In this article, Aashi Parekh discusses Cabotage Rules under the Merchant Shipping Act, 1958.

Introduction

India’s shipping industry is a necessary and vital component of its economy, playing an indispensable role in the country’s trade and commerce. As per the Ministry of Shipping, 95% of India’s trading by volume and 70% by value is moved by maritime transport. The industry acts as a primary mode of transport internationally of various essential commodities.

The shipping industry is handled by the Ministry of Shipping which is the apex body for formulation and administration of the rules and regulations related to shipping. It was formed in 2009 by bifurcating the erstwhile Ministry of Shipping, Road Transport and Highways into two independent bodies.

‘Cabotage’ refers to the transport of goods or passengers between two ports/places within the same country by a foreign shipping/transport operator. Cabotage laws are formulated by all international countries to protect their own national ships and promote local development. The Ministry of Shipping instituted the cabotage law to protect the domestic shipping industry in coastal transport.

Cabotage Rules under the Merchant Shipping Act, 1958

India’s cabotage policy is covered under the Merchant Shipping Act, 1958 (“Act”). Section 406 of the Act states that Indian ships and ships chartered by a citizen of India (or a company or cooperative society) may be operated locally only on grant of a license issued by the Director General.

Section 407 states that no ships other than an Indian ship or a ship chartered by a citizen of India (or a company or cooperative society) shall engage in the coastal trade of India except under a license granted by the Director General.

As per the law, only Indian flagged vessels or vessels chartered by Indian companies, operating under a license granted by the Director General of Shipping could carry cargo or passengers from one Indian port to another. Only Indian ships were allowed to function on local routes. This meant that foreign flagged vessels were permitted to operate only when Indian ships were unavailable.

Reasons for relaxation of the cabotage rules

While the cabotage rules were formulated to protect the Indian shipping industry and promote local ships, cabotage restrictions had hindered the transportation of goods via sea and resulted in escalation of costs. Indian ports were losing nearly INR 1,500 crores annually in business which led to a significant loss of revenue potential for Indian port operators.

The Shipping Secretary, Mr. Gopal Krishna, had stated that ‘relaxation shall increase transshipment from Indian ports, and it is expected that by the end of 2018, 10% of Indian cargo transshipped abroad shall be pulled back to Indian ports’.

Relaxation of Cabotage Law

1. EXIM (“Export-Import”) transshipment containers and empty containers

The Ministry of Shipping passed a General Order No. 1 of 2018 dated May 21, 2018 relaxing the cabotage rules for EXIM containers and empty containers. Highly competitive rates for international shipping, the lack of the ‘hub and spoke’ model in India, and various other reasons had resulted in 33% of Indian containers getting transshipped at foreign ports. All these circumstances eventually led to increase in costs for EXIM operations which led to the Indian shipping industry experiencing loss of revenue in terms of port and logistics charges and loss of foreign exchange to foreign ports.

As per the notification, the foreign flagged ships engaged in transportation of EXIM containers and empty containers are exempted from the application of sub-section (1) of Section 407 of the Act, subject to the following conditions:

• the container is consigned through a Bill of Lading to or from a foreign port for transhipment at an Indian port;
• the container is loaded or unloaded at an Indian port for transhipment purposes only; and
• the container has an adequate arrival or departure manifest.

2. Agriculture, horticulture, fisheries and animal husbandry commodities

The Ministry of Shipping passed a General Order No. 2 of 2018 dated May 22, 2018 relaxing the cabotage rules for coastal movement of agriculture, horticulture, fisheries and animal husbandry commodities.

Farmers rely solely on the shipping and logistics industry to store and transport products efficiently, including perishable products required in daily domestic consumption and export markets. As per the National Perspective Plan of the Sagarmala project, an estimate of potentially 9 million tonne per annum of food grains and processed food is moved by sea.⁵

As per the notification, the foreign flagged ships engaged in transportation of agriculture, horticulture, fisheries and animal husbandry commodities specified in Annexure 2 of the Indian Trade Classification (“ITC”), Harmonized System(“HS”), are exempted from the application of sub-section (1) of Section 407 of the Act, provided that such commodities contribute to at least 50% of the total cargo on board.

3. Fertilizers

Fertilizers are the seventh item to be freed from the chains of cabotage restrictions. The need to relax cabotage rules was brought up to provide the farmers with good quality fertilizers and seeds that would therein result in good quality crops and products leading to an increase in the farmers’ income and to provide flexibility and reliability in transportation within various parts of the country.

However, if a foreign flagged vessel is chartered by any Indian company, the ship can load any quantity of fertilizers for coastal movement and the restrictions shall not be applicable to such ships.

As per the notification, the foreign flagged ships engaged in transportation of fertilizers specified under the 2-digit code 31, of the ITC, HS are exempted from the application of sub-section (1) of Section 407 of the Act provided that such fertilizers contribute to at least 50% of the total cargo on board (as applicable only for cargo loaded at any Indian port for coastal movement.)

Relaxation of cabotage rules for transportation of fertilizers is a step forward in enabling the farmers to compete globally and to avail fertilizers in the required quantity and a cheaper cost. The Shipping Secretary is positive that due to such relaxation, by the end of 2018, at least 3 metric tonne of fertilizers shall be moved by coastal shipping.

Conditions applicable to relaxation

Relaxation of cabotage rules come at a cost and are applicable conditionally to those ports that transship at least half their container traffic. For applicability, such ports shall have to reach a mark of at least 50% transhipment. If such demand is not met annually, the relaxation for that port shall stand revoked. Once revoked, the same port shall not be reconsidered for 3 years subsequently. The relevant ports shall also be required to provide monthly container traffic data for monitoring to the Director General.

Consequences of relaxation

Relaxation of the rules will attract more containerized cargo. It will result in the growth of the shipping industry, allowing India to compete internationally with other countries in terms of international shipments. Foreign shipping companies shall be able to take cargo directly from one port to another which will allow them to accommodate more containers. It shall also result in bringing down the overall cost of domestic freight.

Due to such relaxation, Indian ports are now expected to witness a profit of INR 70 billion in 2018. EXIM containers transported by foreign flagged vessels for transshipment at Indian ports in August exceeded the empty containers moved on by foreign vessels providing sufficient indication that the policy shift has begun to benefit the industry.

Relaxation of such rules would encourage farmers to access a larger market, widen the range of goods and products and provide a greater distance for conducting domestic trade.

As per a study under the Sagarmala project, development in the rules shall save expenses up to INR 800-900 crores on transportation of 6-7 million tonne per annum of fertilizers via ships.⁴

Cabotage relaxation shall also help in acquiring a 5-7% cost saving for the cotton and textile industry since it will help export goods from domestic ports itself.

Conclusion

This modification in the rules is a huge step forward in reduction of costs of coastal transportation of various products and commodities including cotton, dairy products, fruits and many other necessities. This change in policy shall in lead to greater import-export, provide more business to shipping companies, increase revenue in terms of port and logistics charges and shall be a huge boost of coastal transportation in India leading to an overall rise in the entire shipping industry.

There is a long way to go in providing various goods to the general population without burning their pockets but relaxation of cabotage rules has been a positive leap in that direction. While the main objective of the cabotage rules are to protect the domestic shipping industry in coastal transport, a change in the global economic sector has increased the demand of transport within India. Changes in the policy have provided an opportunity for two-way cargo movement that has the potential of reducing the cost of transportation, increasing cargo volume and facilitating further investment in the fleet therein improving the state of the shipping industry.