Budget 2025: Shipbuilding gets big push from govt eyeing global trade

The Maritime Development Fund announced by the FM will have a corpus of Rs 25,000 cr; besides, tax breaks and easier infra credit access to shipbuilders aim to reinvigorate the shipbuilding industry

For a decade, there was a standing offer by the Indian government for a Rs 4,000-crore viability support to potential shipbuilding companies. The money, however, remained on the books, un-disbursed for lack of interest.  

 

Now, the government seems keen to make this change, as evinced in the Union Budget 2025, when finance minister Nirmala Sitharaman decided to take another shot at spurring shipbuilding in India.  

 

As India tries to expand the range of government capex support to sectors beyond roads, railways and telecom, the maritime sector has the potential to be a sizeable alternative and, within it, shipbuilding is expected to be a big draw. Currently, India‘s share in the global ship building and ship repair market remains meagre, hovering at less than 2 per cent and has actually declined over the past decade. 

 

A boatload of sops 

 

To remedy this, Sitharaman announced a general purpose Maritime Development Fund (MDF) of Rs 25,000 crore, expected to be nested within the current infra development companies. These build on the momentum of sops building up over the past couple of years.   

 

Another important sweetener is the Shipbuilding Financial Assistance Policy, which will include softer credit from banks. Companies planning to build ships can now have their loans classified as infrastructure credit from banks.  

 

Until now, shipyards could get bank credit as infrastructure loans but not for building ships. That will change now, but with a caveat: ships must be of a specific size, among other specifications. In other words, companies cannot build barges and demand ‘shipbuilding’ assistance.  

 

“Large ships above a specified size will be included in the infrastructure harmonised master list (HML).  Shipbuilding Clusters will be facilitated to increase the range, categories and capacity of ships. This will include additional infrastructure facilities, skilling and technology to develop the entire ecosystem,” Sitharaman noted.  

 

The Budget speech this time is remarkable for the number of elements of the ports and shipping that have been included. “It began with a presentation we did for the Prime Minister in the run up to the Budget," revealed a senior official of the ministry of ports, shipping and waterways (MoPSW). The official said all the pain points of shipbuilding and port expansion were flagged in the meeting.  

 

Two of those are the extension of lower customs duty for import of parts for shipbuilding. One is that India does not have the capacity for greenfield manufacturing of ship engines.  

 

“Considering that shipbuilding has a long gestation period, I propose to continue the exemption of basic customs duty on raw materials, components, consumables or parts for the manufacture of ships for another 10 years. I also propose the same dispensation for ship breaking to make it more competitive”, the finance minister noted, sweetening the shipbuilding proposal further. 

 

The other is the offer of capital gains exemptions currently available to non-residents investing in aircraft leasing being extended to non-residents holding shares of the GIFT city units engaged in ship leasing as well.    

 

The finance minister seems to have recognised that the shipbuilding industry has the same impact as other infrastructure sectors due to higher multiplier effects on investment and turnover. In addition, unlike roads or telecom it has a high employment potential. It is also a strategically important industry.  

 

In May 2024, in the midst of the general elections, the MoPSW and the petroleum and natural gas ministry had formed a joint working group of government and industry officials to devise a roadmap for the industry. The new firm will be based at GIFT IFSC, near Gandhinagar in Gujarat. 

 

The Maritime Vision 2030 planned for Indian shipbuilding to become competitive by reaching the threshold on volumes by 2025, and to then continue building momentum in high volumes to reach “Make in India, Make for World” levels.  

 

Those targets have had to be pushed back. Of the 45 shipyards in the country, of which seven are under the Union government, two under state governments, and 36 with the private sector, none are at global scale. The maximum size of the vessels which can be built in India in the public sector is 1,10,000 Dead Weight Tonnage (DWT), with Cochin Shipyard Ltd. planning to go up to 3,00,000 DWT.  

 

Private sector shipyards have only recently commissioned larger capacities to build vessels. Among these, Reliance Naval Engineering Limited plans to build vessels up to 400,000 DWT and L&T Shipbuilding -Kattupalli is aiming for 300,000 DWT, which includes large LNG Carriers. 

 

Concerns Ahoy! 

 

Other than technology, finance is a large concern for ship builders. Shipbuilding payments are typically usually done in stages. If the owner defaults, he forfeits the money as well as the ship (the unfinished ship then belongs to the yard). Even upon completion, the builder must sell the ship in the global market to recover costs, so there is considerable risk involved. 

 

To cover these risks, most of the leading maritime countries offer risk insurance cover from banks or lending institutions. For example, China has Sinesure, Korea has K-sure and Netherlands has Atradius. If India were to get a similar scheme, banks would be able to offer much lower rates of interest. The combined effect of the high cost of steel, labour, and finance drive up the overall costs of shipbuilding.  

 

The promise of infrastructure credit and the MDF will go a long way in alleviating some of those worries. Sitharaman said the Fund “will be for distributed support and promoting competition. This will have up to 49 per cent contribution by the Government, and the balance will be mobilized from ports and private sector”. The MDF is expected to be structured as a corporate entity to provide various forms of financial support, including debt, equity, viability gap funding (VGF), and buyer credit.  

 

If India is to be positioned among the top 10 nations in shipbuilding, then an ecosystem which would address these infrastructure, regulatory, fiscal issues and capability development will need to be developed.  

 

India also plans to set up a new shipping company to expand its fleet by at least 1,000 ships in the next decade. The firm will be jointly owned by state-run oil, gas and fertiliser companies, which will join with another state-run firm, the Shipping Corporation of India.  The aim is to reduce freight outgoings to foreign firms by at least a third by 2047. Current estimates show freight costs will rise to $400 billion by then. Indian companies paid freight costs of $85 billion in the financial year FY20, of which $75 billion was paid for use of foreign vessels. 

 

However, all of this will take time. India's shipping fleet has not kept pace with the surge in trade, including imports of energy and exports of refined oil products. Indian shipping, after decades of neglect, is just getting its act together. As per CareEdge data the total number of Indian crude, product, dry bulk, container and gas carriers, at a mere 1520, is just 2.6 per cent of the global merchant navy fleet, as of 2022. The numbers will take time to climb despite the incentives offered by the government. For instance, the Union Cabinet has offered a Rs 1,624 crore subsidy over five years to promote Indian shipping companies to compete in global tenders floated by government ministries and state-owned companies.   

 

In Union Budget 2025 

 

Rs 25,000 crore Maritime Development Fund     Shipbuilding financial assistance policy (with Rs 4,000 crore VGF) to complement infra credit      BCD exemption on raw materials, components, consumables or parts for shipbulding for another decade     Capital gains tax exemptions for holding shares of GIFT city units engaged in ship leasing 

  Earlier Announcements     

Rs 1,624 crore subsidy over five years to promote Indian shipping companies to compete in global tenders floated by government ministries and state-owned companies.   

 

Inter ministerial JWG to float a larger Indian shipping company to be jointly owned by state-run oil, gas and fertiliser companies, who would join state-run Shipping Corporation of India 

 

Exemption from tonnage tax