Need of the hour for the Indian shipping sector in the backdrop of supply chain disruptions
By Tapan Sahu, Senior Logistics Professional
We all have been witness to the supply chain disruptions that Covid-19 caused globally. India, obviously, was not insulated from the same and the corresponding swings in the ocean freight that have led to skyrocketing of the freight rates to unprecedented levels. Subsequent to the waning away of the pandemic, the rates were getting stabilised and were, in certain trade lanes, touching the pre-Covid levels. However, with the eruption of conflict in the Middle East, the Red Sea route has become highly risk prone and this has once again catapulted the ocean freight levels.
Such waves of supply chain disruptions translating into abnormal swings in ocean freight levels have deeply impacted the EXIM trade pertaining to India.
During the Covid period, the container freight levels had peaked by around 7-8 times specifically in the Asia-Europe trade lanes, which covered India as part of the service route.
Massive geographical deviation
Similarly, owing to the Red Sea crisis, container traffic is undergoing a massive geographical deviation of being routed through the Cape of Good Hope and accordingly the freight levels have once again zoomed to levels 5-6 times prior to the crisis, notwithstanding the increase in transit times by 2-3 weeks. Such abnormal swings in the freight levels - are they really justified when correlated to the increase in the operational costs of re-routing the vessels? A reputed credit rating agency has estimated that shipping companies’ operating costs on the affected routes would have escalated by about 50%, which is considerably lower than the freight increases witnessed in the range of 500%-600%. The current spot rates might also have a ripple effect on the contract prices, leading to higher average rates for the year and thereby resulting in temporary relief for container shipping companies from what could have been a lean patch for them in 2024 due to lower demand for goods and eased industrial supply chain issues.
The Red sea route through the Suez Canal caters to around 30% of the global container traffic. Furthermore, the Indian EXIM trade depends primarily on this route for carrying out trade with European countries, North Africa and the Americas, which collectively account for about 35% of India’s total foreign trade, primarily in the container segment. The re-routing of shipments through the Cape of Good Hope to obviate the risks of sailing through the Red Sea has become a necessity. However, the abnormal hikes in freight levels being charged by the carriers to more than offset their operational costs is an area that needs to be addressed. A similar situation of abnormal hike in freight levels was encountered during the pandemic.
Need of the hour – Indian Maritime Commission, Indian shipping line
The need of the hour is for the WTO member countries to constitute a regulatory body on the lines of the IMO for laying out the framework for regulation of ocean freight. Countries that already have Maritime Commission for regulating ocean freight specific to their country can come under the umbrella of the proposed regulatory body.
A lot many positive developments have happened in the Indian shipping sector. Need of the hour now is to establish an Indian Maritime Commission for regulating the freight of Indian-borne EXIM trade so as to protect the interests of the trade fraternity more effectively. On the statutory front, ocean freight needs to be exempted from the ambit of GST so as to improve the liquidity of the EXIM trade partners. Also, the shipping sector in India can be incentivised for setting up a shipping line of global repute considering the fact that India remitted over $80 billion as transport service charge in 2021 and, as the country heads towards the objective of achieving $1 trillion exports, this would translate into $200 billion by 2030. A 25 per cent share for an Indian shipping line can save $50 billion annually as also, to some extent, enable regulation of the freight rates.
(The views expressed are solely the author’s own.)