R.L. Pai, a marine engineer by qualification, has been associated with
the shipping industry for over 39 years. He served with the SCI
between 1963 and 1981, in senior management positions at head office.
In 1981, he joined L&T to set up a new shipping operation, where
he spent the next 13 years as chief executive of a business group
managing a fleet of modern bulk carriers.
1994, the Reliance Group invited him, to work on the project planning,
development and commissioning of a new grassroots refinery at Jamnagar. He
continues to be employed with Reliance as Group Senior Vice President and
is involved in corporate logistics for the group companies. He is also
director of Reliance Ports & Terminals Ltd., India’s largest oil
terminal, which owns and operates the infrastructure facilities for
marine, road, rail evacuation and tank farms attached to the refinery and
petrochemicals complex at Jamnagar.
He has been on the board of directors of INSA (Indian National Shipowner's
Association) since 1987, and was elected President of the association in
1993-94. He was re-elected Vice President of INSA in 1999. He represents
Reliance as well as the shipping industry on the boards of several
shipping organisations and at various national, international and
In this paper Mr. Pai presents an overview of the development of shipping
in India since independence and what ails this industry presently. The
connection with glorious past of shipping has been effectively dealt with.
The views expressed in this article are Mr. Pai's own and do not reflect
the policies of his employers or organisations he is attached to.
Among the many achievements in the glorious past of
our country, our maritime tradition takes prominent pride of place. At a
recent presentation made by the distinguished historian Dr Romila Thapar
at Mumbai, we were taken on a spellbound journey through our maritime
history. The Odyssey commenced sometime in the beginning of the first
millennium and there were fascinating insights into the commercial acumen,
the trading instincts and the technological innovation of our forefathers.
We learnt of the maritime and trading expertise that enabled them to
effectively compete and trade even with far-flung colonies of the Roman
Empire. Historical artefacts of these achievements are still found around
our coast. An interesting facet of this saga was, that free trade and
globalisation were not complex issues debated and negotiated at WTO-like
forums, but were taken as granted in the milieu of the era. There was free
exchange of currency interspersed with barter, based on sound principles
of economics and commerce. Administrators
of those days were obviously men of vision who were pragmatic enough to
understand the longer-term benefits to the national economy and
proactively facilitated vibrant, unrestricted international trade.
The inevitable question that one will ask is,
whether the technology and commercial sophistication we boast of in our
present world is a progression or have we made our lives and businesses
redundantly complex? Whatever the answers to these philosophical
conundrums, the fact of the matter is that we can scarce afford to
continue to bask in our glorious past, and must come to accept that the
process of globalisation and integration into the world economy is an
inexorably irreversible process. On it will depend the pace of our GDP
growth and the creation of better opportunities for our citizens.
the first five decades of the post-independence era we have had the
tremendous task of catching up with industrial and commercial progress in
the developed world. Our post-independence rulers deigned it expedient to
set up a centrally planned economy with the state and its enterprises at
the commanding heights. All economic planning revolved around the National
5-year Plans with policy guidelines and attendant controls that sought to
prescribe the total model of economic growth. Investment and asset
acquisition was closely administered and rationed to the Public and
Private Corporate sectors. In the total scheme of things, it was the
public sector that was given first preference both in investment
opportunity and pricing. This inevitably led to a system of slots for
investment licences and administered or controlled prices for a large
range of goods and services.
With adequate potential in national demand and
insular protection, there was little need to look at international
competitiveness. This often
resulted in inadequacies or anomalies in the system, manifested in
inefficient use of capital and resources, indifferent quality and cost
structures that were not aligned with international realities. Governments
and their administrations can seldom play the role of business
entrepreneurs. It would be fair to point out, though, that despite the
many deficiencies, the system did contribute to economic growth, albeit,
at a moderate pace. It also helped in generating employment for a
burgeoning population, although at some cost to productivity and
accountability. During this period we were able to effectively build up
large manufacturing enterprises with the state playing a major role in the
process of capital resource generation.
This developmental model was also deployed in the
shipping sector. In the first 4 decades after independence, the Indian
flag fleet grew from 0.2m to 5.7m g.r.t. – A compounded annual growth
rate of over 9%. This is remarkable when viewed in the context of our
national GDP growth during the same period. As part of the 5-year national
plan exercises, a TAC undertook a tonnage acquisition plan, to dovetail
into the requirements of domestic and international sea-borne trade. Each
cargo sector was broken down into sub-sets to arrive at the number and
type of ships required. A clear reservation was made for the public sector
and private sector companies were licensed to acquire a limited number and
specific types of ships. Investment by new private sector corporate was
restricted. Ostensibly, a company had to first demonstrate to government
its ability to run a shipping business, before a restricted licence was
Like with most other industries in the country,
this perpetuated the infamous “Licence-Permit Raj”, with licences
often being acquired with the sole purpose of pre-empting a business
competitor’s opportunity. The specifications and performance parameters
of ships acquired were also, of necessity, optimised to meet the
limitations of Indian ports and conditions. Cargo preference was implicit
for Indian flag with some premium on rates. The system worked well for the
state as well as for investing promoters but ended up with the economy in
general and the consumer or taxpayer bearing the cost of inefficiencies.
With huge budgetary deficits financed through
public debt and overseas borrowings, the need for change in policy and
direction became imperative. With the advent of economic reform in the
early 1990’s, deficiencies in the system became apparent in the harsh
light of fiscal reality. In shipping, while the CAGR of 9% in g.r.t. in
the first four decades after independence was indeed impressive, in the
next 13 years to 2001 the comparable growth rate has been a dismal 1.5%.
Obviously, the central planning and control model
of the first four decades turned out to be woefully inadequate in a global
competitive environment. To better appreciate the challenges we face in
coping with and exploiting globalisation, we would do well to examine some
of the issues that contributed to this decline:
system encouraged subsidised finance and high gearing ratios without
commensurate corporate accountability. Balance sheets of many shipping
companies showed up serious weaknesses, with some becoming sick and in
need of state financed bailouts. Quite a few sank.
planning of ship acquisition based on life-cycle projections showed up its
inherent inadequacies in the dynamic world of international shipping with
commercial and technical obsolescence cycles becoming ever shorter.
rigid system of licensing and controls inhibited the more progressive
companies in exploiting the potential of asset trading as a legitimate
means to profits and balance sheet enhancement.
on domestic business created complacency and did not encourage managers to
build up skill sets in marketing and international business practice.
infrastructure and inefficient port facilities resulted in the
unsustainable situation of demurrage contributing a significant proportion
of a shipping company’s revenues and profits – at the cost of the
ton-mile utilisation of assets and unproductive deployment of capital
employed was endemic in many sectors.
users of shipping services were afforded little opportunity to optimise
logistics strategy due to limitations in the type and capacity of
available ships in the Indian fleet.
prices for some products and services created gross inefficiencies in the
system. Cost structures tended to be non-transparent and were absorbed
into pools or fed through subsidies. The economy and consumers paid the
price with little benefit to those for whom such subsidies were intended.
designed for domestic port conditions found it difficult to compete in
provisions in the statutory and regulatory regime were (and continue to
be) anachronistic and a throwback to restrictive policies imposed by our
through licensing led to management complacency. Ironically, in some cases
it was government that did the marketing for business.
With the progressive maturing of our economy,
globalisation is no longer a matter of choice but a compulsion. It is the
pace and effectiveness at which we are able to adapt into this ethos that
will eventually determine how successfully we evolve and integrate into
the world economy. Globalisation implies many things, but foremost among
them is free trade. While economists will disagree on most issues, there
is one on which they are almost unanimous i.e. free trade is always better
than protection. The proposition that follows is that protection does not
The main argument for free trade is based on one of
the oldest theories of economics - the leveraging of competitive
advantage. Put into effect, what it implies is, that in an increasingly
inter-connected global system of input souring, manufacturing and
services, each nation will do well to leverage its unique competitive
advantages to be able to effectively trade its goods and services with
other countries or sectors that are less competitive. There are
innumerable examples of this theory put into practice. Globally based
multinational corporations have long honed the skills of optimising the
costs of goods and services they sell through sourcing inputs and
production processes from geographically diverse sectors that give them
the greatest economic advantage. International logistics management is a
key arbitraging factor in the success of such strategy. This is where the
cost efficiencies of ocean transportation step in.
India, though not a global player in ship owning,
has over several decades built up certain niche competitive advantages in
the maritime sector. This is perhaps, more an issue of circumstance rather
than design or policy. Let us look at some of these:
For decades, we have continued
to provide the world’s best-qualified and skilled seafarers, which now
stand at 21,000 officers and 43,000 ratings.
Our training institutions and
systems are reputed to consistently turn out quality personnel in all
facets of management and operations.
We have demonstrated
world-class management skills in technical, operations, commercial and
Proficiency in English
language and communication skills presently gives us clear advantages over
other Asian competitors.
Premier technical universities
ensure that our expertise in Naval Architecture, engineering and ship
design is state-of-the-art.
The impressive safety record
of the Indian fleet matches that of major maritime states.
World’s leading shipping
companies employ Indian managers and other shipping experts as a
preference of choice.
Significant presence in world
economic and regulatory forums provides India with strategic clout in the
maritime and trade sectors.
With all these apparent advantages, what is it that
inhibits the growth of our own national fleet? Foremost is the fact that
besides the administrative Ministry of Shipping there is little national
recognition of the potential that can be exploited from these competitive
strengths. Our fiscal regime treats shipping no differently from other
manufacturing or service industries. It does not need reiterating that if
an industry has to globally compete, it must be provided a globally level
fiscal and operating environment that is at least equal to that of the
International shipping is a prime example of
classical economic theory at work. International freight rates are truly
market driven and governed almost solely by the balance of supply and
demand. Any cost input handicap of an individual player puts him
automatically out of the competition or in a position of lesser
profitability. Attrition levels, therefore, are high.
Specifically, then, what are the challenges we face
in enhancing our global competitiveness? This is not just a task for
industry, but also calls for concerted national teamwork of industry,
government, service providers, port sector and users. To sell our products
and services we obviously must learn to compete. Shipping while being a
significant link in the chain of international trade has to play the role
of cost efficient and reliable service provider. How should we approach
this challenge at a national level?
is recognition by all sectors of government of the role of national
shipping in our domestic and international trade towards the process of
globalisation and integration into the world economy. This calls for
attitudinal changes that perceive matters in longer-term perspectives that
go beyond the annual budgetary rituals of revenue generation.
sectors of sea transportation such as energy lifelines, coastal movement
and offshore oil exploitation are strategically sensitive to a maritime
state. In these areas, globalisation has to be confined to achieving
globally competitive prices, with nationally owned or controlled assets.
costs represent 50-60% of a ship’s break-even daily rate. Weighted
Average Cost of Capital (WACC) is high to Indian shipping companies, for
various reasons many of which are within the control of government or
regulators to alleviate. The imposition of withholding tax on external
commercial borrowings is a typical case in point – it is not the
overseas lender that bears these costs but the economy.
build-up and renewal is a continual process towards maintaining
competitiveness and quality in services with profitability. A significant
part of capital for growth and development has to come from internally
generated resources. The taxation regime must facilitate this fundamental
vehicle for growth.
perceptions are reflected in the P/E ratio of a scrip. Raising resources
from capital markets is an intensely competitive business and is driven
largely by the perceived image and future revenue potential of a specific
sector. Investor perceptions are modified only through changes in
fundamentals – i.e. improved profitability with higher retained earnings
geared towards growth.
indeed a dichotomy, that while we provide the highest quality manpower to
world shipping, we cannot retain enough of them for our own fleet on
account of skewed personal taxation policies. Clearly, this is a task for
government to recognise and set right.
projects that depend upon movement of large volumes of bulk goods have
necessarily to be coastal located. Advanced maritime countries fully
recognise and continue to exploit the advantages of water-borne movement.
Our infrastructure policy must leverage the commercial advantages of
and production of offshore oil and gas resources will play an increasingly
important role in our energy deficient economy. There is vast potential
and challenge for shipping in this sector.
recent setbacks in new power generation projects, energy shipping such as
LNG has great future potential. The shipping industry must understand that
it is one important link in the total chain and must play its supportive
role as a cost-effective service provider. It is essential to remember
that one player in the chain cannot expect a higher return on capital than
its other team players.
monopolies in the ports sector continue to inhibit projects that wish to
derive advantage from the economies of scale. A case in point is the
inefficiency of crude and petroleum product handling at our ports. The
cost of poor capacity utilisation of ships is eventually passed on to
consumers. Port privatisation and corporatisation is one effective way to
achieve better productivity with accountability.
skills and systems in Indian companies have traditionally tended to be
more domestic oriented, as this has been the main area of operations.
Mindsets and attitudes need to change towards developing global
unions have to contribute in this effort to work in unison with ship
owners to reduce manning scales and raise productivity to international
industry we tend to exhibit inertia to technological change. We must learn
to more effectively use the new tools of information technology,
communications and networking.
major challenge to a country which accounts for a sixth of the world’s
population and with ambitions to become a global player, is to cease
revelling in its past achievements and continually maintain and leverage
the longer term potential of its competitive advantages. This needs
objective introspection to identify weaknesses and metamorphose them to
strengths. We already possess the basic skill sets and inherent strengths
to effectively exploit the opportunities that globalisation of world trade
provides. We need to learn to leverage these strengths. To leapfrog in
growth we need to look beyond our shores and have the ambition to become
global players on our own merit in the example of our enterprising
compatriots in the Information Technology industry. It is perhaps only
then that we can again take pride in being a world-class maritime player
in the glorious traditions of our ancestors.