India's tryst with shipbuilding: Govt rolls out ₹70,000 crore revival plan

India and Brazil are among countries facing the steepest tariffs imposed by the US

When we remember the maritime dominance of the Chola kingdom and the amazing skills of traditional shipbuilders in Gujarat, it does seem strange that India is less than a footnote in the ranks of the world’s shipbuilding countries. It is estimated that India today has as many as 61 shipyards, but only about 8 of them are considered large enough to count.

 

Surprisingly enough, shipbuilding, as an industry, has always received stepmotherly treatment from the government. Surprising because India has a large labour force, and shipbuilding is known as a labour-intensive industry. The exception was Indira Gandhi, who realised this and established the public sector Cochin Shipyard in 1972 when South Korea, now a giant among world shipbuilders, was not even a twinkle in anyone’s eye. In fact, long before South Korea attained dominance in shipbuilding, it sent a delegation to visit Cochin Shipyard and see what it could learn from it. Unkind rumours had it that when, many years later, the Indian government asked for a copy of that delegation’s report, the Korean government showed a strange reluctance to part with it. When after much persuasion the report was given, it turned out that it stated that Cochin Shipyard was a good example of how not to establish a shipyard. 

In the new atmanirbhar dispensation, shipbuilding has rightly been recognised as the ideal fit for India. The Prime Minister recently pointed out that every year, India pays ₹6 trillion to foreign shipowners by way of freight charges for carriage of goods to and from the country. This figure is nearly the size of the defence budget. So, the aim is to build ships in India and encourage Indian owners to take the place of outsiders who now batten on what should be earned by Indian tonnage in India’s foreign trade. It is also true that the share of Indian bottoms in the country’s exim trade has fallen from about 41 per cent in 1987 to as little as 5 per cent in 2023. By itself, this would not be such a damaging statistic if Indian ships were earning huge revenues from carrying freight of other countries around the world. The fact is, however, that for a country of India’s size and the size of her economy, the fleet is woefully inadequate. So, incentives to build more ships in India and grow the size of the Indian flag are very much in order. 

The difficulty will be how to gain entry into an industry that already boasts so many yards in traditional shipbuilding countries, many of which now face redundancy from the domination of the sector by Japan, South Korea, and China. The US, under Donald Trump, is trying very hard to recover America’s earlier position in shipbuilding, lost over the years to Asian giants. The process for them will be more difficult than it is for us because wages in the US are so high. But some dexterous arm-twisting may succeed where pure economics fails. India obviously does not have this advantage. And so a series of measures to boost shipbuilding in India are now being undertaken. 

The Union Cabinet has just approved an outlay of nearly ₹70,000 crore to re-vitalise the shipbuilding industry. On the anvil are the establishment of a Shipbuilding Finance Scheme of about ₹25,000 crore to help domestic shipbuilders, a ₹25,000 crore Maritime Development Fund for low-cost financing that will be made available to shipbuilding and related industries, and a ₹20,000 crore fund for setting up shipbuilding development clusters where concentrated attention can be given to the requirements of shipbuilders. This will include expanding the existing capacity of maritime infrastructure and enhancing land connectivity. In addition, the state will establish an apex body to provide credit risk coverage and generally to enhance capability development. 

The incentives are meaningful and should give the much-needed fillip to this neglected industry. But the state would do well to look into one aspect that could have a negative impact. This is the proposal to link disbursement of funds under the scheme to the use of at least 40 per cent of local content. It is difficult to see the logic of this proposal. The government must decide its priorities: Does it want to encourage shipbuilding in the country or does it want to encourage the use of local inputs? There could well be a contradiction between the two. If an entrepreneur is investing his money in shipbuilding, we must assume that he will use the best materials at the most competitive rates. If such materials are available locally, there is no way that anyone would go outside to source them. By insisting on a minimum local content will we not be compromising on quality issues and protecting local suppliers who have not taken the trouble to upgrade their production to international standards? 

The way forward is to encourage domestic entrepreneurs to become part of the value chain of the shipbuilding industry. Once they are convinced that the demand for high-quality inputs is here to stay, they will scale up their expertise and ensure that they are part of that chain. When that happens, quality will automatically be ensured and no reservation will be needed. 

There is another reason why this restriction is dangerous. There will always be differences of opinion on how local content should be valued, what should be included or excluded. And these differences will impact the smooth working of the scheme. Ideally, there should be no physical interface between the shipbuilder and the agency releasing the subsidy. As each agreed stage of construction is reached, the subsidy should automatically be released. But a process tied to a variable that is not easy to define and which, therefore, allows for discretion, merely creates an opportunity for rent seeking. Above all, the state should seek to avoid this.

 

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The writer is former se­­c­­retary, Ministry of Shipping