Homeland Security

Strengthening India’s Trade Capabilities Through Fwtz at Car Nicobar: An Analysis
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Issue Vol. 33.4 Oct-Dec 2018 | Date : 10 Jan , 2019

The Very Large Container Ships (VLCS) have considerable operating costs which usually consist of bunker fuels costs and operating costs. Shipping companies try to reduce their ships deviating from the East-West Trade Lanes; they prefer to make landfall at the ports closest to the East-West Trade Lanes. One proposal is that the Government of India create a Transshipment Port and Free Trade and Warehouse Zone (FTWZ) at Great Nicobar, specifically at the South Bay, which sits over the six-degree channel.

The Indian Ocean is the world’s third largest water body and covers one fifth of the world’s total ocean area (Albert, 2016).The Western Indian Ocean is ringed by the East coast of Africa and the Arabian Peninsula. The central Indian Ocean consists of the jutting Indian Peninsula and the island nation of Sri Lanka. The Eastern Indian Ocean is ringed by Myanmar to the North and Indonesia to the South. The entire Indian Ocean Region is a “horse shoe”. This horse shoe is connected to other water bodies by chokepoints that are some of the world’s most important. (Administration, 2017). These are the Straits of Hormuz, and the Strait of Malacca through which around 32.2 million of barrels of crude oil and petroleum products pass through every day.

The Indian Ocean Region (IOR) hosts of one the most important trade routes that connect the Far East with Europe. This trade route passes through the South China Sea, the Strait of Malacca, the Indian Ocean, the Red Sea, the Suez Canal and the Mediterranean until the Atlantic Ocean. Most of the world’s Very Large Container Ships (VLCS) ply on this trade route. Of all the countries that border the IOR, India has the largest economy with a GDP of $2.263 trillion (Economics, 2016). India is the fastest growing major economy and is expected to reach $6 trillion by 2027 with a significant rise in consumption to $4 trillion by 2025 (About Indian Economy Growth & Statistics, 2018).

Indian Prime Minister Narendra Modi has initiated the ‘Make in India’ programme which aims to make India a global manufacturing hub. It is estimated that by 2020, India will be the fifth largest manufacturing hub in the world. The manufacturing sector in India has the potential to reach $1 trillion by 2020. The Government of India has initiated several programmes to increase manufacturing in India (Manufacturing Sector in India, 2018). The Andaman and Nicobar Islands (A&NI) are a Union Territory of India and are situated in the Bay of Bengal. It consists of 349 Islands with a geographical area of 8,249 sq. km. (Planning Commission, 2008). The island of Great Nicobar plays host to Indira Point, which is the Southern-most tip of India. Indira Point sits above the six-degree channel which is also known as the Great Channel. The six-degree channel leads into the Strait of Malacca and Indira Point is just 100 nautical miles from Sumatra and 200 nautical miles from Singapore (Arora, 2015).

The Strait of Malacca is located between Great Nicobar to the North-West, Malaysia to the North, Indonesia to the South and Singapore to the East (Lejla Villar, 2017). In 2016, 83,740 ships above a 300-gross tonnage transited the Strait (Hand, 2017). Of these 83,740 ships, 25,786 of them were container ships which account for 30.7 per cent of the total number of ships (Hand, 2017). A growing percentage of these vessels are Very Large Container Ships (VLCS) with carrying capacities of greater than 10,000 Twenty-Foot Equivalent Unit (TEU) Containers. These ships are operated mainly by the largest shipping companies in the world primarily due to the high cost of acquiring and operating these vessels. There are very few ports around the globe that have the required depth to allow access to these vessels.

The Very Large Container Ships (VLCS) have considerable operating costs which usually consist of bunker fuels costs and operating costs. Shipping companies try to reduce their ships deviating from the East-West Trade Lanes; they prefer to make landfall at the ports closest to the East-West Trade Lanes. One proposal is that the Government of India create a Transshipment Port and Free Trade and Warehouse Zone (FTWZ) at Great Nicobar, specifically at the South Bay, which sits over the six-degree channel.

Advantage of Location

The island of Great Nicobar that sits above the six-degree channel, is also known as the Great Channel. The six-degree channel leads into the Strait of Malacca. Great Nicobar is 100 nautical miles from Sumatra and 200 nautical miles from Singapore (AECOM India Private Limited, 2016) and has an area of approximate 400 sq miles (Directorate of Tourism, n.d.) which is larger than the area of Singapore at about 278 sq. miles (Statistics Singapore, 2017) and Salsette (Mumbai) Island at 239 sq. miles (Arunachalam, n.d.).

As seen in Figure 1, Great Nicobar sits above the E-W Shipping lane. The island is strategically located being equidistant from Colombo, Port Klang and Singapore and is also very close to the East–West international shipping corridor. South Bay has the least deviation from the East–West international shipping corridor; it is only eight nautical miles away from the corridor. Due to its location, nearly all the ships in the Indian Ocean pass by it.


South Bay has a deep harbour with depth of over 18 metres in most places. The anchorage is of a depth of 26.5 metres. The length of the harbour is 4.5 km and the mouth of the harbour is 6.9 km. The bottom of the bay is rocky. This is a great feature for a future port as it will not require dredging which is a major recurring operating cost for most ports (Indian Hydrographic Office, 2014).

The chart also gives Tide and wave conditions as under:-

  • Tide: 0.2 m to 1.6 m with a tidal range of 1.4 m (Indian Hydrographic Office, 2014).
  • Wave Conditions: 65 per cent of the waves approach from the South-West quadrant and the harbour needs protection from these. 22 per cent of the waves approach from the East-Northeast quadrant and the bay is naturally protected from these  (Indian Hydrographic Office, 2014).

2004 Tsunami

In December 2004, the IOR was hit by a massive tsunami caused by a 9.3-magnitude earthquake. The A&NI were hit hard by the tsunami. After this disaster, there has been considerable wariness among people and organisations investing in development in this area. There have been multiple studies done by government agencies to look at the effects of the tsunami and the viability of a trans-shipment port in the region. This report references two of these. A geo-technical investigation (M Ravichandran, 2016) into the proposed location of Great Nicobar looked at the viability of building a port. Another study (Durgesh C. Rai, 2006) looked at the effects of the damage done by the tsunami and concluded that most of the damage was to the old colonial structures. The damage to port structures was minimal.


The laws in India have changed since the time of the “License Raj” and have become more business-friendly. The laws that pertain to this project are explained below.

Free Trade Warehousing Zone (FTWZ)

FTWZ is the policy of the Government of India announced in the Foreign Trade Policy 2004-2009 to setup Free Trade and Warehousing Zones. The objective of the policy is to create trade-related infrastructure to facilitate EXIM of goods and services with freedom to carry out trade transactions in free currency (AECOM India Private Limited, 2016). An FTWZ is designated as a deemed foreign territory and is envisaged to be an integrated zone for use as an international trading hub. It would have fully integrated mega-trading hubs integrated with warehouse and storage infrastructure, rail connectivity with hinterland and commercial complexes for offices. As FTWZ are deemed foreign territory in India, these enjoy tax benefits on goods handled there (AECOM India Private Limited, 2016).

Indian FTWZ – Benefits

  • Custom Duty exemption of re-export of imported goods as duty is not applicable till the goods exit FTWZ to a location within a domestic tariff area in India (AECOM India Private Limited, 2016).
  • Income tax (section 80IA) and Service Tax exemptions for developers and users of the zone (AECOM India Private Limited, 2016).
  • No service tax is applied on the activities carried out in FTWZ (AECOM India Private Limited, 2016).
  • Excise duty exemption for products sourced from the domestic markets, including goods, spares, DG sets and packing materials (AECOM India Private Limited, 2016).
  • Foreign exchange transaction capability (AECOM India Private Limited, 2016).
  • Allows for a storage time of two years as against 90 days at CFS and ICD (AECOM India Private Limited, 2016).
  • Assist in meeting specific warehousing requirements for each product category (AECOM India Private Limited, 2016).
  • Cost effective shared warehousing and handling equipment (AECOM India Private Limited, 2016).
  • Duties are to be paid on goods leaving the FTWZ only. Hence bulk inventory may be stored at FTWZ and taxes may be paid as and when material is taken out to save immediate cost (AECOM India Private Limited, 2016).
  • Availability of temporary storage facilities to enable users to meet short term demand without incurring significant costs (e.g. leasing space for a year to meet two to three months demand) (AECOM India Private Limited, 2016).

Indian Cabotage Laws

Definition of Cabotage – “Trade transit of a vessel along the coast (coastal trading), from one port to another within the territorial limits of a single nation” (Duhaime, n.d.). For example, “No ship shall carry coastal cargo, unless the ship is (a) a New Zealand ship or (b) a foreign ship on demise charter to a New Zealand-based operator who employs or engages a crew to work onboard the ship under an employment agreement or contract for services governed by New Zealand law….” (§198 of the Marine Transport Act 1994 of New Zealand). To put it in the Indian context, for a cargo vessel to ply between two Indian ports such as Kochi and Mumbai, the ship must be Indian flagged. Cabotage Laws are a sort of protection for the local maritime industry.

In 2015, the Government of India lifted cabotage provisions that prevented foreign flag ocean carriers from transporting containers between domestic ports. This allows foreign flagged vessels working for Maersk and others to sail in between Indian ports (Journal of Commerce, 2016). The Ministry of Shipping stated that cabotage rules will not apply to container handling ports that are able to trans-ship at least half of their total volume (Journal of Commerce, 2016). “Foreign flag vessels shall transport export import and empty containers only from the transshipment port to any other port in India and vice-versa” (Journal of Commerce, 2016).

Major Ports Trust Authorities Bill 2016

In December 2016, the Union Cabinet replaced the Major Ports Trust Act, 1963 with the Major Ports Authorities Act, 2016. The main purpose for this replacement was to promote the expansion of port infrastructure, facilitate trade and commerce, decentralise decision making and to infuse professionalism in port governance (Press Information Bureau, Government of India, 2016).

Features of the Bill

  • The Bill is more compact in comparison to the Major Port Trusts Act, 1963 as the number of sections has been reduced to 65 from 134 by eliminating overlapping and obsolete Sections (Press Information Bureau, Government of India, 2016).
  • The new Bill has proposed a simplified composition of the Board of Port Authority which will comprise 11 members as against the present 17 to 19 representing various interests. A compact Board with professional independent members will strengthen decision making and strategic planning. Provision has been made for inclusion of representative of the State Government in which the Major Port is situated, Ministry of Railways, Ministry of Defence, Customs and Department of Revenue as Members in the Board apart from a Government Nominee and a Member representing the employees of the Major Ports Authority” (Press Information Bureau, Government of India, 2016).
  • The role of Tariff Authority for Major Ports [TAMP] has been redefined. Port Authority has now been given powers to fix tariff which will act as a reference tariff for purposes of bidding for PPP projects. PPP operators will be free to fix tariff based on market conditions. The Port Authority Board has been delegated the power to fix the scale of rates for other port services and assets including land (Press Information Bureau, Government of India, 2016).
  • An independent Review Board has been proposed to be created to carry out the residual function of the erstwhile TAMP for Major Ports, to look into disputes between ports and PPP concessionaires, to review stressed PPP projects and suggest measures to review stressed PPP projects and suggest measures to revive such projects and to look into complaints regarding services rendered by the ports/private operators operating within the ports would be constituted (Press Information Bureau, Government of India, 2016).
  • The Port Authority Boards have been delegated full powers to enter into contracts, planning and development, fixing of tariff except in national interest, security and emergency arising out of inaction and default. In the present MPT Act, 1963, prior approval of the Central Government was required in 22 cases (Press Information Bureau, Government of India, 2016).
  • Empowers the Board to make its own Master Plan in respect of the area within the port limits and to construct within port limits pipelines, telephones, communication towers, electricity supply or transmission equipment. The Board is empowered to lease land for port-related use for up to 40 years and for any purpose other than those specified in Section 22 for up to 20 years beyond which, approval of the Central Government is required (Press Information Bureau, Government of India, 2016).
  • Provisions of CSR & development of infrastructure by Port Authority have been introduced (Press Information Bureau, Government of India, 2016).

Major Players

The shipping industry is dominated by three players who jointly control 42.1 per cent of the industry.

  • Maersk and APMT: Maersk Shipping Ltd. is the world’s largest shipping company operating 640 vessels worldwide and has a Twenty-Foot Equivalent Unit (TEU) of carrying capacity of 3.4 million TEU allowing Maersk to capture 16.3 per cent of global market share. APMT is their sister company and operates ports and terminals worldwide. Maersk is based in Copenhagen and APMT is based at The Hague (Champion Freight, 2017).
  • MSC and TIL: Mediterranean Shipping Company is Geneva-based and has a carrying capacity of three million TEU on 511 vessels. This accounts for 14.7 per cent of global market share. Terminal Investment Limited (TIL) is a subsidiary of MSC and is a port and terminal operator (Champion Freight, 2017).
  • CMA CGM and Terminal Link: Compagnie Générale Maritime (CGM) and Compagnie Maritime d’Affrètement (CMA) is the third largest shipping company in the world with 462 vessels with a capacity of 2.3 million TEUs. It has 11.1 per cent global market share (Champion Freight, 2017).

The main liner operations and feeder vessel operations of the Maersk line is shown in Figure 3 and Figure 4 (Maersk Line, n.d.).

Figure 5 (Maersk Line, n.d.) shows all the proposed routes for Maersk Line feeder vessels in the IOR using Great Nicobar as their Trans-shipment port. These proposed routes when compared to the current routes in Figure 4 are, in most cases, at least half the distance from IOR and Bay of Bengal ports when compared to current trans-shipment locations at Colombo and Singapore.

Setting up the Port

The Shipping & Ports Industry has had major changes in the last decade:–

  • Major Ports Trust Act (MPTA) 1963 allows the port to fix tariff and lease land.
  • The exemption for ports with over 50 per cent trans-shipment to the cabotage law.

The MPTA removes government control from the day to day activities of Ports and the changes in cabotage law allow foreign shipping companies into trans-shipment in India. The FTWZ has considerable benefits for companies that decide to set up shop. The main criteria that drives a successful port is the volume of TEU moved through the port. To ensure the movement of large volumes of TEU, the GOI should invite APMT, TIL and Terminal Link to set up Terminals at South Bay. With the least deviation from the East-West Trade Route, Maersk, MSC and CMA CGM will prefer to dock at South Bay and they would feed volumes into their sister companies terminals. For the feeder vessels in the Bay of Bengal, it cuts their trip by half when compared to Singapore and Colombo.

The second criteria that drives a successful port is the speed of TEU moved. To move TEU quickly the port should be highly automated.

Asia-Africa Growth Corridor (AAGC)

The development of a trans-shipment port at Great Nicobar should be a centre of gravity for the Indo-Japanese Asia-Africa Growth Corridor (AAGC). The AAGC is an economic cooperation between India, Japan and multiple African countries. The AAGC is an ocean-borne trade corridor that links Africa to India and Far East Asian countries to India (Panda, 2017).

Given the central location of Great Nicobar between Africa, India and Japan and its proximity to the E-W Trade Lane, a Trans-shipment port at Great Nicobar would be the central facet of the AAGC (Panda, 2017). Because Great Nicobar is in a geologically risky zone, India should invite their major AAGC partner Japan in the design and construction of the port and surrounding facilities in Great Nicobar. Japan is the world’s leader when it comes to earthquake proofing of buildings and Infrastructure (Zuu Online, 2014).

Proposed Port Design

The port design should contain sea walls to protect the Eastern and Western approaches to the bay. This is specifically important because sea walls are the best protection against tidal swells and tsunamis. The terminals will be built on the Western coast of the bay with jetties protruding out into the bay for container ships to dock at. Terminal depots and container depots will line the Western shore of the bay. The Eastern coast will contain a naval dockyard and subsequent quays for the Indian Navy.

Role of the Indian Navy

The Indian Navy can be a major player in the development of a port in South Bay. Currently, Great Nicobar is home to INS Baaz, a naval air station. The Island has a small port at Campbell Bay, which the Indian Navy regularly uses. The construction of major civilian and naval port facilities at Great Nicobar should have a potentially beneficial effect on the economy of Great Nicobar. Growth of the local economy would increase internal immigration to the island and the island city would rapidly expand.

15 years after the completion of the port, the Indian Navy would have a major naval base on an island city that is also the hub for Indian Ocean trans-shipment.

Benefits and Drawbacks

Short Term Benefits Analysis

  • Creation of a Trans-shipment port on Indian territory that is competitively located when compared to Colombo and Singapore.
  • Increase in revenues from ship and container traffic.
  • Employment generated by the port and support infrastructure.
  • Support and encourage ancillary industries supporting maritime activities on the East coast and Andaman and Nicobar Islands.

Short Term Drawbacks Analysis

  • Insufficient hinterland demand and supply: The population of Great Nicobar as of 2011 was 36,842. This number is insufficient to drive hinterland demand and supply (National Informatics Centre, n.d.). This drawback is a constant in the numerous papers and studies conducted by the GOI and consultants (AECOM India Private Limited, 2016).
  • High initial cost for building a port: There is no port-based infrastructure in the South Bay. The proposed port will have to be built from scratch and at a substantial cost (AECOM India Private Limited, 2016).
  • Singapore and Sri Lanka: These two countries currently control the trade in the region and they will offer better prices to shipping companies to put Great Nicobar out of business.

Long Term Benefits Analysis

  • Creation of a city and the jobs associated: Most of the world’s major cities are port cities like New York, London, Singapore Hong Kong and Shanghai. In India, Kolkata, Mumbai and Chennai are the major metropolitan port cities. India faces serious challenges of finding jobs for a young population. By 2050, close to 280 million more will enter the jobs market. The foundation of a new port city would help alleviate this problem to a certain extent.  (Mishra, 2016).
  • Control of IOR trade by India: Given that India is the largest economy in the IOR, a trans-shipment port at Great Nicobar would be a geo-political boon to India by ensuring it is the premier port for trans-shipment in the IOR.
  • Enhances security: Consequently, since there would be greater presence of ‘people’ in the region which it currently lacks leading to uninhabited islands being used for gun and human trafficking from Bangladesh, Indonesia and Myanmar.

Long Term Drawbacks Analysis

  • Environmental Concerns: 84 per cent of the Island is covered by rich forests. The Island has 2,200 varieties of plants of which 200 of them are endemic. The Island is a Biosphere Reserve recognised by India and UNESCO. The Island contains two national parks, larger Campbell Bay National Park and Galathea National Park. The foundation of a port and city will have environmental consequences (AECOM India Private Limited, 2016).


This article evaluated the proposal of setting up a trans-shipment Freeport in South Bay, Great Nicobar with FTWZ. Development of the trans-shipment port is an attractive prospect for the GOI to make India a logistics and transportation hub. There will be numerous hurdles to the completion of this project but the advantages of a trans-shipment port with the most favourable location when compared to the E-W Trade route far outweigh the disadvantages. Additionally, the Indian Navy will end up getting a major base while not having to invest into the entire port. Thus, such a port would prove to be of great strategic advantage – both economically and militarily for India.


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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Johanan Collins and Lt Commander Renjan Oommen

Johanan Collins is currently doing his MBA and teaches at Western Michigan University. He has worked as a Research Analyst with Assistant Professor Marcel Zondag and Lt Commander Renjan Oommen has 19 years of leadership and procurement experience from Armed Forces, Global Shipping and Transport and Heavy Engineering Industries.

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