Draft Report of the High Level Group on Services Sector

4.2 Cargo support issue
Recognition of the need for a policy for cargo support in India predates Independence. The report of the Reconstruction policy Sub-Committee on Shipping, which was accepted by Government of India by the Resolution of July 1947, envisaged a cargo reservation policy for 100 percent coastal cargo, 100 percent strategic cargo like crude oil and oil products on the coast and overseas, 50 percent dry bulk cargo in overseas trade and 40 percent cargo in liner trade. This policy was subsequently enshrined in the Merchant Shipping Act of 1958. India also adopted the UN Code for liner Conferences which provided for 40:40:20 sharing of liner cargo. The policy of cargo support to Indian ships took concrete shape in the form of cargo policy directive requiring the Central/State Government Departments and Public Sector Undertakings to enter into import contracts on FOB/FAS basis and export contracts on C&F/CIF basis. Since much of the bulk imports and exports in the pre-reform era was canalized through CPSUs this directive covered a substantial proportion of trade.
For implementing the policy of cargo support to Indian ships the Central Government established TRANSCHART as the chartering wing of the Ministry of Shipping in 1958 to centralise the shipping arrangement for all Government and canalised cargo and the wing is still in existence. Presently it operates on the basis of giving the right of first refusal to Indian shipping companies to accept the freight rate that it offers after inviting quotations from both Indian and foreign shipping companies. Thus there is no price preference but only purchase preference for Indian shipping companies. Over the years TRANSCHART has been a source of strength for Indian vessels in the carriage of Government owned/controlled cargoes. A review of its operations since 1960 shows that particularly in the years of recession in shipping, it could obtain a high share for Indian vessels in the carriage of such cargo, reaching a maximum of about 75% in 1987. During the recent boom it has succeeded in raising the share of Indian vessels from about 23 % in 2001 to almost 44% in 2006. During the period 1.4.06 to 31.3.07 Indian vessels carried 42.55% of Government and PSU cargo. However, in terms of the quantum of cargo carried by Indian vessels, there was a decline from 243.80 lakh tonnes in 2004 to 176.39 lakh tonnes in 2006. Nevertheless, the cargo support policy has helped to strengthen the Indian shipping industry, which is keen on its continuance.
With the economic situation improving in the country and controls on foreign trade being dismantled the cargo reservation policy has been under pressure. First in 2001 relaxed the requirement of centralized shipping arrangement for exports and the Government Departments/ PSUs were permitted to finalise the export contracts on FOB/FAS basis without seeking prior TRANSCHART clearance. In recent years most of the oil companies have been permitted to make their own arrangement of shipping for import contracts as well on the plea that finalising contracts through TRANSCHART was causing delays and resulting in higher transportation costs. The dilution in Government policy on cargo reservation for Government controlled/ owned cargo has already had substantial impact on the TRANSCHART operations and the volume of shipping arrangements in respect of such cargo declined by more than 25 % in 2006 as compared to the previous year.
The Group considered the continuation of the policy of cargo support to flag ships through TRANSCHART in future and came to the conclusion that since the competitiveness of Indian ships was diminished by the tax handicaps discussed above and since the growth of Indian shipping needs to be encouraged, the cargo support policy needed to be continued. Among major industrialised economies, the USA and China have a proactive policy of cargo reservation, requiring only vessels with the domestic flag to be used for carriage of national cargo. The policy could be revisited after progress has been achieved in eliminating the tax handicaps of Indian shipping.
In the evolving context of India’s growing energy demand and consequent dependence on global energy markets, the Committee also considered the urgent need to own and develop a national “core” fleet in the energy sector. It is felt that this core fleet of strategic marine assets, similar in concept to the United States “Sea-lift Command”, can be used in case of national emergency and/or war to ensure energy security, by means of un-interrupted transport and service of essential commodities such as crude oil, petroleum products, gas, coal and offshore oil fields. During peace times this core fleet could be deployed on long-term contracts with public sector units serving the commercial shipping requirement of the nation. This fleet would also serve as protection against the imperative 2010 phase out of single hull tankers. While the economy benefits in terms of national security, the industry too benefits as long-term contracts often lead to lower financing costs, which in turn can be shared with the end user.