India’s maritime makeover

**Akshara** (0:04)
In today's episode, we'll break down two important stories. First, we'll talk about India dreaming of owning the sea, and then we'll talk about why protein powder is getting expensive. Welcome back to The Daily Brief by Zarodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Tuesday, 16th June. Coming to the first story.
Picture a container leaving a garment factory in Tirupur, packed with t-shirts bound for Rotterdam. It moves by road and rail to a port on the western coast, waits its turn, gets lifted onto a ship. And from that point on, when it touches the water's edge, almost everything about the journey belongs to another country.
So the ship carrying the shipment is almost certainly foreign-flagged. Indian ships carry only about 5% of the country's export and import cargo. And that ship probably doesn't head for Europe. Instead, the container is likely trans-shipped from a nearby port in another country like Sri Lanka or Singapore, as three-quarters of India's long-distance shipments are. A foreign-flagged ship financed and insured from abroad then carries it to its destination. So the bulk of India's trade crosses the sea. But the entire infrastructure carrying it– the ships, the hubs, the insurers– comes from other countries. Since the COVID-19 pandemic, we've made a strong push to upgrade our port infrastructure. The Mundra Port, the Pipawav Port, and the Jawaharlal-Nehru Port in Navi, Mumbai, rank among the world's top 30 most efficient ports. In fact, the Jawaharlal-Nehru Port was among the most improved ports on earth in the last five years. We clearly have the ability to build world-class maritime infrastructure.
These improvements have also reduced our logistics costs substantially, from well into the double digits to just about 8% of our GDP, which is in the same ballpark as countries like the United States and Germany. But Indian shipping suffers from a wider range of legacy problems, and these fall into two broad families. One, that we rely too heavily on foreign infrastructure, and two, that range of frictions make India's experience with shipping uneven. Now, the last year has seen the Indian government wrestle extensively with these issues. In the space of a single year, it brought in a Rs 69,725 crore package, floated three new laws replacing statues dating as far back as 1908, launched a development fund and an insurance pool that both run into thousands of crores, and inaugurated a new deep water port. Taken together, these measures present a serious overhaul of Indian shipping on the horizon. Now, depending on who you are, your logistics costs can vary substantially. To a large company, shipping costs can add up to approximately 8% of their turnover. Smaller businesses meanwhile spend more than twice as much, at roughly 17%.
The very exporters least able to carry those costs pay the most. Now, some of this is structural. Scale unlocks many efficiencies and gives you bargaining power that a smaller firm simply doesn't have. But these differences are hard to iron out. But some frictions are peculiar to India. Indian ports are wrapped in layers of processes and procedure which small businesses struggle to handle. And those struggles create a crop of brokers and intermediaries one must deal with to get a shipment through.
Each middleman adds to a firm's costs, making shipping far more expensive than what tariff cards alone imply. But this isn't uniformly the case. Some Indian ports compare favorably to the world's best. At the same time, many of India's most important ports like those at Vishakhapatnam, Cochin or Chennai don't even feature among the world's 100 most efficient ports. The experience of sending a shipment out depends entirely on where you do it. Now, at any of those ports, you're probably met by a ship that carries a foreign flag. After all, it's incredibly expensive to run an India domiciled ship. Running an Indian flag vessel for a foreign voyage costs about 20 percent more than running a foreign one. And this is almost entirely a matter of policy. Indian ships borrow at higher rates over shorter tenures, pay tax on their cruise wages, pay import duty on the vessel itself, lose tax credits they cannot recover, and pay GST on domestic legs that are foreign ship sales free of. Moreover, a foreign charterer must pay a withholding tax of around 7.5 percent on the freight they earn if they're renting an Indian ship. This is a business where a few percentage points of cost can make or break a contract. A 20 percent gap essentially kills the case for Indian shipping, ensuring that Indian shipping is extremely unattractive to Indian firms, let alone foreign ones. In fact, even when Indians own and operate ships, they don't fly them under an Indian flag. It makes better sense to register a ship in Panama or Liberia. As a result, we pay foreign shipping companies roughly 6 lakh crore a year, a figure close to our defense budget.