The latest delay in the privatization of India’s only state-owned merchant shipping company, Shipping Corporation of India (SCI), offers the Center an opportunity to reconsider the privatization of this strategically important national asset.
While there is a good case for the government exiting business in general and the privatization of most state-owned enterprises in particular, SCI should be viewed through a different lens – that of national security.
Nothing underscores this other than the hardships Russia has faced in its attempt to bypass Western sanctions and continue its international trade. Logistics operations have almost come to a standstill, with major operators either suspending or severely restricting services. It is estimated that freight traffic from Russia by road has decreased by more than one million tonnes per quarter. In Frankfurt, Europe’s busiest air cargo hub, 20 flights a week operated by Russian heavy cargo planes have stopped.
But by far the biggest impact has been felt by shipping, with major Western container and general cargo suppliers shutting down services to Russia. By this time, this should have created a situation for nothing to go in or out of Russia. This is not because of two factors: one, Russia has a fairly strong merchant fleet in its own right; And second, China, the world’s fastest growing merchant shipping power over the past decade, has stepped in to oust Russia.
The fact that Russia had a strong local merchant fleet helped. According to UNCTAD data, the Russian Federation had 1,786 ships, which was about 1.3% of the world’s maritime cargo capacity. However, before the war began, only 322 of these were ‘foreign flagged’ – that is, owned by Russian entities but operated under other countries’ registries. Following sanctions, this has forced a record number of “flag switches” by Russian ships. According to some industry watchdog websites, flag switches have hit double digits since March — more than three times the long-term monthly average. In addition, Russian ship identification and location transmitters have been forced to shut down, as well as painting on vessel names and IMO numbers to try and stop identifying as Russian.
While these are in violation of international maritime laws, as the sanctions specifically prohibit other activities such as ship-to-ship transfers of cargo, the fact that these actions have helped to stifle Russia’s economy as a whole, Despite the fact that 90% of the world’s trade is done on the sea.
This has happened because Russia not only owns ships, but also has China’s support in conducting its trade by sea. China’s merchant fleet has more than doubled in size in the past decade. With 7,318 ships under the Chinese flag in 2021 and 1,764 ships registered in Hong Kong, China is de facto the world’s largest trading maritime power, with a total tonnage capacity of 348 million DWT, only marginally more than world leader Greece’s 373 million DWT. is behind. Most of Greece’s fleet is foreign-owned, operating under the flag of the facility.
In the event of conflict – either directly involving India or in the Indian Ocean region – would leave India with few such options. While 98% of India’s trade is carried by volume and 68% of its trade value is by sea, most of it is money paid to foreign operators – India ranks 19th in merchant fleet strength in the world rankings, in which About 1% of the global capacity. tonnage but these numbers hide much more than they reveal. More than a third of the total (and a much higher percentage in critical cargo sectors such as crude, LPG and natural gas carriages) is under foreign flags. The existing Indian fleet is also aging, with the average age increasing from 15 years in 1999 to 19.71 years as of October 1, 2019, with more than half of the fleet being over 16 years old, according to the Economic Survey for 2019-20.
This is where SCI becomes critical to India’s maritime security interests as well as its ‘blue economy’ policy. With a total of 59 vessels of 531,1211 DWT, it is by far the largest merchant cargo carrier in India. It also owns important infrastructure such as very large raw materials, petroleum products and gas carriers. In addition, SCI owns and operates offshore supply vessels for ONGC, marine survey vessels, deep sea exploration vessels and even dredgers that maintain the operations of our ports. A privatized SCI can exit these niche markets.
It is not that privatization of SCI will lead to autocratic development of shipping sector in India. The fact is that the two largest private Indian shippers – Essar and Great Eastern – do not have a combined fleet strength that matches that of SCI. Despite policy changes preferring Indian-owned vessels for Indian freight traffic, the fact remains that China, South Korea and Japan together account for 85% of the world’s shipbuilding market – with limited shipbuilding capacity – and lack of financing options. The shortage has meant that even Indian shipping companies increasingly opt for overseas flag operations.
Unless India can resolve its long-standing structural issues related to shipping – building shipyard capacity and developing domestic financing and insurance capacity – privatizing a strategic asset like SCI makes little sense.