Why India’s plan to regulate freight rates could backfire

Indian Shipping lines, after the global container shortage and a simultaneous recovery in exports and falling imports, have been accused of sky rocketing freight charges and monopolistic practices.

The export groups of the nations accused the shipping lines of the same claims that if the situation remains the same, exports might not be able to maintain the uptick trend and asked the intervention of the centre to resolve the issue.

Addressing these issues, the Indian government is planning to force shipping lines and agents to provide “all-inclusive” freight rates.

The Shipping Ministry’s draft Merchant Shipping Bill 2020 says carriers involved with import, export or domestic transport “shall specify the all-inclusive freight in the bill of lading or any other transport document”.

Further it states, “No service provider or agent shall levy any freight charges other than the all-inclusive freight specified.”

However, it is believed that the government interventions and regulations to regulate the freight rates might backfire and divert business to other countries.

Freight rates are a bilateral agreement between the merchant and the shipping line, it would therefore not be right for the government to regulate such private business transactions.”

~Sunil Vaswani, Executive Director of the Container Shipping Lines Association (India)

He said that it would mean Indian exporters and importers would have a competitive disadvantage as confidential contracts with shipping lines would be made public, and visible to their competitors, as shipping documents pass through multiple agencies.

“Commodities such as textiles, garments, leather, handicrafts, tea, coffee, seafood, rice and so on, move on FOB terms, where freight is paid by the foreign buyers and sellers. They would not want to disclose their contracts with lines and will not allow freight costs to be disclosed to their competition”, he said.

“About 40% of exports and 80% of imports will be affected – business is likely to be diverted to other countries if this is regulated,” added Mr Vaswani.

Further, the freight forwarders doubt if the government regulation and all-inclusive rates would reduce costs.

Increasing freight rates and equipment shortages are not a localised matter; shipping lines are global businesses and will allocate their assets where they earn maximum yield.”

 ~Naveen Prakash, Director at Global Logistics Solutions India

Following announcements of GRIs by most carriers for December, he said import rates from Port Klang to Chennai, for example, had increased from $150 to $700, while rates from China were “almost five times higher”.

Exports to Europe and the US were up 40% and 100% respectively, he said.

“If the global supply of containers increases and demand falls, then Indian consignees and shippers can again enjoy much lower rates and extra free days of up to 21 days,” added Mr Prakash.

Rakesh Pandit, CEO of Conbox Logistics also questioned whether all-inclusive rates would solve India’s high freight and logistics costs, given the “various malpractices associated with the entire EXIM ecosystem”.

He accused operators of Container Freight Stations (CFSs) of being “politically linked” and of issuing arbitrary pricing.

“There is a nexus between CFS operators, NVOCCs, customs brokers and other service providers which results in high logistics costs, especially for importers,” he said.

Furthermore, he added, policies provided advantages to a certain set of importers and exporters “closely associated with the government.”

And another problem keeping costs high is the widespread use of cash in supply chains, according to Mr Pandit.

Pandit further claimed: “Most of the time, this cash is black money,”

“Because of this, many traders and service providers get undue advantage over others. Unfortunately, this issue is never looked into by the government, as often this cash belongs to politicians who invest in supply chains to convert it into ‘white’ money.”

Source: The Loadstar

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