Coastal Shipping – An Imperfect World
Picture a scenario where trucks from neighbouring countries like China transport goods across Indian cities—moving cargo from Delhi to Amritsar, then to Hyderabad, onward to Kolkata, and finally returning to their home countries. With lower vehicle costs and accessible finance, major foreign logistics firms might seek to enter the Indian market, potentially lowering transportation costs and enhancing service quality. Similarly, imagine Indian Railways bidding against Chinese rail operators or European railway systems like EURAIL for domestic freight contracts involving coal, iron, cement, fertilizers, and petroleum. While competition is often credited with improving efficiency, would it be desirable to extend this logic to domestic aviation—allowing Air India and IndiGo to compete with global carriers such as Qatar Airways, Emirates, or Singapore Airlines for major domestic routes?
The question arises: why do governments restrict foreign participation in domestic logistics? The answer lies in safeguarding national economic interests, ensuring security, and maintaining control over critical infrastructure. While competition can drive efficiency, unrestricted foreign access to domestic transportation networks could pose strategic risks and impact local businesses.
In the context of coastal shipping, this question has become significant with the introduction of Coastal Shipping Bill, 2025 in the parliament as it has reignited the debate on whether the government should control foreign participation in coastal shipping. Thus far the often conflicting interests of Indian shipping, ship builders, ports and charterers has resulted in a tightrope walk leading to the policy of grant of ‘Right of First Refusal’ to Indian ships which fall short of absolute protection that others in the logistics chain receive. This, more so, has been done through executive orders making the policy an easy target for pulls and pressure. The bill, rightly so, now seeks to provide a legislative cover to this policy so as to provide more clarity and certainty to the prospective investors. The relevance and importance of this Bill cannot be easily appreciated unless the whole concept of ‘cabotage’ is understood.
What is cabotage?
The exclusive right of domestic operators to transport goods and passengers within a country by land, air, or sea is called ‘Cabotage’. While the term may not be widely known, nations have long used cabotage laws to protect their internal transportation sectors. The definition of the term and the objectives for implementation of cabotage policy, however, differ from country to country.
In maritime transport, cabotage laws restrict foreign-flagged vessels from operating within a country’s domestic waters. A 2018 study by Seafarers’ Rights International (SRI), commissioned by the International Transport Workers’ Federation (ITF), analysed cabotage laws across 140 countries. The findings debunked the myth that cabotage laws are exceptions and revealed that:
Cabotage is “Widespread,” Existing in Nearly Two-Thirds of UN Maritime States -91 countries, covering 80% of the world’s coastlines, enforce cabotage laws to limit foreign maritime activities in domestic trade.
Cabotage Exists Across All Political, Economic, and Legal Systems- Countries with different political and economic models—such as China, South Korea, Russia, Japan, Chile, Mexico, Brazil, Argentina, Australia, and Canada—have some form of cabotage restrictions. The United States has one of the strictest cabotage policies under the Jones Act, which allows only U.S.-built, U.S.-registered, U.S.-owned and U.S.-manned ships to engage in coastal trade.
Cabotage Laws have Endured for Centuries- The study found that rudimentary principles of cabotage date back to as early as 1381 in the reign of King Richard II.
There is No Single Definition of Cabotage- Different nations define and apply cabotage laws in varied ways. Some countries explicitly reserve coastal trade for national ships, while others impose restrictions on foreign-flagged vessels.
Cabotage Policy Objectives are Diverse- The objectives stated in the laws of various countries varied but mostly included: maintain national security; promote fair competition; develop human capacity; create jobs; promote ship ownership; increase safety and security of ships in port; enhance marine environmental protection; and preserve maritime knowledge and technology.
Impact of Cabotage Laws on Logistics Efficiency
Cabotage, however, is not without its shortcomings. A study titled "Relaxing the Cabotage Restrictions in Maritime Transport" by Gilberto M. Llanto and Adoracion M. Navarro examined the negative economic impact of cabotage laws, drawing insights from international experiences.
1. High Domestic Shipping Costs- An advocacy paper by the Joint Foreign Chambers of Commerce in the Philippines (JFCCP, 2010) revealed significant cost inefficiencies in domestic shipping. The study found that a local trader could reduce shipping expenses by approximately 43% by routing a container from Manila to Cagayan de Oro via Hong Kong or Taiwan using foreign transhipment vessels, rather than shipping it directly between these ports through domestic carriers.
2. Lack of Meaningful Competition- Research on Austria (Austria, 2002; JFCCP, 2010) highlights persistent cartel-like structures in the maritime transport sector, even a decade after deregulation began in 1992. The industry remained concentrated among a few dominant players with (i) 50% of primary routes and 70% of secondary/tertiary routes functioned as monopolies, (ii) 90% of passenger and cargo markets were controlled by just five shipping companies, (iii) Most primary and secondary routes were operated exclusively by these companies, restricting competition and innovation.
3. Weak Incentives for Modernization- The lack of competition has also slowed the modernization of domestic shipping fleets. Study by Llanto and Navarro (2012), revealed that though Philippines had the capability to build large vessels, yet domestic operations were dominated by smaller vessels with capacities of 200–300 TEU as against 5,000 TEU of foreign flags, leading to longer transit times, increased port turnaround, and higher shipping costs for domestic trade.
Furthermore, the Maritime Industry Authority (MARINA, 2013) reported that the average age of cargo and passenger vessels had increased from 5–10 years in the 1990s to 18–20 years by 2012, demonstrating the industry's lack of incentive to modernise. Similar trends were observed in Austria, where aging fleets were linked to cabotage restrictions.
4. Reduced Opportunities for Ports- While no conclusive empirical studies exist on the subject, some experts argue that cabotage restrictions reduce port activity, particularly for containerized cargo. The theory suggests that limiting access for foreign vessels may decrease ship calls at domestic ports. However, due to a lack of comprehensive data, this claim remains largely anecdotal.
Impact on domestic shipping if cabotage is removed
It is these shortcomings that prompt many experts to seek removal of cabotage. Cabotage, by design, imposes restrictions on free trade, preventing coastal shipping from operating as a fully competitive market. Given that 80% of global coastal trade is reserved for domestic vessels, the decision to relinquish cabotage rights raises critical questions about its impact on a nation's shipping industry. Proponents of abolishing cabotage argue that removing these restrictions would lead to increased vessel availability, lower costs, improved service quality, and greater efficiency.
However, this perspective overlooks two fundamental economic realities: (i) Coastal shipping does not function as a perfectly competitive market due to longstanding protectionist policies, & (ii) Ship acquisition involves high capital costs, meaning investment decisions are typically contingent on the assurance of long-term charters.
In an imperfect and highly protected global shipping environment, the unilateral removal of cabotage laws could create an imbalance. Foreign shipping companies would gain dual-market access—their own protected market and the newly liberalized market. Conversely, domestic shipping companies would face a major competitive disadvantage, losing their only guaranteed market without reciprocal access to foreign-protected routes.
Faced with this challenge, domestic shipping firms might find it more viable to deregister their vessels and reflag them under a jurisdiction that retains cabotage protections. Rather than increasing supply, this shift could lead to a shortage of domestic vessels, negatively impacting availability, service quality, pricing, and overall industry efficiency—contrary to the expected benefits of deregulation.
Indonesia’s experience: is often referenced in discussions on cabotage liberalization, highlighting the potential risks of opening domestic shipping to foreign competition. Initially, Indonesia allowed foreign vessels to participate in its coastwise transportation, aiming to enhance competition and efficiency. However, this policy led to a near-complete collapse of the domestic shipping industry, as local companies struggled to compete with international players. Recognizing the threat to its maritime sector, the Indonesian government was forced to reinstate cabotage laws to protect domestic shipping firms and safeguard national strategic interests in maritime trade.
At the same time, Indonesia faced pressure from influential oil exporters concerned about restrictions on foreign-operated vessels. In response, the government exempted certain specialised vessels used in the oil and gas sector from cabotage restrictions. The experience underscored the need for a carefully calibrated policy that supports national maritime interests while addressing industry-specific demands.
Indian Case: Unlike countries such as the USA, Japan, Nigeria, and Brazil, which enforce absolute cabotage laws, India does not have a formal cabotage law. Instead, foreign participation in coastal trade is regulated through executive orders issued by the Director General of Shipping. India follows a soft-cabotage approach, granting Indian ships the right of first refusal (ROFR). This means that foreign ships can operate in Indian coastal waters, if Indian ships are unavailable or unable to match the costs offered by foreign vessels.
Over the past decade, India has experimented with relaxing cabotage restrictions for certain vessel categories, with the stated goals of increasing tonnage availability, improving service quality, and reducing costs. However, an analysis of the impact of these policy changes suggests that they have yielded limited benefits and, in some cases, even negative consequences.
(i) Cabotage Relaxation for Ro-Ro Vessels (Roll-on/Roll-off Ships, 2015) - On September 2, 2015, India relaxed cabotage restrictions for Ro-Ro vessels, used for transporting automobiles. Despite more than nine years of implementation, there has been no increase in supply, cost efficiency, or operational activity in this segment. No operator has entered the coastal trade with car carriers. This shows that the underlying cause of lack of Ro-Ro vessels is not its availability but its financial viability. A more effective solution, therefore, for introducing Ro-Ro in India could have been viability gap incentive rather than cabotage relaxation.
(ii) Cabotage Relaxation for Agricultural Commodities, Fisheries, and Fertilizers (2015) - Around the same time, India also extended cabotage relaxation to agricultural commodities, fisheries, fertilizers, and specialized vessels. India was already allowing foreign vessels under the ROFR framework, for such purposes especially if there was a shortage of Indian tonnage. Cabotage relaxation has only eased the process by dispensing with the need to obtain licence for participating in such trades by foreign vessels. Again, there is no evidence to suggest that any additional foreign tonnage has become available in India due to this cabotage relaxation.
(iii) Cabotage Relaxation for Container Shipping (2018) – In September 2018, the Ministry of Ports, Shipping, and Waterways issued General Order 1 of 2018, relaxing cabotage for laden EXIM containers and empty containers. This had immediate adverse impact on the Domestic Container Shipping. Before 2018, India's container shipping sector was growing at a robust annual rate of 21.40%, adding 4 to 5 new ships per year. Post-cabotage relaxation, the growth rate plummeted from +21.40% to -3% between 2020 and 2024 in terms of the number of vessels. Cargo previously carried by Indian ships was transferred to foreign-flagged vessels, eroding the domestic industry.
Despite expectations of lower costs, container prices in India have surged, mirroring global trends. There is no evidence that foreign shipping lines have passed on any cost savings to the customers. As for the stated expectation of increased ship calls at Indian ports, the Government records show that the number of cargo vessels sailing from major Indian ports has remained largely stagnant—from 22,091 in FY 2017-18 to 22,554 in FY 2022-23.
The relaxation of cabotage, particularly in container shipping, has weakened India's domestic shipping industry while benefiting foreign shipping lines. Moreover, India has lost its strategic ability to intervene during trade disruptions and crises, making its EXIM trade more vulnerable.
These outcomes suggest that policy measures aimed at improving domestic shipping efficiency should focus on financial viability, infrastructure development, and targeted incentives rather than indiscriminate cabotage relaxation.
Way Forward
In a global maritime landscape dominated by protectionist policies, the removal of cabotage restrictions could be detrimental to Indian coastal shipping. Instead of dismantling cabotage, India must focus on positive reinforcements for shifting domestic cargo from rail and road to coastal shipping, thereby reducing congestion and lowering logistics costs. For coastal shipping to compete effectively with rail and road transport, targeted financial incentives will be far more effective to foster fleet modernisation and bridge the cost and efficiency gap.
At the same time, the challenges posed by absolute cabotage restrictions—such as higher costs, lack of competition, an ageing fleet, and slow modernization—cannot be overlooked. An ageing fleet not only compromises safety and operational efficiency but also deters cargo owners, whose confidence in the fleet quality and safety is critical for a large-scale shift to water-based transport.
Indian automobile sector which suffered for several decades due to absolute cabotage, managed to use the same principle as an asset with minor tweaking of policy. With the Coastal Shipping Bill, 2025, currently under parliamentary discussion, India has a crucial opportunity to design a balanced cabotage policy. By learning from global best practices and addressing the shortcomings of rigid cabotage laws, India can create a regulatory framework that protects domestic shipping while fostering competitiveness, modernization, and long-term growth in coastal trade.