As the cost of labour rises in large shipbuilding nations, India has a chance to gain a larger share of manufacturing in the years to come so that it can supply vessels to both domestic and international customers.
India has been a major maritime power for millennia, controlling the key routes through the Indian Ocean which facilitates half of global maritime trade. But with the onset of invasions and colonisation, the merchant and military navies faded into oblivion. The decline in trade brought with it a downscaling in the domestic shipbuilding industry, which began to pick up slowly only post-independence. Today, the country's consumption profile for international goods and natural resources combined with the renewed effort to boost exports, provides an ideal platform to develop the vessel manufacturing industry. Over the last four decades, the world witnessed the shift in the centre of shipbuilding from Europe to Japan and Korea and then to China. As the cost of labour rises in the latter two markets, a space develops for growing this segment in low labour cost economies. India has slowly and steadily built its capacity on this front but has yet to attract large international order books and going forward, it will be able to leverage its existing technical expertise in key areas to be able to expand its footprint in the global shipping industry.
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India currently runs a miniscule 1.3 per cent of the global vessel fleet, an eighth of China's share. The 28 shipyards, small and lacking economies of scale, host a combined half of one per cent of total yard capacity worldwide. With a high cost of financing, these shipbuilders have found it challenging to expand and offer competitive prices to end users, with the result being a slim order book, low profits, and even lower reinvestment.
To break this cycle, the State must take the initiative to extend credit facilities to shipbuilders so that they can expand their size and lower per-unit costs, bringing them to a competitive level with international players. Long term funding can be accessed through discounted debt and a repayment structure that is back-loaded, while borrowing in low interest rate international credit markets can be back-to-backed against a firm orderbook.
The Shipbuilding Financial Assistance Policy launched by the Modi government in 2016, aimed to reboot the industry by offering 20 per cent coverage of the lower of the “contract price” or “fair price” of vessels constructed, and the $700 million scheme is set to last over a 10 year period. In addition, beyond 2025, government run firms and agencies will utilise these ships for their operations. Despite this encouragement, the industry has stepped in gingerly, wary of input cost escalation considering 65 per cent of the material used in construction is imported. As a consequence, just $8 million of the scheme's funds has been disbursed till date. Indigenising the entire supply chain from fitted machinery down to the iron ore extraction to produce the necessary steel, can go a long way to reassure yard owners of supply reliability and ensure cost visibility. This in turn feeds into pricing for clients.
Starting with a low-hanging fruit, the government is focused on first making the country self-reliant in the repairs sector which is a $12 billion global industry of which India has a 2 per cent share. Alongside, it recently announced that locally made vessels will get priority for oil and gas operations and cargo shipments. In order to prevent a shortage in available vessels, shipbuilders that are in the process of manufacturing a boat would be allowed to charter a foreign vessel for the period of construction. This is expected to reduce Public Sector Units' (PSUs') dependency on non-Indian ships when transactions are over $30 million.