-sector one.  Regarding my remedies for Air India, please read my earlier post on the same blog.  Here I’ll state how mainly citing the report’s recommendations.

Raising such huge amounts of investments would require the government to adopt a more progressive and positive fiscal regime as well as develop a collaborative approach with industry.  Civil Aviation industry would require not only large but continuous flow of funds if the next phase of growth needs to take place. For this to happen the government must relook at its FDI policy which disallows foreign airlines from purchasing equity of domestic airlines.  One of the reasons successive governments have been citing against foreign airline equity participation is that the US doesn’t allow it.  My rebuttal to this is – why follow the US model or example?  Why not one of our own?

This is what direct investment by foreign airlines would do (according to the report):
• Provide managerial and technical expertise needed to improve productivity
• Raise much-needed capital for the private-sector players
• Improve operating standards and services
• Add brand value (my addition)
• Spread out the network of Indian carriers (again, my addition)

Here is an estimate of the amount of capital that can be raised by three prominent Indian private airlines shows (foreign non- airline investor’s equity has not been considered in estimation):
• The promoters by off loading 26 % of their Equity Stake can raise up to Rs. 1341.45 crores.
• This figure goes up to Rs. 2528.3 crores in case 49 per cent FDI is allowed.
• Combined equity valuation (promoter and non-promoter) at 26 % comes out to be Rs. 2834.27crores.
• The valuation at 49 % goes up to Rs. 5341.52 crores.
The capital raised from equity sale can be used to address the working capital requirements of the airlines.  The report gives a detailed table for each of the carriers.  I’d suggest that readers look at it.

Here are a few other benefits from FDI.  It has, since 1991, proved to be a game-changer for wide segments of Indian industry.  Wherever it has been allowed it has transformed those industries in ways that are now irreversible.

To conclude, I’d like to state that if India has to emerge as a global player in civil aviation, FDI in the airline industry is a must.

Air India - a way out of the mess sans tax-payer's money by Archie D'Souza

Air India's mess only strengthens the case for throwing open the domestic aviation space to foreign airlines.

Viewed purely from a public policy perspective, the decision to use taxpayers' money for bailing out Air India cannot be justified. This is a company whose operations cannot even remotely be seen as touching the lives of the vast majority of Indians. Also, the sums involved are, by no means, small. The Government is trying to save a company with accumulated losses of over Rs 27,000 crore and outstanding debts of Rs 43,000 crore. The absurdity becomes even more manifest as it is engaged in a business that does not really demand the Government's direct involvement, whether for socio-economic or strategic reasons. Having said that, it must be admitted that the Government was left with little or no option in what it has undertaken to do. The company is saddled with a vast workforce, whose livelihood concerns it cannot be totally indifferent to. Some of the bailout money for Air India is actually going towards paying salary arrears. Another chunk is also going to be used for settling the dues of public sector oil companies, who would not have accommodated the airline with liberal credit for extended durations without some gentle nudging by the Government in the first place. Besides, one cannot ignore the series of managerial blunders – presided over by a succession of ministers in charge of the aviation ministry – that had brought the national carrier to its financial ruin. Taken all in all, there is some serious moral imperative behind the Government's actions to save the company.

That does not however take away the fact that the so-called turnaround and financial restructuring plan for Air India, approved by the Union Cabinet on Thursday, runs the risk of throwing good money after bad. While there may be leakage of resources of monumental proportions on the expenditures the Government incurs on subsidies, the National Rural Employment Guarantee Act and a plethora of other welfare programmes, these can be criticised only on grounds of poor implementation or their benefits not reaching the intended beneficiaries. But the basic idea of state funding for schemes aimed at the poor and vulnerable sections cannot be questioned. That cannot be said, though, about civil aviation, which is hardly a priority area for direct government involvement. The irony is complete when one considers that the Government has been niggardly in its support of the Railways, which carries in three days what the entire domestic aviation industry does in an entire year.

The best solution for Air India is for the Government to create conditions, which enable the airline to be taken over in a manner that does not generate industry-wide turbulence. The mess that Air India has slid into, indeed, only strengthens the case for throwing open the domestic aviation space for foreign airlines. It would be a win-win not only for consumers (who stand to benefit from new players coming in), but also existing cash-strapped airlines (including those other than Air India) whose promoters want to sell out. The latest approved plan, by contrast, neither envisages Air India's takeover nor sees it generating even cash profits till 2018-19. The country's taxpayers should be spared from such ‘turnaround' and ‘restructuring' packages.

(This article was published in the Hindu Business Line on April 13, 2012)
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My comments

This is my third article in a series about what ails the aviation industry in India and what the right and wrong solutions are.  In this article I shall confine my discussion to Air India.  I am not going into the pros and cons of nationalisation and public sector monopoly, although I’ve always maintained that the government has no business to be in certain businesses and aviation & hospitality top that list.

The entity that is Air India today is a result of the merger of two culturally diverse organisations – Air India which is also the name of the merged enterprise, and Indian Airlines.  When the then Civil Aviation Minister, Mr. Praful Patel, decided on a merger, his thoughts were purely from a commercial point of view.  Remember, Mr. Patel is a businessman and his thinking would be on those lines.  The merger of the two airlines has been mooted in the past too.  Mr. Patel had a valid point when he talked about synthesising the strengths of the two organisations.  His calculation went awry when he decided to overlook the individual and combined weaknesses.  Here are some moot points I’d like to mention – some cultural, some commercial:
• Up to 1992, Air India was one of the best international carriers in the world.  It operated in a very competitive environment and competed with the best
• Indian Airlines, on the other hand, was more of a bureaucratic organisation enjoying a monopoly in its market.  The moment it faced competition it started losing business.  Its market share started declining rapidly and in no time it lost its number one status.  The service levels of Indian Airlines, or rather its new avatar Air India’s domestic services, are much better than what it used to be, but just not good enough compared to the competition.  If I am to take a domestic flight today, Air India is my last choice.  Before private domestic airlines came into being, I had no choice but to use Indian Airlines.  On the international sector, a choice always existed and we exercised it very often in favour of the national carrier.
• Air India and Indian Airlines had between them some of the best training facilities in the world.  This applied to both technical and non-technical training.
• The same can also be said with regard to maintenance facilities
• In Chef-Air Air India had one of the best flight kitchens in the world.  It was a division of the now defunct subsidy of Air India – the Hotel Corporation of India which, also ran the Centaur chain of hotels
• The real estate, both commercial and residential, that these two airlines own is phenomenal
So, what happened and how did things come to this sorry state of affairs?  I will go into that at some later date.  Right now I’d like to offer solutions which can be worked out if the government of the day has the political will to make it happen.

The newspaper report I’ve quoted in the beginning offers the following:
“The best solution for Air India is for the Government to create conditions, which enable the airline to be taken over in a manner that does not generate industry-wide turbulence. The mess that Air India has slid into, indeed, only strengthens the case for throwing open the domestic aviation space for foreign airlines. It would be a win-win not only for consumers (who stand to benefit from new players coming in), but also existing cash-strapped airlines (including those other than Air India) whose promoters want to sell out. The latest approved plan, by contrast, neither envisages Air India's takeover nor sees it generating even cash profits till 2018-19. The country's taxpayers should be spared from such ‘turnaround' and ‘restructuring' packages.”

So, the Government needs to “create conditions, which enable the airline to be taken over in a manner that does not generate industry-wide turbulence.”  How exactly would these conditions be created?  If I were in the Civil Aviation Minister’s shoes and assuming, as highly improbable as it may seem, that I was carrying the coalition partners with me, these are the steps I’d take:
• Demerge the two carriers.  May seem to be a Thuglak-like solution but if the carriers have to be saved (using national resources paid for by taxpayers to prolong their life is not saving them) there is no alternative
• Hive off some of the facilities into separate companies/entities.  Examples of these would be:
o Training – technical & commercial, separately
o Maintenance
o Real estate – commercial & residential separately
o Catering
o Medical clinics (these are huge with some of the best equipment in them)

Once these steps are taken, let each new entity be evaluated by one or more teams of experts.  Other than the training facilities, convert each unit into a company and auction them individually to the highest bidder.  Allow the existing players to bid with the condition that Air India and Indian Airlines must go to separate buyers.  Allow potential buyers to form consortia, but the names and investments of all parties must be made public.  Foreign airlines may be part of these consortia.  This will result in no loss of jobs, with not a penny coming from the taxpayer.  In fact the companies so formed will need professional and non-professional staff.  Instead of money flowing out of the national exchequer it would actually flow in.

What should be done with the training facilities?  These should be converted into centres of excellence.  I’d moot separate centres for commercial and technical training.  Convert them into not-for-profit organisations with financial contributions from all players involved in the aviation industry.  IATA too could be a player here.  This would result in India becoming one of the biggest centres for aviation education in the world.  What we need is a political establishment with the necessary world vision.

ATF Imports - more sops to airlines & more skin balm to a burns victim - Archie D'Souza

Airlines need brave lenders
Editorial Deccan Chronicle April 22, 2012

Since the proof of the pudding is in the eating, one will have to wait to see how helpful is the lifeline thrown by the government to cash-strapped airlines. The government has opened a one-year window for external commercial borrowings of up to $1 billion, with an individual airline limit of $300 million, for working capital requirements. In normal circumstances, the ECB route is preferred because it is a quicker and cheaper way of getting loans. But these are not normal times. Almost all airlines are running huge losses.

The overall debt of airlines is Rs 70,000 crore, of which Air India’s is Rs 40,000 crore. The lenders would have to be very brave to lend to such clients. It would have been better if the government had permitted FDI in domestic airlines, a move scuttled by some airlines which have political clout and fear competition.
Equally distressing is the helpline that permitted airlines to import aviation turbine fuel (ATF). It sounds like a great idea as ATF is 45 per cent of the total cost of running an airline because of high state taxes. It would have been easier for the states to pare their taxes. But then, who likes to give away money?

My comments
One more opinion from the school of thought that says FDI is stalled because of pressure from certain airlines – “a move scuttled by some airlines which have political clout and fear competition.”   I do not think that this is the actual reason.  I feel this is happening to protect the interest of the only public sector airline.  I have never really been able to understand the politics of it but such protection to the public sector is definitely bad economics.   If AI is not able to fend for itself it is best that it is wound up.  I’m not going into the merits and demerits of this.  I’d keep this discussion confined to two points – one, FDI and two, what purpose do these sops serve.

Let us look at the sops first.  I’ve already stated my opinion on ECBs.  (see my post entitled FDI in Civil Aviation – how it will help, in the same blog).  Now, I’ll speak about import of ATF.  According to reports appearing in papers on APR 22, 2012, Kingfisher, SpiceJet and IndiGo gave been permitted to directly import jet fuel.  The quantity expected to be imported is 13 lack kl at a cost of about 5730 crores.  If this policy results in a saving to the airlines concerned, then there’s something drastically wrong with our fuel pricing policy.  Remember, the costs involved are freight plus storage.  If that is less than buying fuel locally, the government needs to relook at the taxes on fuel, or at least ATF.  Fuel marketing & refining companies, need in turn, to relook at the pricing mechanism.

If all the airlines decide to import ATF, the local refiners will not have a market left, rendering useless infrastructure created for the purpose.  The exchequer too – centre & states, will lose out on tax revenues.   So where does this place us?  To quote the editorial, “It would have been easier for the states to pare their taxes.”

FDI in Civil Aviation – how it will help - Archie D’Souza

The Central Government recently approved a proposal for airlines to borrow $1 billion overseas, but delays FDI.  Here are two reports on this subject which appeared in the press on week 16 (APR 15-21, 2012)
20 APR, 2012, 06.06PM IST, REUTERS
Decision on FDI in aviation not before May-end: Minister
NEW DELHI: The cabinet is unlikely to consider a proposal to allow foreign airlines to invest in domestic carriers before the end of May, a cabinet minister, who asked not to be named, told reporters.
The ruling Congress party's biggest ally - Trinamool Congress - is opposing the proposal, the minister said, adding that the decision depended on the ally's consent.
Indian airlines, facing a debt-load of $20 billion and losses of $2.5 billion, have been hurt by high fuel costs and massive competition, and are looking for ways to bring in cash to run daily operations.
Under current rules, foreign airlines are barred from buying stakes in domestic carriers, although foreign investors are allowed to hold a cumulative 49 percent.
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Govt lays down ECB norms for civil aviation
THE HINDU BUSINESSLINE BUREAU
Industry cap at $1 b; individual airline limit pegged at $ 300 m
NEW DELHI, APRIL 19:
The Government has allowed companies in the civil aviation sector to raise external commercial borrowings (ECBs) for a year to meet their working capital needs and also refinance outstanding working capital rupee loans.
This would come as a lifeline to cash strapped domestic airlines which had to face the brunt of increased interest rates as well as rising jet fuel prices, besides the slowdown in the economy. The proposal to allow airline companies to access ECBs was part of Finance Minister, Mr Pranab Mukherjee's Budget 2012-13 speech.
Prior to this decision, domestic airline companies were not allowed to access the ECB window. Domestic airlines can now tide over their present financial crunch as they can access low-cost funds through the ECB window.
The aviation sector can avail itself of external commercial borrowing to the tune of $1 billion with individual airline companies allowed to borrow up to $300 million in 2012-13, a Finance Ministry statement said today.
The limit can be availed in a lump-sum or in tranches depending on the utilisation during one year, it added.
The RBI, which will notify the details of the scheme in a week's time, will consider proposals of individual companies under the approval route based on parameters such as cash flows and the capacity to repay their loans from the forex earnings.
The central bank would also consider relaxing the average maturity period for ECBs above $20 million from five years to three years.
krsrivats@thehindu.co.in

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So, as per the press-releases of the government of India aviation companies will be allowed to borrow up to $1 billion (Rs. 5,100 crore) collectively and up to $300 million individually, from overseas, via the external commercial borrowings (ECB) route.  Last month, in his Budget speech the Finance Minister had announced that companies in the aviation sector would be allowed to avail of ECBs for a period of one year for working capital/re-financing of outstanding working capital rupee loans.  Here is an extract from that speech:

“The ECB made under this provision would have a maximum ceiling of USD 1 billion for the entire Civil Aviation sector. The limit for individual airline companies would be US$ 300 million. This limit can be availed either in a lump sum or in tranches depending upon the utilization of the limit during the 1 year when the facility is available.

“The rapid growth of the Aviation sector in India has generated demand for additional finance for working capital and capacity expansion. High operating costs, particularly on account of high fuel costs, have put additional stress on the Airline Industry.”

A major problem that coalition governments face is trying to carry every party on economic issues.  One party that has been a spoiler in the economic policies of UPA-2 is the Trinamul Congress (TMC).  They have not tolerated any departure from their populist agenda as we have seen in the way their own party member and former Railway Minister Mr. Dinesh Trivedi was treated.  So, in spite of the fact that we have a very able person leading our nation (no one could do better under the current circumstances) the UPA has been unable to take even small steps towards economic reforms.  And, the word FDI seems to be evil in the eyes of certain UPA members, notable among those the TMC.

The press reports are a clear indication that the proposal to permit up to 49% foreign direct investment (FDI) by foreign airlines in Indian carriers is going to be a non-starter.  The proposal was supposed to be approved by the Cabinet in week 16 of 2012.  However, from the press-releases and other reports it is clear that one more policy of the government will be put on the back-burner.  Although the report says May-end it looks like these have been put on hold indefinitely.  The PM himself, no less, has referred the issue back to a Group of Ministers (GOM) with a directive to "establish consensus".  Is it possible?  Only time will tell.

There is a perception in certain quarters that the shelving of FDI is essentially due to the friendships of former civil aviation minister, Mr Praful Patel, with the heads of Jet Airways and IndiGo.  Another perception is that both these companies are opposed to FDI, as, again another perception, their competitors Kingfisher, GoAir, and SpiceJet will benefit from it.  No doubt FDI will dilute the promoters’ stakes in the respective airlines but what about the benefits it would bring?

It does make political sense, at the moment, to pander to the allies even though it could lead to economic disaster.  The PM has definitely learnt its lesson in the last parliamentary session when it had to retract an approval to permit FDI in retailing.  My purpose in writing this is not to go into the pros and cons of political issues or strategies, though I dread to think what would happen to the economy if the NDA comes back to power.  We saw where they took the country during their five year tenure.  It is economics not politics that I’m referring to.

What does the proposed current policy do?  In my opinion, it’s like applying skin ointment on a patient with over 80% burns.  While this policy decision will provide the Airline Industry an additional source of capital at a low cost and thus help them tide over their present financial crunch, it will not solve the problems faced by the individual companies or the industry as a whole.  This is definitely one of the most unenthusiastic responses from the government – a half-baked measure that, in all likelihood, considering the volatility of the Indian Rupee, will make the situation worse.  I hope that the government’s indecision or the realities of coalition politics, whichever way one puts it, does not lead to the sector going into ICU.

 The relevant circular/notification giving effect to the aforesaid Budget announcement is expected to be issued within 7 days.

[To be concluded – in part II, I shall go into the benefits of FDI in Civil Aviation]

Subsidy Scheme for Shipbuilding – Good or Bad? Archie D’Souza

The following is the text of a press-release made by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) on APR 16, 2002 (Source ASSOCHAM’s website www.assocham.org):
Shipbuilding & ship repair industry to reach Rs 9,200 crore by 2015: ASSOCHAM
Monday, April 16, 2012

The Indian shipbuilding and ship repair industry is likely to reach Rs 9,200 crore [USD 18.4 b] from the current level of just over Rs 7,310 crore [USD 36.6 b) and is growing at a compounded annual growth rate (CAGR) of about 8 per cent, apex industry body ASSOCHAM said today.
India accounts for just about one per cent of the global shipbuilding industry worth about Rs 7.3 lakh crore, [USD 146 b] according to a study titled ‘Shipbuilding Industry in India: An overview’ released by The Associated Chambers of Commerce and Industry of India (ASSOCHAM).
The global shipbuilding and ship repairing industry is growing at a CAGR of about 24 per cent and is likely to reach Rs 14 lakh crore [USD 28 b] by 2015 owing to rising global sea borne trade, according to the ASSOCHAM study.

“Lower costs of labour, availability of skilled workforce together with robust demand in the domestic market and a growing steel industry are certain factors that build up a strong case for shipbuilding sector in India,” said Mr D.S. Rawat, secretary general of ASSOCHAM while releasing the findings of the study.
“For a well balanced and comprehensively developed domestic shipbuilding and ship repair industry, the government should provide fiscal incentives to develop strong research and development facilities, designing capabilities and set up an auxiliary base to encourage the growth of the sector,” said Mr Rawat.
The overall cargo traffic at major ports in India is about 600 million tonnes and is likely to reach 1,230 million tonnes by 2015 and 3,000 million tones by 2020 growing at a compounded annual growth rate (CAGR) of about 20 per cent, said ASSOCHAM study.

“For this India needs to furbish up its ports and the whole shipping infrastructure to enhance the handling capacity and facilitate operation of larger shipments to increase its share in the global maritime business,” said Mr Rawat. “The government should rope in maritime states to identify and make land available, thereby seeking their contribution for setting up a new port or a shipyard in each of these states.”

“This also denotes huge scope for private sector and foreign direct investment (FDI) in the shipping industry and the maritime states can develop a composite project on the public-private partnership model,” he said.
China, South Korea and Japan are leading shipbuilding nations and cater to over 80 per cent of the global shipbuilding industry. China alone accounts for over 35 per cent of this global industry. India and Vietnam are upcoming centres for global shipbuilding.

Indian companies are cashing in on the huge scope in building and repair of offshore vessels (OSVs) as leading nations in this industry are jostling with limited capacities.

High input costs and rising costs of raw material, freight together with miscellaneous duties and taxes being imposed amounts to a huge price differential of about 50 per cent in building a ship in India and other countries, said ASSOCHAM.

Besides, though the costs of labour in India is low compared to that in other nations but shipbuilding being a labour-intensive industry, fulfilling the requirement of skilled workforce is another significant problem being faced by the shipbuilding companies.

The government has a key role to improve the efficiency and productivity of domestic shipbuilding companies to enable them compete with their overseas counterparts. ASSOCHAM recommends revival of subsidy scheme, easing tax related regulations and declaring the shipbuilding a status of strategic industry.
With about 8,000 kilometre long coastline there are about 27 shipyards, 12 major ports and 200 ports under states’ jurisdiction in India, there is huge scope for development of shipping sector considering that country’s opportunities in the maritime business have not been utilized fully. Besides, the government should simultaneously boost inland water transport.

Here is what I have to say:

The domestic shipbuilding industry may be growing at eight per cent annually, but it accounts for just one per cent of the global shipbuilding market.  There isn’t a shadow of a doubt that we’ve missed the opportunity to become a major player in shipbuilding despite the fact that the government invested heavily of the years immediately after independence.  The biggest shipbuilding nations are China, South Korea and Japan which between them account for over 80% of the global shipbuilding industry.  China alone accounts for over 35 per cent of the global market.

ASSOCHAM has suggested that in order to put Indian shipbuilding on a faster track, the following should be done:
• Bracket the industry as a strategic one
• Revive the subsidy scheme for shipbuilders
• Cut the slack on certain tax regulations
These three could be taken up for starters.

Let us see what the subsidy they are looking at is.  This, they say, should be provided to the extent of 30 per cent of contract price of orders, subject to certain conditions such as price discovery through competitive bidding.   How much will the exchequer be affected by this?  Domestic shipyards put the estimate in the range of Rs 700 crore [USD 14 m] in 2011-12.  Both the shipbuilding and ship-repair industries are expected to see huge growth despite the current slowdown in the shipping markets.  The study estimates that the global shipbuilding and ship repairing industry is seen as growing at a CAGR of about 24 per cent.

Will subsidising actually be of benefit to Indian shipbuilding?  And, will such a regime be WTO-compliant?  According to ASSOCHAM secretary-general DS Rawat, “Lower costs of labour, availability of skilled workforce together with robust demand in the domestic market and a growing steel industry are certain factors that build up a strong case for shipbuilding sector in India.”   No doubt, the input costs together with miscellaneous duties and taxes, makes manufacturing ships in India about 50% more expensive than other countries.  A 30% subsidy in this case will hardly help as there will still be a 20% difference.

So, what is the alternative?  In my opinion, the main reason why shipbuilding costs are higher in India is the tiny scale of operations compared with the major shipbuilding nations.  An infusion of investments and increase of capacity is the only way out.  In an earlier article (see BRICS: Possible Benefits to Civil Aviation posted on APR9) I had said that BRICS nations could get together to build a third alternative to Boeing and Airbus.  As far as shipbuilding is concerned, I have no such hope for the simple reason that China will not allow it.  However, I don’t see a reason why India can’t go ahead on its own.  The Central Government will have a minimal role in this.  The maritime states though will be important players to ensure that the necessary land and sea accesses are put in place to enable the private sector to build the infrastructure.
I do see India as a major shipbuilding nation, maybe number one.