• Research

India Hears Call of the Sea

Boosting coastal and inland waterway transportation could alleviate pressure on the country’s roads and rails—and realize billions of dollars in lower logistics costs, a boon for competitiveness and economic growth.

Stuck in New Delhi traffic or backed up on congested tracks into Mumbai, India’s drivers, commuters and delivery fleets can only dream of what it means to go with the flow.

Despite more than 7,500 kilometers (4,660 miles) of coastline and 14,000 km of navigable inland waterways, India transported just 6% of its freight by boat in 2015. Higher-cost roads and rails still carry the lion's share—some 87%—of India's cargo. Now, to help unlock savings and economic potential over the next decade, India is casting its eyes toward the sea.

The upshot could be significant market share gains and overall industry growth by 2019 for coastal shipping, and a reversal of long-term neglect for seafaring transport, says Akshay Soni, Morgan Stanley's India industrials analyst, in the latest installment of the "Next India" Research series.

To the extent that ships can supplant trucks and trains for cargo transport, the country stands to not only ease the burden on its congested roads and rails, but also to realize billions of dollars in lower logistics costs and improved efficiency, which would boost competitiveness and drive economic growth.

A Sea Change

A number of factors have worked against India’s coastal shipping industry. East-west shipments by sea, for example, have to round the southern tip of the country, contributing to many companies’ preference for the relative directness and speed of roads and rail. Like many other developing economies, India has also focused for decades on building up its road infrastructure, investments that initially yielded high returns in terms of regional mobility, greater geographical access and expanded markets, plus the economic gains from just the sheer scope of such projects.

Travel and transport by sea became an afterthought. Historically, India's regulatory environment hasn’t helped. Roadblocks have ranged from cabotage laws restricting domestic transport on foreign-flagged vessels and domestic duties on oil to high tonnage taxes and unfavorable financing terms for would-be Indian shipbuilders.

What has changed prospects for coastal transport? Largely its matter of new political will and action on the part India’s current reformist government to make coastal shipping a viable alternative, says Soni. "In the last 15-18 months, not only have we seen the government speak about promoting a modal shift of cargo from roads to coastal waters, but that speech has also been backed up by a spurt of regulatory measures aimed at boosting coastal shipping," Soni says.

Among other changes, India's government has reduced service taxes on coastal shipping, introduced a subsidy to encourage shippers to use coastal transportation, and relaxed cabotage restrictions for certain types of vessels that are in limited supply. These types of regulatory changes can energize coastal shipping sectors, Soni says, pointing to the buoy effect from similar initiatives in Europe and Japan recently. 

Coastal Winners and Losers

Coastal shipping growth should be immediate and relatively dramatic because the country's ports are already in a position to handle the expected increase in cargo. After 2019, the planned introduction of India's dedicated freight rail corridor should boost that mode of transportation, and roads as a share of the modal mix are expected to fall 15 percentage points by 2025, to 43%.

The shift to coastal shipping should help improve the financial performance of port and logistics companies, too. Meanwhile, sectors that depend on road transportation—namely, heavy commercial vehicles and the companies that finance their purchase—may suffer. Sales of lighter commercial vehicles, particularly those used to connect ports and rail stations with cities, should benefit.

The shift to coastal should pay off in lower shipping costs. Soni projects that growth in coastal shipping, at the expense of sending cargo by road, could reduce costs by $2.5 billion by 2025. The lower cost of transporting bulk commodities, everything from coal to metal ores, will also distribute savings across the value chain of end-user industries. India's manufacturing sector, long hindered by high logistics costs, can redeploy those savings elsewhere, for example, toward hiring more workers and expanding operations, which could help fuel economic growth.

Along with the increasing share of rail—another target of higher investment for improved performance—the focus on coastal transport could lead to a 6%-7% increase in trade and a 120%-140% increase in the range of products exported, Soni says.

Morgan Stanley Research has written a series of reports on “The Next India," the latest installment of which is “Asia Insight: The Coastal Wave" (May 30, 2016). Contact your Morgan Stanley representative or Financial Advisor for the full report. Read previous stories in this series on rail transport, reform and growth and the Internet boom in India. Plus, more Ideas.