Impact of Indian Government on Indian Port Sector

Posted: March 25th, 2023

Impact of Indian Government on Indian Port Sector
1. Introduction
1.1 Background of Indian Port Sector
Colonial India inherited 11 major functioning ports in Bombay, Kolkata, Madras, Cochin, Visakhapatnam, Kandla, Marmagao, Calcutta, Rangoon, and Chennai. During the partition, Bombay and Calcutta were divided and new ports were built named Nhava Sheva and Haldia respectively. The federal system of India meant that from the beginning, ports in India have been a subject of both joint state-centric activities and individual state undertakings. At various times there have been differing opinions on whether port operations should remain a concurrent subject or be a complete matter for the state in question. This has blurred lines between public and private endeavors at state ports and resulted in varied administrative trends.
This thesis is mainly concerned with the impact of government interventions on the development of Indian ports since 1956. By government intervention, we mean that of the Ministry of Shipping and its undertakings including the Ports Act of 1963 and the major reorganisation of ports into public corporations. The underlying theme in the entire thesis is the extent of autonomy the port sector has been able to exercise in making strategic economic decisions. Usually, the initiative for government intervention comes from a belief that the port sector does not seem to be meeting a certain national objective or at other times it is seen as a response to financial crises. It is therefore necessary to check the impact of state activity on the port sector against these actions and to investigate the success of other ports that have not undergone the same treatments.
1.1 Background of Indian Port Sector
After the Suez Canal opening in 1869, the government appointed an Investigative Committee, which suggested that a policy should be adopted aiming at the development of sea ports. The Kandla port developed as a certain aftermath of this policy. However, it was only after independence and with the partition of the country that the Union Government, taking into account the necessity for having a more systematic development of the ports, set up the first National Transport Committee in 1948. This Committee recommended an inclusive and integrated policy for port development. Subsequently, the Central Water Transport Corporation was set up in 1967. With a need to have a legislating authority for the major ports, to free them from the general administrative control of the government, the Board of Administrators was formed. These acts and agencies have been largely responsible for the present state of the port sector. A boom in the cargo movements and considerable changes in the kinds of cargo handled can be seen since independence. So also, there have been changes in the number of ports dealing with such cargo.
A nation’s development depends upon the smooth functioning of various infrastructures like highways, airports, railways, and seaports. Among these, between 90-95% of its international trade – by volume and 75% by value – is moved by sea, reports the Maritime Administration of the Government of India on their website. Previously, until the promulgation of the Major Port Trust Act 1963, India only had a few minor ports. It is these legislations, initiatives, and acts taken by the government for the fulfillment of the aforementioned objectives that have had an immense impact on the Indian port sector.
1.2 Significance of the Study
This study holds an enormous significance in terms of India’s infrastructural development in the current decade. As highlighted in the previous section, the Indian port sector has undergone various policy changes from the pre-independence era. The outcome of these changes is visible today. This research encompasses all the changes, consolidation phase, and policy initiatives in the post-liberalization era till recent times. In-depth analysis of the impact of each policy initiative at that point has been considered in this study. The reason is that the intent of each policy initiative, if understood, can give useful insights for today, while India stands at the juncture of a major policy change in public-private participation. It can also highlight which of the policies have been beneficial and can be replicated. The entire research is an attempt to seek answers for the current crisis of the Indian port sector from its past. It seeks to identify the policy initiative which has brought the Indian port sector to its present state. At present, there is a sea-change in the government’s stand on various issues. With a flurry of PPP projects currently being planned, it would potentially change the entire gamut of issues highlighted in the research till now. In that context, the research can be a source of reference for the stakeholders to understand the past and better predict the future. It would also be a ready reckoner for academicians and students alike, who are interested in including sector-specific case studies to understand theoretical concepts. Last but not least, it can assist the government in understanding the impact of each policy initiative to draft new policies. This is significant as there could be many policies of the past that have not been documented (the major case being the “landlord model”), and the government is trying to reinvent the wheel, being unsure of what went wrong in the past.
1.3 Research Objectives
A comprehensive overview of the Indian port industry will be provided at the beginning while studying the current state of Indian ports and the influence the Indian government has had on the industry. This context gives a broad and thorough understanding of the current influences of the Indian government on port operations and development, and why there is evidence to suggest that government intervention has sped up the growth of the port sector, however this intervention has implications. A look at the recent cargo volume trends for the major ports in India suggests that there has been no change in cargo volumes until recently (Sarkar and Sinha, 2007). During the 90’s there was a slowdown in growth with some ports experiencing negative growth rates in handling cargo (Sarkar and Sinha, 2007). The last 4 years has seen an increase in cargo volumes and the growth rates of cargo volumes relative to the previous era of slow growth (Sarkar and Sinha, 2007). This time frame also suggests a time of increased reform and government intervention, in which change the maintenance and significant improvements in port infrastructure has translated into improved efficient handling of cargo (Sarkar and Sinha, 2007). This has implications that the government has the potential to influence the port industry in a positive manner if efficient planning and resource allocation is utilised. This report will look into the current state of port operations and the trend that India is becoming an emerging player in the world economy, building a strong foundation for policy and reform which will steer and improve the efficiency and operability of the port sector.
2. Government Policies and Initiatives
Indian port sector was totally controlled by government till early 90’s. The major drawback of these ports was the inefficiency and high costs. Looking at the international scenario, an expert committee was appointed in 1994 to recommend the changes in the port sector. This was followed by a series of changes in the government policies in the last decade. One of the major changes was the decision to allow private sector participation in the port infrastructure and the landlord port model. This has led to a shift of focus from the administration of the port to the development of the port. In this model, the port authority acts as a regulatory body and the private companies are lured to develop terminals, which would be leased to the developed for a period of 30-60 years. This has resulted in considerable improvement in efficiency and an increase in capacity. This is evident from the fact that in the past decade the capacity of the ports has increased from 200MT to 700MT. In the meanwhile, the private ports were given green field status. This model has been highly successful but some leases were derailed due to certain policy issues. This mode of participation was extended to joint ventures in the year 2000. The joint venture is involved in the development of berths and terminals on behalf of the major or intermediate ports. Significant policy changes were brought in to improve these projects in the years 2004 and 2010. These projects have been carried out in Build-Operate-Transfer and Design-Build-Finance-Operate-Transfer models.
Government of India has one of the vital roles in bringing significant changes in the infrastructure of the ports. The government policies and initiatives play a great role in improving the presence and functioning of the Indian ports. There have been many initiatives which have greatly influenced the port sector. Some of the important policies and initiatives of the government which have influenced the Indian port sector are Port Development Plans, Public Private Partnership (PPP) projects, Ease of Doing Business Reforms, Coastal Shipping Promotion and Regulatory Framework. These are explained as follows:
2.1 Port Development Plans
The government launched the National Maritime Development Programme (NMDP) in 2006, which incorporated the earlier Sagarmala Programme with a view to integrate the development of the major and minor ports so as to provide a competitive advantage to the Exim trade. This programme identified around 276 port modernisation and expansion projects. The programme did succeed in enhancing the capacity of the ports. The capacity increased from 576.39 MMTPA to 943.87 MMTPA during the period 2009-14, thus exceeding the intended target. The NMDP programme was very successful in meeting its intended objectives. This programme has been a game changer in terms of port infrastructure development. Although it did not meet the expected target achievement by 2012-13, it did very well during the 12th Five Year Plan. With earmarking of investment worth ₹870 crore, the programme was able to achieve a very impressive quantum of capacity augmentation at the major ports by addition of about 162 MMTPA capacity. This amounted to spill over of NMDP projects in the year 2016 and also prompted the Ministry of Shipping to announce immediate approval of projects worth ₹8000 crores in September 2015. A study has found that investment in port infrastructure has a positive relationship with the passenger and cargo movement. NMDP by enhancing the capacity of the ports has steered up port efficiency in terms of faster turnaround of the ships and less waiting time for berthing.
Post 2014, the launching of the Sagarmala project has also been a very ambitious project that aims to take port led development to the next level. Though it has a broader outlook, the 173 projects identified are primarily related to port modernisation and new port development. Sagarmala programme has plans to earmark US$ 11.44 billion for capacity expansion at ports which is projected to help the ports augment their capacity to an international standard of 8-10 MMTPA/berth. This will enable the major ports to enhance their capacity from the current 1,400 MMTPA to about 3,000 MMTPA. This programme has targeted to employ the PPP route to finance a large chunk of the investments and intends to double its share in the funding for port infrastructure over the next five years. High amount of investment with the use of latest technology is hoped to bring in a productivity gain at Indian ports which needs to be about 35-40% if it has to compete globally.
Improving the efficiency at the ports is necessary in light of slow industrial growth. For this, the policy outlook till date has tried to improve the efficiency through capacity augmentation. But with changing times, efficiency needs to be more focused on rationalising of the costs. In the coming times, we shall expect more policy initiatives targeted at cost reduction and revenue enhancement measures at the ports. Given the slow industrial growth and shift of car manufacturing to make India an export hub for cars, these initiatives shall possibly be formulated to provide a competitive advantage to the Exim trade. Thus summarising the government policies, it has been largely successful in terms of capacity building of the ports through various well captured and quantified policy initiatives right from NMDP till date. With changing times, the policy outlook is also expected to change its horizon and will need to be dynamic as the shipping and port sector is a fast moving sector in terms of changing business environment and the wide use of latest technology.
2.2 Public-Private Partnership (PPP) Projects
The government has largely moved away from implementing port projects itself and has instead adopted the policy to ‘hand over’ construction and operations of port projects to the private sector. With substantial policy and regulatory reform having taken place as discussed in 2.5, the playing field is currently even enough to allow fair competition between both domestic and foreign investors. This has led to much higher levels of private investment in port projects and has seen the private sector’s share of the port sector in India increase substantially from 20% in 1990 to around 40% by 2010.
A landlord port model whereby the port authority will act as a regulatory body and the port operations are to be conducted by private concessionaires – this is the model that is expected to be the most successful in the future.
Public-private partnership (PPP) projects have emerged as the favored option for port development in India. This has come about as a response to the poor development of ports with state funding, the poor performance of publicly operated ports, and the unsatisfactory performance of earlier private initiatives. The major port trusts have now been given full autonomy to enter into joint ventures.
2.3 Ease of Doing Business Reforms
(4) Improved Consistency in Rule Enforcement across the country: Variations in the methods of operationalizing the regulations across various states and ports are often counterproductive. This program will endeavor to create a national standard/regulation for various activities in the port sector. Where such activity is subject to a state regulation, efforts will be made to create a national consensus on the same. This will lead to better understanding and increased compliance by the stakeholders.
(3) Transparency and Governance: A key component of this agenda is creating awareness of the right procedures amongst the various stakeholders and ensuring accountability of the regulatory authorities. This would be achieved by training the staff of port authorities and other stakeholders in the right procedures and registering the same in the form of Standard Operating Procedures to be used as a reference guide. The stakeholders would also benefit from a Citizens’ Charter which will clearly spell out the service standards and time limits for the various services offered.
(2) Port Community System (PCS): PCS integrates electronic flow of information and facilitates electronic exchange of messages between the various stakeholders in the trade, to undertake various activities ranging from lodgment to clearances. This will reduce the interface of the trade with the various regulatory and administration agencies. It aims to provide value-added services such as electronic Manifest filing, e-payment of service charges, electronic delivery orders, electronic Form9/11, and message alerts which can improve the turnaround time in port business, reducing the overall cost incurred by the trade at the ports.
(1) Business Process Re-engineering: Detailed assessment of the existing processes at ports to identify the bottlenecks and streamline the processes. This will result in simplification of processes and removal of redundant steps.
To improve the overall business environment in the country and maintain global competitiveness of Indian ports, several measures such as simplification of processes, reduction of cargo release time, and cost reduction are required. Improvements in infrastructure need to be complemented with procedural improvements to make Indian ports user-friendly. Towards this end, a new initiative titled “Ease of Doing Business Reforms” for the benefit of the EXIM trade has been launched by the Ministry of Shipping. The vision is to maintain global competitiveness of Indian ports by providing an enabling business environment, and its objectives are aligned to the indicators proposed by the World Bank. Important components of this program are:
2.4 Coastal Shipping Promotion
The customs and excise duties on bunker fuel have been central excise and the additional duty of customs leviable under sections 3 and 3 (5) of the customs tariff act, payable on fuel oil used in ships for generation of steam or power for propulsion. These duties put the coastal shipping industry at a disadvantage against road and rail as the sales tax on HSD, which is not leviable on these modes, but is refunded to coastal ships. Although bunker fuel has been outside the purview of the above mentioned levies, excise duty on LSHS has continued to create a cost disadvantage for coastal shipping. LSHS is a low cost and efficient maritime fuel, which was used extensively by coastal ships. However, being in the nature of an HSD, it has long ceased to be manufactured in India due to the acute disadvantage of the customs and excise duties. The duty leviable on HSD has made it necessary for the ships to obtain a sales tax exemption, which has often been difficult to procure. Steps are being taken to exempt bunker fuel from customs and excise duties to create a level playing field with road and rail. This is being done by replacing the duty leviable on LSHS under section 3 of the customs tariff act with an equivalent duty on bunker fuel through the Merchant Shipping Bill.
Coastal shipping refers to the movement of goods, both in bulk and in containers, by sea between ports situated on the coast of the same country. The government feels that transportation of goods through the coastal area, which encompasses shipping as the principal mode, is more energy efficient and environmentally friendly than road and rail transport. Given India’s long coastline and inadequate road and rail infrastructure, coastal shipping is a particularly attractive option. It is posited that a one rupee reduction in the cost of coastal shipping would save the country about 6 billion rupees.
2.5 Regulatory Framework
Oligopoly to Landlord Model (1999-2013): The Major Port Trusts Act was to be amended to keep pace with the fast-changing global trends in the shipping industry and to increase port efficiency. So, in 1999, a new act was passed, replacing the Major Port Trusts Act. This new act aimed to corporatize the major ports and thereafter allow a greater degree of autonomy to the ports in their operations. Because the act did not allow for full corporatization and private participation, it failed in achieving its objectives, and in 2013, another act was enacted repealing the 1999 act. This new act was aimed to introduce the landlord model at major ports. This act was quite a significant one; however, many of its provisions are yet to be translated into actions.
Monopoly to Oligopoly (1950-1999): Initially, the major ports were operated by the Port Trusts and were holding a monopoly over the cargo handling. In 1986, the Major Port Trusts Act was passed, which pretty much defined the way the port sector was to operate in the coming years.
Regulatory framework refers to the arrangement where government regulations are set up to control the activities and businesses. In the context of the port industry, the regulatory environment is a very critical determinant of the players’ behavior and performance. It defines the rules of the game and the incentive structure under which a port is supposed to operate. The Indian port sector has seen various changes in the regulatory environment since independence. The major changes have been:
3. Impact on Port Infrastructure
Logistics cost in India is one of the highest in the world. It accounts for 13 to 14 per cent of the GDP which is almost double (6-8%) the logistics cost to GDP ratio in developed countries. High logistics cost is the result of poor and fragmented infrastructure, inefficient logistics services, and complex regulatory environment. Inefficient inter-modal logistics, due to high cost and low service quality, results in a modal mix that is not the best in economic terms, and a large amount of freight congestion on the road and rail networks. Over 90 per cent of the country’s trade by volume is moved through sea routes and the traffic is expected to double in the next 10 years. So it is essential that the port development is dovetailed with the development and integration of the transport logistics infrastructure. This has bunched up a series of road and rail projects which will connect the hinterland to the ports. National highway connectivity is being targeted to cover 20 km radius from ports and for rail it is targeted to have a market share of 45 per cent. This is expected to save over 20,000 crore of rupees for the exchequer.
The most critical component of port infrastructure is the connectivity to the hinterland. An ineffective and inefficient multi-modal transport logistic system (roads, rails, waterways and air transport) has meant high logistic costs and huge time delays for the trade.
The government has continuously emphasized on the need for expansion and modernization of ports to foster sustained economic growth and international competitiveness. The National Maritime Agenda 2010-2020 has set a target to increase the capacity of ports from 1,400 million tonnes to almost 3,000 million tonnes. This rapid increase can only be achieved by way of adding new capacity and modernizing the existing facilities. Sagar Mala project identified 251 port capacity expansion plans (14 greenfield and 37 brownfield) entailing an investment of around 2.64 lakh crores. This will be accompanied by modernization and mechanization of the existing terminals and enhancement of their efficiency.
3.1 Expansion and Modernization of Ports
The expansion and modernization of India’s ports is the primary objective of the National Maritime Development Programme. With its investment of over Rs 140 billion from 1997 to 2007, the plan is Asia’s largest ports improvement effort. The main goals of the National Maritime Development Programme are to upgrade and expand port infrastructure, privatize terminal services through joint ventures between private and public sectors, improve the port’s competitive positions, and prepare for the globalization of industry. With these plans in mind, the major ports plan to add 205 berths and create an additional 313.56 million tons per annum. The goal of additional capacity is to lower the congestion of cargo which has been recorded at 85 percent, and to prepare for future cargo increases.
The results of these actions on port infrastructure are ports attaining full self-sufficiency in funding capital expenditure, drastically increasing efficiency of the port in terms of berths and well as employee productivity, becoming more competitive on a global scale, and increasing India’s share of maritime trade from 0.95 to 1.52 percent. With an overall positive outlook on future trade expectations, the port sector is vital to achieving this success. Full self-sufficiency in funding capital expenditure will be achieved by ports in the means of loans from financial institutions or by issuing bonds. Port trusts will set up infrastructure project-specific companies to involve private sector funding in joint ventures. With better infrastructure and a positive global outlook, the port sector is a prime area for investment for both private and public sectors.
3.2 Upgradation of Connectivity and Logistics
India is a vast country which has a diversified geography. The lack of proper connectivity of the ports to other parts of the country was one of the major drawbacks in using sea routes as a cheaper mode of transport of goods. The major ports were administered by the central government and there exists poor connectivity with railway network. More than 90% of the exports and imports take place through the sea route. In order to harness this potential revenue, the Ministry of Shipping has launched the Sagarmala Project. It aims at promoting port led direct and indirect development and to provide infrastructure to transport goods to and from ports quickly and efficiently. This would enable the ports to support importers and exporters to save on inventory and logistics cost. This would be done through comprehensive upgradation of port infrastructure and effective and efficient use of information technology. This project majorly addresses the issue of port to market connectivity. This in turn benefits the local communities to have a faster and cheaper mode of transport of their goods to other places in and around their location.
Upgradation of port infrastructure and efficient use of information technology would result in:
1. Efficient movement of cargo to and from ports
2. Lower time and cost of logistics for export-import and domestic trade with transshipment port becoming the central hub for cargo collection and distribution
3. Enhance the competitiveness of Indian export goods in international markets, and goods transiting through India.
3.3 Enhancement of Port Efficiency
Another major area in efficiency enhancement is the improvement in the administrative procedures and documentation. Due to the multiplicity of agencies and a lack of coordination among them, the procedures are time-consuming and result in increased transaction costs. E-migration has been identified as the solution and there are plans to make this the primary means of documentation for all cargo management-related activities. This system will be based on the self-declaration by the shipper or importer, with an objective to reduce the dwell time of cargo at ports. Measures will also be taken to improve the port community IT infrastructure and create a uniform electronic format for all the documentation related to cargo and vessel movement so as to facilitate easy exchange of data.
It has been recognized that there is a shortage of technically qualified and skilled manpower in this sector and the quality of existing manpower is low. Steps will be taken to upgrade skills to the level of international standards through training institutions, management development programs, and human resource development in cooperation with international consultants. An autonomous body in the form of a society under the Societies Registration Act, 1860, to train and inculcate the right skills for different facets of the ports and shipping industry has been recommended.
In the recent past, the major port sector has initiated the process to change and has recognized the need to be efficient and provide better services to the customers. The government has also tried to create a corporate culture based on performance with financial autonomy. The government has also realized the need to facilitate the much-required training and skill development of the employees in the port sector.
Introduction
The Indian government’s intention to enhance efficiency in the port sector is evident through the policy measures and recommendations implemented. Efficiency in the ports and shipping sectors can be defined as the ‘ability to enhance the level and quality of service while minimizing the costs’.
3.4 Technological Advancements
The technological advancements of the Indian port sector have revolved around better port operations and cargo handling as well as simplification of procedures. There have been many new initiatives taken to make cargo handling more efficient, less time consuming and therefore less costly. An example of such an initiative could be the Container Corporation of India’s Logistics Data Bank project which is aimed at tracking and moving the containers on a real-time basis.
Another technological change in order to make operations faster is the possibility of Direct Port Delivery (DPD) and Direct Port Entry (DPE) of cargo. The main advantage of DPD is that it enables cargo owners to clear their consignments directly from the port and move to their respective warehouses without having to wait for clearances from the custodians. Currently, about 80% of the cargo is cleared through the Container Freight Stations (CFSs) because the importers do not have a valid IEC or a facility to obtain a bond. This is a time-consuming and costly process. DPD would cut on costs and clearances would also be faster. This would also help consolidators or less than container load (LCL) cargo in movement of their containers from the port to their CFS and vice versa. This would give a better start to the movement of import containers to a CFS for handling.
In order to encourage DPD, customs has decided to grant certain concessions to cargo importers opting for this facility. The clearance can be done by filing a single self-assessed Bill of Entry. This option has simplified the procedure considering the importer does not have to maintain separate accounts current, save for the fact customs would require a bond or bank guarantee for de-stuffing at importer’s factory or warehouse. Customs would have a risk management system wherein clean clients could be granted less scrutiny. A customs broker can maintain a common ledger on behalf of his clients and no separate bill of entry would be required to be filed. This would help the broker to move the cargo by rail without having to seek the permission of diversion, transfer the containers to his own location, save on freight and ex-lease charges of containers from shipping lines and/or avoid repacking LCL cargo at a CFS to direct a clearance from the port.
3.5 Environmental Sustainability Measures
The Indian port sector is already on the right path to anticipate the IMO regulations. Select Indian major ports have joined a World Bank-sponsored International Sea Ports Environmental Management System (ISEMS) to put in place a sustainable environmental management system. This initiative is undertaken to make the ports environmentally friendly and to have a continuous positive impact on the surrounding area and the sea. A navigational study and stakeholder analysis were carried out in Melaka and a national workshop in the year 2010. The result of the workshop implies the requirement of a more systematic and comprehensive approach towards ISEMS implementation in order for the impact to be more apparent and lasting.
Encouraging quality of bunker (fuel) to improve environment at sea and port, in recent years the issue has been addressed by the Maritime Pollution Prevention Act and strictly implemented by the International Maritime Organization (IMO). It concerns air pollution at sea causing environmental problems to human health through the emission of pollutants from ships. New regulations have been set by the IMO to curb the pollution by limiting the sulfur content of fuel oil used in ships to 3.5% by the year 2012 and reducing it to 0.5% by the year 2020. It also concerns the emission of NOx and SOx, which are also harmful to human health.
Indian Port Rail Corporation Ltd (IPRCL) prepared a project report on ‘Harbour Line connectivity to the Major Ports’ with the aim to connect all the major ports through an efficient rail network. The project is currently in the process of obtaining approval from the Ministry of Railways/Government. The project aims to decongest the road traffic in the port vicinity and to provide a cheaper and eco-friendly mode of transportation.
4. Economic and Trade Implications
(2) Exim Policy steps have usually been sector-specific because general policy changes have been very difficult to implement in the trade sector. But with the signing of the WTO agreement which includes initiatives for Agreement of Agriculture and Agreement on Services, it is envisaged that agriculture exports and the service sector, which are the emerging sectors of the Indian economy, can gain a long-run comparative advantage in the international market. Between 1995-2005, the share of economy-wide labor compensation in the revenue from export of services and that from software exports grew from 5% to 25%. This shows that software has also been part of the growth of the service sector employment and a link between port efficiency and software export is supposed, although data on this are currently hard to obtain. With increasing privatization of the port sector and globalization, Indian ports endeavors to integrate with the global economy will have both negative and positive effects on the volume and types of goods to be handled at the port sector. A dynamic forecast analysis with a simulation model showcasing scenarios for the year 2010, done by NCAER for the port sector, says that it is possible to increase the cargo volume to 3 times the current volume during the next 10 years. This will require adjusting the types of cargo to a broader range of dry and liquid bulk and containers, the latter of which is known as the principal mode for general transportation of goods from door to door worldwide today.
(1) It has been advocated very often and also argued that infrastructure has a direct or indirect impact on a country’s international trade. Indian ports in the past had been lagging behind in giving the Indian exporter and importer the service which matched international standards. Unreliable port services are a trade barrier as they increase the uncertainty of delivery time and the inventory cost. The recent trend is that Indian shippers factor in a large safety stock due to an uncertain supply caused by irregular schedules of the feeder vessels. If Indian ports can provide world-class service by having a fast turnaround time and point-to-point cargo delivery, it can result in huge cost savings for the trade. According to a study done by the National Transport Development Policy Committee, it is estimated that the ‘transaction cost’ for exports is very high in India amounting to 14-18% ad valorem. Reducing this cost directly increases the price competitiveness of Indian goods in the international market. With the coming up of Major Ports Act 2003 and the Tariff Authority for Major Ports, Indian ports are moving towards giving the Indian trade port services with a ‘customer orientation’. This would be especially beneficial for the principal and intermediate cargo where a price elastic commodity is very responsive to fluctuation in price. Professional cargo handlers and new technology will lead to price competition between private ports and a slow regulated reduction in port tariffs. (Mishra 2006) This increased price competitiveness will reduce the landed cost of imports further boosting trade.
Boost to exports and imports
4.1 Boost to Exports and Imports
India’s export-import policy has undergone a drastic change. The tariff rates have been rationalized to a great extent and quantitative restrictions on imports have been removed with the current and capital goods being taken off the list. Licensing has been done away with for most of the items except for a negative list. All this has been possible due to India’s commitments to WTO which necessitated the removal of import and export restrictions. This has been utilized as an opportunity to redraft the Exim policy which would have long-term objectives that ultimately lead to an increase in the exports for the country and simultaneously providing the exporters with a sustainable competitive edge while operating in the international markets. This policy has also given an increase in export credit. Step by step, India has now realized the adverse effects of imports on domestic industries and thus has taken various measures to promote the exports in order to neutralize the adverse impact of imports on the Indian economy. The growth of exports is vital for the successful integration of the Indian economy with the global economy.
The first and foremost impact has been the increase in the efficiency of ports. This translates to lesser time in port and quick clearance of cargo. Costly delays are avoided and perishable cargoes are handled more efficiently. It’s estimated that at current productivity levels, the value of additional exports generated is equivalent to a tariff reduction of 30%. This, in turn, leads to an increased economic activity in the maritime sector – more cargo, more ships. Since the port requires servicing the export cargo, this increase in economic activity reinforces the initial increase in efficiency. The Indian economy is expected to benefit from the synergistic effect of more cargo and more efficient ports to the tune of 0.2% of GDP over a sustained period. All this ultimately increases the exports for the country.
Trade facilitation is the second direct impact on exports. The simplification in customs procedures and documentation, the single window and electronic clearance of goods, and the improvement in logistics have a positive impact. Enquiry has shown that the logistics service providers have already started to brand themselves as facilitators for export and import trade. The significance is well understood. A 5% increase in the efficiency index of ports and a 10% increase in the same for other infrastructure could increase the GDP by more than 1% and generate an additional 1.3 million jobs. Importantly, these impacts are not limited to trade in goods but extend to the provision of services. India aims at improving the efficiency index by 10% or more over a period and with the sector getting more organized and professional, the targets seem achievable.
4.2 Employment Generation
Another significant impact in this area has come from the initiation of public-private partnerships in the major ports. The government has decided to corporatize the major ports under the Companies Act and to allow private container terminals to operate on the berths, with a view to increasing revenue from the major ports by 2.7 lakh crore. It is also expected that the PPP projects can triple their capex and create an extra 250,000 jobs.
The different changes in the port industry have different impacts on the economic growth of the country. The major change that has become an implication is tariff flexibility. This is expected to generate huge additional cargo as the importers will now be in a position to bring in imported raw materials and intermediate goods. This step has the potential to make Indian exports more competitive and also to reduce unit costs on the basis of economies of scale. The port sector is expected to create an extra 100 million tons of cargo for the additional revenue of 6000 crore, assuming elasticity of 1.
4.3 Contribution to GDP
As can be seen with other cases in the global economy, privatization can lead to dramatic changes in industry structure through forced cost efficiency and the development of new service differentiated products. It is argued that the changes in the port sector industry structure have been too rapid for the public sector to adapt and that this has resulted in loss of market share. This is difficult to prove and correlation with market share loss and privatization is not sufficient evidence of the impact on the economy. For example, the market share of Singapore’s private sector-led port industry has been relatively stable. That being said, there is evidence to suggest that the new product development and service differentiation have helped arrest decline of Indian port market share in some cargo categories. This is considered one of the prime consequences of port industry changes with that it has only indirect effects on the economy through altering the level and type of port services consumed by the shippers and receivers of the goods.
In the public sector, there were changes in the organizational structures of the port authorities in that they were made more autonomous and given more responsibility in planning and developing port infrastructure. This was a response to the inefficiency of the old organizational structures which were highly centralized and bureaucratic. A lack of responsiveness to changes in the market led to piecemeal development of port infrastructure and large revenue losses.
This section is designed to analyse the impact of the changes in the port sector on the Indian GDP. In order to ascertain the extent of the impact on the economy, many changes have taken place due to policy changes as aforementioned and investment in port infrastructure. 87% of market share is held by the public sector. This represents a change from the era of pre-reform when the public sector played an exclusive role in the supply of port services. This change has been largely attributed to the fact that urbanization of port services is linked to a global phenomenon already mentioned. This part of the process of globalization has pressured states into making changes in the structure of the port supply industry in efforts to make it more competitive and capable of coping with the changing nature of shipping and logistics.
4.4 Trade Facilitation and Cost Reduction
The major ports of India are facing tremendous competition from private ports and foreign ports. To survive in this tough competitive environment, there is an urgent need for major and minor ports to improve upon their efficiencies in export and import of cargoes. It is important for the Indian ports to provide better services and cost-effective solutions to their customers. The marginal cost incurred by an exporter or importer into port logistics and marine services in the total value of cargo is very high. It is one of the highest in the world and this problem is chronic with the major ports. The major reason for this is the fact that the Indian port industry is highly controlled and the inefficiencies arising from this have been inherited over the past. The government role so far has been the regulator with participation, which can be viewed as a rule maker, player and umpire. However, it has now decided to become a facilitator with the recent reforms. With the taking over of the landlord port model and corporatisation of the major ports, they are driven to increase their efficiency and provide better services to their customers. The new port services have now been standardised and priced and they are being offered to the captive market and to non-major port customers who have currently been taking Indian cargo to foreign ports. This will help in reducing the cost of logistics to the customer.
4.5 Attracting Foreign Direct Investment (FDI)
The government was quick to realize that mere an increase in the FDI limit would not result in investment inflow. As a result, in the year 1997, the government abolished the Shipping Development Fund Committee, which had to sanction all foreign currency loans to Indian shipping companies, which also had the onus to ensure their timely repayment. This move was to give unconditional access to foreign currency loans to shipping companies. An additional move active from Jan 1999 was allowing direct foreign currency external borrowing regulations. This move, as predicted, has been good with many companies planning to expand their fleet having gone in for loans from foreign banks.
In the Indian maritime sector, FDI was allowed as a part of the economic liberalization in 1991 when the FDI limit was raised to 51% from 40%. At that point in time, it was largely expected that with this increase in the limit, there would be a large increase in the investment inflow. But according to a report by the Indian Institute of Foreign Trade, the response to this move was not enthusiastic. This report cites the instance of a proposal by a large shipping player in the industry seeking an investment of $50 million, but local financiers were not prepared to put in more than $10 million on account of the basic risk averseness caused due to the lack of a clear policy-making regime in the country.
The last decade of the 20th century has seen FDI becoming the dominant mode of investment. According to UNCTAD’s World Investment Report 1999, during the period 1991-1996, 72 percent of the FDI that flowed from developed countries went to other developed countries. For developing countries, the corresponding figure is 40 percent.