Hopes from a Ship Builiding Cluster

Historically, India had a rich tradition of shipbuilding. The coasts of Gujarat, Kerala, and Odisha were traditional ship-making hubs that utilized teak wood, iron nails, and skilled craftsmanship. The 11th-century texts titled Yuktikalpatru and Samaranga Sutradhara reference various designs of ships suitable for trade and warfare. When the British arrived with modern technologies and monopolized the shipbuilding industry, it led to the decline of traditional craft-based ship-making in India. Nevertheless, the challenges posed by British colonial rule were effectively countered by none other than V.O. Chidambaram Pillai (VOC), also known as "Kappalottiya Tamizhan," after whom the major port at Tuticorin is named today. VOC Pillai established the Swadeshi Steam Navigation Company (SSNC) in 1906, challenging British dominance in maritime trade. However, he faced the ire of the colonial aggressors, which led to his imprisonment and financial ruin, but his legacy continues to inspire generations.

The world has advanced, and a century later, among the ten thousand ships floating on the oceans, Indian ships number less than a thousand. Indian shipbuilding capacity at 1.6 million DWT accounts for less than 1% of global shipbuilding, placing it in the 20th position in 2024. China, South Korea, Japan, and Europe are the leading nations in shipbuilding, with China producing around 45 % of all modern ships.  The shipbuilding industry, valued at USD 150 billion, is growing by nearly 3% to 4 % and is expected to exceed USD 200 billion. An era of ships powered by non-fossil fuels and autonomous AI-based shipping lies ahead. It is also noteworthy that 95 % of India’s EXIM cargo is transported by foreign-flagged ships.

India has no more than fifty shipyards, most of which, except for a few that build smaller vessels of less than 35000 tons gross weight. Last year, the private sector produced 179 ships, while the public sector constructed 27 vessels, primarily for local use and defense needs. Although shipyards like Cochin Shipyard and Mazagaon Docks remain prominent today, primarily focusing on defense-related vessels, the Indian private shipbuilding industry has faced difficulties, with companies such as ABG Shipyards and Tegma Shipyard being among the few that have shut down. A lack of orders, order cancellations, high manufacturing costs, absence of standard designs, limited financing options, outdated technologies, and low economies of scale have driven the cost of Indian ships to be over 20 % higher than that of foreign-manufactured vessels. This situation not only signifies a loss of prestige but also poses a risk of excessive reliance on foreign-flagged vessels in a geopolitically unstable world, where 95 % of our EXIM volumes rely on maritime routes.

Policy initiatives to revamp the shipbuilding sector started in 2001, when the government of India allowed 100 percent FDI in the shipping sector through the automatic route. Through the insertion of clauses in the Merchant Shipping Act 1958, the Government also ensured a subsidy scheme of up to 30 % for domestic orders obtained by Indian shipyards for the construction of merchant ships of a length of 80 meters through global tender. In 2014, through the Make in India initiative, Shipbuilding was allowed with 100 percent FDI through automatic. Further, in 2016, a ten-year shipbuilding financial assistance scheme (SBFA) was announced with a subsidy up to 20 % for ships manufactured from 2016 to 2026, where the subsidy reduces as the period elapses, and shipyards were declared as infrastructure assets. In 2021, the Directorate General of Shipping (DGS), under the Ministry of Ports, Shipping, and Waterways, granted Indian shipping companies the Right of First Refusal (RoFR) when hiring ships for government and PSU (Public Sector Undertakings) contracts. This policy allowed an Indian-registered shipowner to match the lowest bid made by a foreign shipowner in a tender. Despite all these incentives, the shipbuilding sector did not revive, and after the COVID pandemic, it reached a situation where shipping companies started becoming bankrupt.

The new budget proposals of 2025 have again revived hope. The key takeaway of the budget provisions includes the revamping of the existing Shipbuilding Financial Assistance Policy to address cost disadvantages, which will include Credit Notes for shipbreaking in Indian yards to promote the circular economy. With the current SBFA due to end in 2026, it is expected that the duration and percentage of subsidy may change. Secondly, all large ships above a specified size will be included in the infrastructure harmonized master list (HML) which would facilitate financing based on criteria identified for infrastructure financing. Thirdly, Shipbuilding Clusters will be facilitated to increase the range, categories, and capacity of ships. It needs to be understood that ship sizes are increasing, and hence, demand for larger ships having lower freight rates are most sought by the shippers. A ship building cluster modelled like an Auto Cluster with OEMS and suppliers of various tiers nearby reduce manufacturing cost. The cluster will house infrastructure facilities for skilling and technology development, enabling a complete ecosystem to develop the entire ecosystem. Lastly continuation of the exemption of Basic Customs Duty on raw materials, components, consumables, or parts for the manufacture of ships and ship breaking for another ten years will keep the input cost lower  

In conclusion, we must understand that approximately 60 percent of a ship's costs comprise materials and inputs, while around 30 percent is the labor component. The advantage here is that labor costs in India are one-fifth of the international rate. The subsidy will provide benefits regarding material and input costs, suggesting a theoretical advantage. However, the associated risk involves potential global disruptions, which could lead to order cancellations like during the COVID pandemic, which impacted the Indian Shipbuilding sector. Providing Infrastructure status and the development of a Maritime Development Fund may ease financing. However, how banks respond to the need for long term finance of the sector is still a question at large. While China and Korea have a single-digit financing rate for the shipping sector, the double-digit rate in India continues. Hence, there needs to be an increase in risk appetite among Indian banks for both capital and working finance support. These risks have already eaten upon entrepreneurial confidence. The lack of emerging technology is another challenge, the development of which may take time. However, the hope is the initial interests shown by European and South Korean manufacturers in getting into India either as wholly owned subsidiaries or in a joint venture

Ships face an unknown horizon at sea and encounter storms, but the buoyant ships finally reach the shore. Let us hope that India’s shipmaking sector reaches the shores of its ancient glory 

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Rajesh Menon is a maritime policy specilist and views expressed here are personal and for academic purposes