India’s Leading State-Owned Shipyard Signs US$54M Deal With A German Shipping Company For Cargo Vessels

By Tanmay Kadam

One of India’s major state-owned shipbuilding company has been awarded a USD 54 million contract by a German shipping company for building 4 commercial ships of 7,500 Dead Weight Tonnage (DWT) each.

Kolkata-based Garden Reach Shipbuilders & Engineers (GRSE) signed an agreement earlier this month with Carsten Rehder Schiffsmakler and Reederei GmbH & Co., KG Germany on for the construction and delivery of four multi-purpose vessels, with an option to build another four ships in near future.

The vessels will be 120 metres long and 17 metres wide with a maximum draft of 6.75 metres. Each of them will have a cargo carrying capacity of 7,500 metric tonnes, GRSE said in a statement.

“The vessels will have a single cargo hold each to accommodate bulk, general and project cargoes. Containers will be carried on hatch covers. The ships have been specifically designed to carry multiple large windmill blades on deck,” the company’s statement said.

Main Works Unit of the Garden Reach Shipbuilders & Engineers    Source: Wikimedia

The said contract is approximately worth USD 54 million (INR 450.69 Crores) and is to be executed within 33 months (or 2 years and 9 months).

State-run GRSE is a ship building and repairing company under the administrative control of the Indian Ministry of Defence (MoD). In addition to commercial vessels, the company also builds warships and other vessels for the Indian Navy and the Indian Coast Guard.

Furthermore, the shipyard has also been exporting warships since a decade. India’s first warship to be exported, he CGS Barracuda, an Offshore Patrol Vessel exported to Mauritius in 2014, was built by GRSE.

In 2021, PS Zoroaster, a Fast Patrol Vessel built by GSRE was exported to Seychelles. The ship returned to GRSE earlier this year for a refit that has been completed.

The shipyard is currently working on six patrol boats and a TSH dredger for Bangladesh. Last year, GRSE delivered the MV Ma Lisha, a passenger-cum-cargo ocean-going ferry to the Cooperative Republic of Guyana, which is the largest and most advanced ferry in that country at present.

It is worth recalling that Prime Minister Narendra Modi, while addressing the Global Maritime India Summit 2023, had said that India is going to become one of the top five ship-building nations in the coming decade.

For the past nine years, the Indian government under the leadership of Prime Minister Modi has been undertaking systemic measures to foster self-reliance in the shipbuilding sector, and for the overall development of the country’s maritime sector.

These measures, which will be discussed in detail the next section, are part of the Modi government’s larger ambitions to make India one of the top 3 economies in the world, and they stem from the realisation that strong maritime capabilities are essential for India’s economic growth and overall standing in the world.

This is because, throughout history, ships have been instrumental in realizing economic prosperity through trade and commerce as well as projecting military power, and most powerful nations were those who managed to control the seas.

Current State Of Indian Shipping And Shipbuilding

India’s shipbuilding capabilities have not been able to keep up with the country’s surge in trade, which also includes imports of energy and exports of refined oil products, forcing it to rely on foreign carriers for its shipments.

Maritime transport happens to be the prime medium of India’s international trade, carrying almost 95% of country’s trade by volume and 68% by value. Of this, only about 8% was carried on Indian-flagged or owned vessels in 2018, per a report authored by India’s National Productivity Council (NPC) and KPMG.

According to the unnamed Indian government officials cited by Reuters, Indian companies paid freight costs of $85 billion in the financial year 2019/20, of which $75 billion was paid for use of foreign vessels.

At present, India has a fleet of around 1,500 large vessels which includes tankers, gas carriers, container ships and dry bulk carriers.

Maharshi Parashuram, a crude oil tanker owned by Shipping Corporation of India (Source:Shipping Corporation of India)

As per a report by the National Maritime Foundation (NMF), a government-funded Indian think tank, over 50 percent of this fleet, both in terms of number and gross tonnage, is more than 15 years old, with almost 35 percent crossing the 20-year mark. To put this in perspective, we must see the age of Indian fleet in comparison to the average age of the international fleet, which is 15.06 years.

Therefore, at least 50 percent of India’s current overseas fleet is going to need replacement in the next decade.

Going by the latest statistics put out by the Ministry of Ports, Shipping & Waterways (MoPSW), the Indian shipbuilding industry comprises a total of 42 companies, of which seven are in the public sector with six of them being under the Central Government and one under a State Government.

The overall capacity of public sector shipbuilders is over 2 lakh DWT, of which, the Cochin Shipyard Ltd. (CSL) possess the maximum ship building capacity (110 thousand DWT) followed by Hindustan Shipyard Ltd. (HSL) (80 thousand DWT), Goa Shipyard Ltd. (GSL) (4.5 thousand DWT) and Hooghly Cochin Shipyard Ltd. (HCSL) (3.5 thousand DWT).

While the remaining 35 private sector shipyards have a capacity of around 1 lakh DWT, in which, Shoft Shipyard Pvt. Ltd. (SSPL) possess the maximum ship building capacity (10 thousand DWT) followed by San Marine, Mandovi Drydocks Ltd. (MDD), Chowgule & Co. Ltd. (C&CL) and Waterways Shipyard Pvt. Ltd. (WSPL) (8 thousand DWT) each and Yeoman Marine Service Ltd. (YMSL) (5 thousand DWT).

While India certainly has the potential to become one of the top shipbuilding countries in the world, it has a long road to travel.

For instance, shipyards in China, South Korea, and Japan delivered 38.1, 24.8, and 22.5 million DWT of ships respectively in the year 2021, whereas the Indian shipbuilding industry delivered an anaemic 0.03028 million DWT (30.28 thousand DWT) during 2020-21. Not much has changed in two years, as even at the end of Financial Year (FY) 2022-2023, both the public and private sector companies delivered a total of 206 ships with 0.03253 million DWT (32.53 thousand DWT).

The Indian government has undertaken several measures to ramp up the shipbuilding sector in the country, most notable among them, is the Shipbuilding Financial Assistance (SBFA) approved in 2015, which offers financial support to Indian shipyards up to 20 percent of the lower of contract price or the fair price or actual payments received of each vessel built and delivered by them within three years, or six years in the case of specialised vessels. This SBFA was meant to be valid for ten years from 2016 to 2026.

Furthermore, there is the Right of First Refusal (ROFR) policy which mandates the government agencies and CPSUs to prioritize Indian shipyards for vessel acquisition or repairs until 2025, with some guidelines to enable small shipyards’ participation.

Taking cognizance of the strategic importance of shipyards, they have been granted infrastructure status, enabling access to flexible long-term project loans, lower interest rates from Infrastructure Funds, relaxed External Commercial Borrowings (ECB) norms, and infrastructure bond issuance for working capital needs.

The Pradhan Mantri Matsya Sampada Yojana (PMMSY) also has provisions in the form of the Standard Operating Procedures for Chartering of Tugs and Procurement of Deep-Sea Fishing Vessels which aim to promote small and medium shipyards.

To realize the vision of ‘atma nirbhar’ or self-reliance and to promote tonnage under Indian flag and ship-building in India, the government revised the criteria for granting the Right of First Refusal (ROFR) in chartering vessels, as part of which, preference is now given to vessels that are Indian-built, Indian-flagged, and Indian-owned.

Moreover, The Public Procurement policy, as revised in 2020, dissuades government Ministries or departments against issuing global tender enquiries for public procurement of goods and services below the value of INR 200 crores, which supports domestic shipyards.

One of the major factors behind soaring costs in Indian shipbuilding is the taxes and duties levied on input material used in shipbuilding, and therefore, to bring down the cost disparity faced by Indian shipyards and encourage the growth of indigenous shipbuilding, the Indian government has exempted customs and central excise duties on material used in shipbuilding.

However, despite these proactive measures from the government, there has not been much progress in the output from the Indian shipbuilding in terms of tonnage, as pointed out by the author earlier.

For example, out of the INR 4000 Cr corpus allocated for the Shipbuilding Financial Assistance Package introduced in 2015, a mere INR 241 crore had been reportedly approved until March 2023 for very few shipyards as of March 2023.

One of the main reasons behind this lack of progress is said to be the coinciding of the implementation of these schemes with the three major private shipyards going bankrupt, namely the ABG Shipyard Ltd. (ABGS) (120 thousand DWT), Bharti Defence & Infrastructure Ltd. (BDIL) (70 thousand DWT), Reliance Naval and Engineering Ltd. (400 thousand DWT).

For instance, the Annual Report of the Ministry of Ports, Shipping & Waterways for 2022-2023 stated that “the lack of infrastructure in the country due to the collapse of private shipyards, resulted in the erosion of capacity and no proper financing system became a big deterrent to attract the attention of the leading ship owners and market players”.

Nevertheless, the Modi government remains persistent in its effort to bolster India’s domestic capabilities in shipbuilding, as part of which, it is forming maritime clusters to bring together all stakeholders in the sector, and developing shipbuilding and repair centers in several places.

Furthermore, the Indian government is reportedly planning to set up a new shipping company to increase the size of country’s shipping fleet by at least 1,000 ships in the next ten years, which would also contribute to the domestic demand for new vessels.

Earlier this month, Reuters published a report citing unnamed Indian government officials as saying that the aim of Prime Minister Narendra Modi’s administration is to reduce freight outgoings to foreign companies by at least a third by 2047.

"Current estimates show freight costs will rise to $400 billion as we boost our exports and imports by 2047," an anonymous source with the direct knowledge of the matter reportedly told Reuters.

The firm, whose name is yet to be known, is reportedly going to be jointly owned by state-run enterprises in the oil, gas and fertiliser sectors, together with the state-run Shipping Corp of India (SCI) and foreign companies, per an Indian government document claimed to have been seen by Reuters.

According to the said government document, India’s oil and shipping ministries agreed in January that all state-run oil companies and the planned company will work together, and they would rely on the expertise of the SCI in "tanker acquisition and ownership, operations and other areas of shipping".

The new shipping company will reportedly be based at GIFT IFSC, a financial centre in the state of Gujrat and it would draw seed capital from a maritime development fund of approximately 300 billion rupees (US$ 3.6 billion), which is planned to be set up by the Indian government in a tie-up with major port authorities, per the Reuter’s source.

Most importantly, for acquisition of indigenously built ships by this new shipping company, the two ministries want state-run companies to sign 15-year charter deals with the new firm, so as to secure low-cost, long-term loans for financing ship-building.

This would mark a shift from the current practice of booking specific voyages or one- or two-year charters. "In return the state-run companies can also become stakeholders in the new ship owning and leasing entity," the Reuter’s source added.

Shipbuilding: A Great Boost To Indian Economy

Expansion of shipbuilding holds immense potential for India’s overall industrial growth due to its corollary effects on ancillary industries like steel, aluminum, electrical machinery and equipment etc., which support the building of ships.

The process of shipbuilding begins with fabrication of the ship’s hull in a dry dock or a launch way and integrating various equipment and systems with that hull in outfitting basins. This requires around 300-400 types of raw materials and electronics, engineering and electrical equipment, which constitutes around 60-70 per cent of the total cost of the vessel.

Now, the shipbuilder has to acquire these raw materials and equipment from various industries, and therefore, expansion of India’s shipbuilding sector would result into increased demand for ancillary products and services, thereby fostering the growth of Micro, Small, and Medium Enterprises (MSMEs) in the country.

Expansion of shipbuilding and associated ancillary industry would contribute to employment generation as well, and accelerate the transition of labourers from agricultural sector which employs over 40% of Indian workforce, to more advanced manufacturing enterprises that would provide avenues for skill development.

In fact, among manufacturing activities, shipbuilding industry boasts one of the highest employment multipliers of 6.4, according to a written reply to a question raised in Rajya Sabha in 2019 by the then incumbent Minister of State for Shipping (I/C) and Chemical & Fertilizers, Mansukh Mandaviya.

Employment Multiplier is a measure of the direct, indirect and induced jobs created in an area by the arrival of a particular type of industry. Direct jobs are related to a particular industry, whereas indirect jobs are those that support the industry, and Induced jobs are those that are a result of the spending by direct/indirect employees.

So, for every single job created by shipbuilding activity at a shipyard, 6-7 other jobs are created through indirect and induced jobs in ancillary industries and consumption goods industries, respectively.

India’s economic growth has created and will continue to create a persistent domestic demand for new ships, and therefore, expansion of Indian shipbuilding industry holds tremendous potential for employment generation and contribution to GDP, on the back of country’s entire tonnage requirement.

Geostrategic Importance of Shipbuilding

In addition to the economic considerations, indigenous shipbuilding bears huge relevance to India’s geopolitical realities.

The waters of the Indian Ocean Region (IOR), which India regards as its backyard, holds 40 percent of offshore oil reserves, 65 percent of strategic raw materials, 31 percent of gas etc. Furthermore, the IOR is home to 30 percent of the world’s population, potentially providing a large consumer market.

All these factors make the IOR an area of interest to extra-regional powers who maintain a significant naval presence in the area with the purpose of controlling choke points to the Red Sea, Persian Gulf and the Malacca Straits.

Among these extra-regional powers, most concerning to India is China and its growing naval presence in the IOR as well as its naval cooperation with Pakistan and its relentless efforts at creating more and more overseas bases after Karachi and Gwadar in Pakistan, Djibouti on the Horn of Africa, and now possibly Ream in Cambodia.

Type 054A frigate (Jiangkai II)    Source: Wikimedia

In the face of this growing Chinese naval presence in the IOR, it is imperative for India to bolster its maritime power to not only protect its coastline but also its various interests in the Exclusive Economic Zone (EEZ) such as fishing and extraction of hydrocarbons, minerals and other seabed resources, etc.

Therefore, expansion of shipbuilding becomes essential for India, as indigenous shipbuilding capability constitutes a major chunk of a country’s maritime power. In fact, India’s biggest geopolitical challenger, China, serves as a great example in this regard.

China is at present the biggest naval power in numerical terms, after overtaking the US Navy in fleet size sometime around 2020. One of the major contributors to this success is China’s commercial shipbuilding industry, the largest in the world.

In the last two decades, China has presided over a tremendous increase in its shipbuilding output. In the year 2001, China ranked 3^rd among the global shipbuilding industry and its shipbuilding activity was just 6%, which has now reached 50% of the total global shipbuilding output according to China Association of the National Shipbuilding Industry (CANSI), which reported that Chinese shipbuilders delivered 42 million DWT of ships in 2023.

With this spectacular growth in its shipbuilding output, China’s commercial shipbuilding industry was able to acquire the capital and technological know-how through foreign contracts that enabled the construction of increasingly sophisticated models of all types of naval ships and weapons systems, thereby subsidizing and supporting the military shipbuilding efforts of the country.

However, a country’s maritime power is not limited to its firepower, and Chinese leaders do understand this, as is evident from their successful efforts to capture the global shipping industry by leveraging China’s vast shipbuilding industry.

China, on the back of its ability to churn out more vessels than any other country as well as its increasing share in global ship leasing and financing market, boasts the largest commercial fleet in the world by gross tonnage, and second largest after Greece in terms of cargo capacity.

Dalian Shipbuilding Industry Company (Source: Wikimedia)

As per the United Nations Conference on Trade and Development’s (UNCTAD’s) Review of Maritime Transport 2023, Chinese shipowners claimed 11.04% share of the world fleet when measured by value, second to Greece with 11.8%. China took sixth place in the leading flags of registration and in the year 2022, the Chinese flag registered at the 2^nd fastest growth rate of 5.4%.

With such level of dominance in global supply chains, China possesses the capability to bring its adversaries to their knees during wartime. For instance, the US economy relies heavily on shipping networks that are increasingly under Chinese control for a substantial portion of its imports.

A US Congressional advisory body has issued a warning that China could use shipping data to track and interfere with the movements of US cargo, including its military equipment, much of which is carried on commercial vessels.

Lessons From China’s Shipbuilding Story

When it comes to developing domestic shipbuilding capacity, India could draw some lessons from the growth of China’s shipbuilding industry, especially the major reforms that China initiated in its military industry in 1999, which created huge shipbuilding capacities for both military and commercial uses.

As part of these reforms, Corporations of five military industries involved in nuclear, astronautics, aeronautics, shipbuilding and weapons sectors were overhauled to create 10 new military corporations, which gave birth to two Corporations for Ship-Building – China State Shipbuilding Corporation (CSSC) and China Shipbuilding Industry Corporation (CSIC).

Among the objectives of these reforms, was the implementation of Chinas ‘military-civil fusion’ (MCF) strategy which involves combining the military, civilian and commercial resources of the country to promote the country’s all-inclusive national power.

These reforms basically consolidated China’s shipbuilding infrastructure including shipyards and research institutes under two large government-owned holding companies that are CSSC and CSIC, which enabled their subsidiary commercial and defense shipbuilding enterprises to utilize infrastructure and labour optimally and distribute the workload in such a way as to avoid overhead costs. (Rear Admiral Monty Khanna, AVSM, NM, How Does China Build Its Warships At A Fraction Of Our Cost?, link)

This also allowed seamless sharing of knowledge such as lessons and best practices learnt during the construction of ships from one facility to other, which shortened the learning curve across China’s entire shipbuilding sector significantly. This helped China to increase the scale of ship production greatly, as it enabled multiple shipyards to construct the same/similar class of ship.

This is a very useful lesson for India, considering a very well-known fact of how GRSE had to relearn several lessons relating to the Brahmaputra-class (Type 16A or Project 16A) guided-missile frigates for the Indian Navy, an enhancement of the Godavari class programme executed by Mazagon Dock Shipbuilders Limited (MDL) based in Mumbai. This was because MDL was obviously not forthcoming when it came to sharing its experience with GRSE, its commercial competitor.

INS Brahmaputra of the Brahmaputra class of the Indian Navy during Malabar Exercise (Source: Wikimedia)

Consolidation of China’s shipyards also enabled single point sourcing of equipment which led to standardization of equipment across diverse classes of ships as well as streamlining of logistics and reduction of training burden. This also resulted in the creation of economies of scale due to large order quantities.

India could follow a similar roadmap to success in shipbuilding. The Indian Navy has cultivated its own in-house design capabilities as well as developed domestic sources of equipment. The advances in ship design and construction technology that have been realized as a result of the Indian Navy’s efforts could be incorporated in commercial shipbuilding sector instead of the latter trying to re-invent the wheel.

Furthermore, the ancillary industry supporting the Indian commercial shipbuilding companies has remained neglected and underdeveloped due to poor demand from the shipbuilding industry. As stated earlier, 60-70% of the cost of a vessel is for raw material and electronics, engineering and electrical equipment.

A substantial portion of these critical component such as propellers, marine gas turbines, high-capacity main engines, shafting, gear boxes, high-capacity diesel generators, control systems, etc are largely imported.

However, the ancillary industry providing raw material to the defense shipbuilding is comparatively better developed than the one providing for commercial shipbuilding because of the Indian Navy’s indigenisation drive. So, the commercial shipbuilders could make use of these ancillary industries supported by the Indian Navy.

Tanmay Kadam is a geopolitical observer based in India. He has experience working as a Defense and International Affairs journalist for EurAsian Times. He can be contacted at tanmaykadam700@gmail.com