The South Asia Channel

Taking Back the Indian Ocean

India’s relaxed shipping rules could spell trouble for China's attempts to increase its influence in the Indian Ocean.

TO GO WITH India-China-SriLanka-Maldives-diplomacy,FOCUS by Claire COZENS and Amal JAYASINGHE in Colombo
This photo taken on September 10, 2014 shows gantry cranes being operated at the new Chinese-majority owned Colombo International Container Terminal (CICT) in Colombo. China's president will kick off his first South Asia tour with a visit to Beijing's latest investment in Sri Lanka, a 1.4-billion USD port city development to include a marina and a Formula One track -- all just 250 kilometres (150 miles) from India's coast.      AFP PHOTO / LAKRUWAN WANNIARACHCHI        (Photo credit should read LAKRUWAN WANNIARACHCHI/AFP/Getty Images)
TO GO WITH India-China-SriLanka-Maldives-diplomacy,FOCUS by Claire COZENS and Amal JAYASINGHE in Colombo This photo taken on September 10, 2014 shows gantry cranes being operated at the new Chinese-majority owned Colombo International Container Terminal (CICT) in Colombo. China's president will kick off his first South Asia tour with a visit to Beijing's latest investment in Sri Lanka, a 1.4-billion USD port city development to include a marina and a Formula One track -- all just 250 kilometres (150 miles) from India's coast. AFP PHOTO / LAKRUWAN WANNIARACHCHI (Photo credit should read LAKRUWAN WANNIARACHCHI/AFP/Getty Images)

When a Chinese military submarine docked at the Colombo International Container Terminal (CICT) in September 2014, it caused a major scramble in India’s security establishment, testing the newly formed government of Prime Minister Narendra Modi. China’s expanding maritime footprint and its port-led infrastructure development strategy – dubbed the “Maritime Silk Road” – in the Indian Ocean continues to challenge New Delhi’s traditional supremacy in its own backyard. However, a potential change to India’s shipping laws could slow the spectacular growth and success of the China-funded CICT transshipment hub in Colombo.

In an unprecedented development last month, APM Terminals Pipavav, a western Indian port controlled by the maritime giant A.P. Moller Maersk Group, received a shipment of 800 Hyundai cars after loading at the port of Chennai on India’s eastern coast. This occurred just five months after the Indian government’s decision to relax its cabotage law – a law that governs transport of cargo between two ports within a country – to allow special foreign-flagged vessels, such as roll-on, roll-off (RoRo) vessels, to transport cargo along the country’s coastline. Akin to the Jones Act in the United States, India’s cabotage law gives first preference to Indian-flagged ships over cargo and foreign ships. Cargo and foreign ships are allowed only when no suitable Indian flag vessel is available for this purpose. With the five-year relaxation of the law, international heavyweights such as Maersk and Mediterranean Shipping Co. will now be allowed to bring foreign-flagged special category vessels to ply the coastal routes stretching into Indian waters. And the government may not stop there. According to Indian Shipping Minister Nitin Gadkari, a final proposal to implement a “total relaxation” of India’s cabotage rules could be approved by Prime Minister Modi soon, throwing open India’s territorial waters and ports to commercial operations by major international shipping lines.

In order to lower costs and benefit from economies of scale, mega-container vessels transport goods to major deep-water ports. From there, they are shipped to smaller, shallower ports, in a process known as transshipment. The relaxation of India’s new cabotage regime has major implications for transshipment traffic in the region and for the future growth prospects of deep-water ports like Colombo’s CICT. Despite India’s solid economic performance over the last decade and a half, the vast majority of India’s container traffic is still shipped through ports outside the country, mainly from Colombo’s CICT and Singapore. This is because India currently has no major deep-water ports near international sea routes, and the country’s cabotage law has restricted the movement of foreign-flagged vessels in territorial waters. Under the existing cabotage law, moving containers between two Indian ports requires an Indian flag – and that is true whether or not the shipment involves an Indian customer shipping from one Indian port to another, or an international container stopping at an Indian port en route to another Indian port. As a result of these legal restrictions, international shippers use Colombo as a distribution hub instead of Indian ports, even for India-bound cargos.

Ports such as the CICT, a joint venture between state-owned China Merchant Holdings International – which controls an 85 percent stake – and the Sri Lanka Ports Authority, therefore, ship a greater share of Indian goods than all of India’s ports put together. Such is the dominance of Colombo that it commanded the largest share of India’s foreign transshipment volume in 2014-15, accounting for 48 percent of all traffic. Singapore was the second-largest gateway for foreign cargo to India, with a 22 percent share. Colombo’s proximity to the Indian mainland allows CICT to tap the bulk of the India cargo with the nearest Indian port just 175 nautical miles away. Indeed, according to data from India’s Shipping Ministry (collected by IHS), the volume of goods moving through Colombo nearly doubled from 652,000 Twenty-foot Equivalent Units (TEUs) – an industry standard to measure containers – in 2013-14 to almost 1.2 million TEUs in 2014-15.

The importance of India in CICT’s container-volume growth cannot be stressed enough. According to a report by the Asian Development Bank, transshipment cargo to and from India accounts for 45 percent of the port’s container traffic volume. Therefore, any policy change by New Delhi that incentivizes international shipping lines to divert traffic to Indian ports could have major ramifications on the future growth prospects of the China-backed CICT.

Yet, easing cabotage rules is but one component of New Delhi’s two-pronged strategy to reduce India’s dependence on Colombo, especially when the latter’s biggest terminal, the CICT, is controlled by a Chinese state-owned entity. The second prong entails the development of a major deep-water port at Vizhinjam, a southern coastal town in the Indian state of Kerala. Last December, the Indian government announced plans to ease the cabotage rules for the new container port at Vizhinjam being developed by India-based Adani Ports. Experts say that the Vizhinjam deep-water port, expected to commence operations by mid-2018, enjoys a natural depth of nearly 66 feet, which gives it the capability to dock mega-container ships operated by international shipping lines.

A relaxed cabotage regime and a major push towards development of a deep-water port connected to inland rail and road infrastructure would mean significant cost savings and greater economies of scale for international shippers if they choose to divert India-bound traffic to Indian ports such as Vizhinjam and away from Colombo’s CICT in the future. The strategy would not only end CICT’s monopoly as the only major transshipment hub in South Asia. It would also expand coastal shipping and attract international carriers to operate in Indian waters. Moreover, it will aid India’s efforts to minimize the country’s geopolitical risk exposure to Colombo’s China-backed port – an exposure that has unnerved India’s strategic community.

LAKRUWAN WANNIARACHCHI/AFP/Getty Images

Shrey Verma is an analyst covering international geopolitical and sovereign risk issues at Height Securities, a Washington-based investment firm.

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