Saturday, 15 September 2018

Relaxations  in Cabotage Law


Cabotage traditionally refers to the transportation of goods within the country via the coastal routes by the transporters of the same nation, thereby restricting the foreign flagged transporters to perform these “chores” in that territory.  Cabotage law is a set of guidelines set by a nation to ensure and guarantee that the entitled ones reap the maximum benefits of waters of one’s own land. Following the historical trail, like most of the other countries of the world, India would not allow the foreign flagged ships to carry goods around until now; things have taken a turn with India relaxing the cabotage laws on May 21, 2018 with a Ministry of Shipping notification, in what is said to be a “game changing decision” by benefitting Indian ports and helping India become a transhipping hub.
The relaxations were long awaited. It has been put that one of the major causes the relaxations were given was that the Indian shipping companies could not provide appropriate services as and when required.  They are also unlikely to have adequate number of vessels to cater to the ever-growing demand of the domestic industries. Water transportation being the cheapest, such a situation could not be allowed to be the Achilles heel.

Positive Aspects

 The relaxations will double up its benefits by forming conducive circumstances to help India become a major transhipment hub.  India can now attract cargo loaded on vessels that are originated or destined to foreign ports that can drop cargo at different Indian ports en-route.  More number of vessels would ensure less delay in cargo transportation. Indian ports would be more busy and gain some extra revenue.
 The freight rates would descent consequently. The persisting problem of empty containers being accumulated on the ports due to an imbalance between imports and exports would also be addressed. The foreign flagged vessels would be allowed to reposition these containers from the ports that have extra, unused containers to the ports facing a crunch of containers as opposed to the earlier cabotage law.

Requirement of a  Level Playing Field

While we look at what the relaxations in the cabotage law have to offer to the shipping industry in India and how the foreign players could change the existing scenario of the industry, emphasis must be laid on providing a level playing field to the Indian flagged ships that have invested over 68000 crores INR based on the existing policy. The Asian countries have relatively relaxed the law more than other part of the world. The relaxations in the cabotage law have already been declared as a “retrograde move” by the Indian National Shipowners’ CEO Mr. Arun Devli. The relaxations might also result in the loss of “Right of First Refusal” to the Indian ship owners.  The point is to put the Indian flagged ships at a level equivalent to the foreign flagged ships who have not relaxed cabotage laws at their land but would be enjoying the relaxations here at India ;  being benefitted doubly they could and would cite lower freight rates. Indian ship owners would not be able to match their rates and ultimately, lose the contract.  The difference could be as humongous as 41%, according to a 2015 data. With globalisation it has become integral for the government to protect its subjects not by eliminating foreign competitions but by pitting both the groups at a level playing field.

Creating a Level Playing Field

One way out could be taking away the burden of hefty taxes from the Indian ship owners; taxation is very consuming in India for the mariners. Other way out, the traditional way, higher taxation rates could be levied so as to create evenness as well as a source of income to India. The reverse charging scheme could be beneficial as well where the foreign flagged vessels were asked to pay service tax based on freight rates and commercial value of their goods at a rate of 15% whereas domestic vessels were somewhat relaxed (at a rate of 4.5%)    The Indian Controlled Tonnage scheme is an Indian ship owner friendly step but only when coupled with the Right of First Refusal. According to this scheme, Indian ship owners are allowed to flag their ships outside India if half of their crew are Indians. The foreign ship owners could also be asked to register their ships in India in order to operate here and pay taxes, which is the National Fleet policy, and enter a level playing field.


The overall impact of the relaxations in the cabotage law would be out in some time for everyone to critically analyse and assess the results. In future, it could as well lead to Indian ship owners  getting their vessels flagged at a foreign land.  If the government manages to create a level playing field for the Indian ship owners, who have been growing their fleet progressively, it could benefit the shipping industry to prosper as well as the end customers who would enjoy a cut in delivery cost and time. The ports will certainly attract more traffic and India is set to become a major transhipment hub.  The rail and road transportation will be relaxed and their rates may descend as well.
India has asked for a global exposure for its cargo movement and to improve the water transportation while other countries still haven’t relaxed their cabotage laws. It is up to it to ensure that the local industry does not succumb to the competition. In the 21st century, sooner or later, relaxations have to be made if the supply portion lags in delivering its service and India has put out a difficult yet bold step; the fruits of the seeds sowed....calculated yet awaited.

Article By- Rajiv Ratna Jha