Prof M K Bhat
The recent drone attacks in Red Sea by Yemen-based, Iran supported, Houthi terrorists on cargo ships, of nearly 35 countries including India has serious implications for India as well as world economy. Indian merchant navy ship MV Chem Pluto was carrying crude oil from Saudi Arabia to India, when it became victim of their assault 200 nautical miles(370Km) away from western coast of Gujarat-India in Arabian sea. These attacks, if prolong, will carry a catastrophic impact on world trade as 10% of global trade flow and 30% of global container traffic takes place through Red Sea route, so countries need to find a solution to this problem as quickly as possible. US blamed Iran for the attack on Indian cargo vessel and Tehran has called the charges as “repetitive accusations”. India gave guarded reaction by targeting Houthi militants without accusing Iran. The attackers say the attacks are to protest against Israel’s military offensive in Gaza.
The attack has both security and economic implication for India as 95 % of India’s trade by volume and 68% by value moves through ocean routes. India has always stood with international efforts to ensure free shipping, whether it be piracy or otherwise. It has been supportive of the free movement of commercial ships, so it has taken attacks seriously. The defence minister has issued a stern warning that “India will track down those behind the Indian drone attacks even from the depths of seas”. India deployed four state of art warships namely Guided Missile Destroyers, INS Mormugoa, INS Kochi and INS Kolkata in the Arabian sea besides it is regularly flying reconnaissance air craft to monitor the situation to secure commercial sea traffic.
The Red Sea route is the shortest route from Asia to Europe. It has an impact on India’s trade to Africa, the Middle East, and the EU. Its importance has also increased due to drought conditions prevailing in Panama Canal. Shipping via the Panama Canal has dropped by over 50% due to drought conditions at the 51-mile stretch. The ships moving from Asia to the U.S.A are being forced to use the Suez Canal because of shortage of water in Panama Canal. This increases their journey by six more days.
The attacks by Houthis have prompted many shipping companies to suspend all Red Sea shipping routes via the Suez Canal. They will be rerouted to go via the Cape of Good Hope in South Africa which will add 3,500 nautical miles to the journey and will make it more expensive. The alternative route adds 12-14 days of sailing time and a 30-40 per cent increase in freight costs. This ultimately will increase prices and make things costly for the customers. Besides freight charges the insurance premium too is likely to shoot up.
The disruption at the Red Sea route will affect Indian exports to countries of Asia, North America, Africa and Europe. It is going to affect our agriculture exports adversely. Rerouting is estimated to push the prices of Indian agricultural products by 10 to 20 per cent, as shipments would be routed through the Cape of Good Hope. India’s trade with Countries around Red Sea, like Saudi Arabia, Egypt, Jordan, Ethiopia, Israel, and Eritrea, will be affected the most as their sailing time using the alternate route will increase drastically. The surge in demand of Indian basmati rice in the Middle East countries has raised our rice exports. Saudi Arabia is the largest importer of basmati rice from India. India exported 954484.2 metric tonnes of basmati rice worth Rs. 836225.6lakh to Saudi Arabia in 2022-23, largest in quantity and worth. The other big importers of rice from India are Iran, Iraq, Yemen, U.S.A, Kuwait and U.K. etc. The freight cost for India’s basmati rice exports to countries around the Red Sea has jumped from $ 600 per 20-tonne container to $ 2,000 given the risk involved, Freight for rice consignments headed for Europe has doubled to $4000 since the first reports of Houthi ambush.
Tea exports from India to Europe and US are also getting badly affected and exporters are staring at massive losses due to huge rise in shipping costs owing to the Red Sea crisis. Moreover, as far as new contracts are concerned, importers from the US and European countries might prefer to buy tea from Kenya instead of India. It has raised tensions among Indian exporters of agriculture commodities.
India will also get hit in case of non- agriculture, labour intensive exports like textiles, Gems and jewellery. India is the largest exporter of Gems and jewellery in the world with 1556 shipments followed by Italy at no 2 with 509 shipments and China at number 3 with 484 shipments. The biggest importers of Indian Gems and jewellery are United Kingdom, United Sates, United Arab Emirates, Israel and Netherlands etc. Houthi attacks in Red sea will influence the demand of Indian handicrafts in these countries.
The Red Sea attacks will not only affect Indian exports but it will also make price rise of imports like crude oil and machinery etc. India imports 84% of its crude oil needs mainly from Iraq, United Sates, Saudi Arabia, United Arab Emirates, Nigeria and Russia. Inflation in crude can lead to overall price rise in the country. It may however be pointed out here that the impact of crude shipments on India will be less as most of the crude oil that India imports passes through the Strait of Hormuz, not Red Sea. Russia continued to be the largest oil supplier to India in August 2023 , with imports worth $4.15 billion, as per data of commerce ministry dated 18th Oct 2023.Almost 30% crude is sourced from Russia which is not shipped through Red Sea route at all. So, there won’t be much of an impact on the country’s crude oil import prices however the import of other chemicals and products transported through Suez Canal route will see a rise in prices. The escalation in the price of capital goods and raw materials will create problems in the growth of Corporate India which is on the cusp of a new investment cycle at present. Goods that are imported from European countries to India, including machinery, vehicles, pharmaceuticals, and chemicals, will face higher costs and transit compared to those imported from other Mediterranean countries
The Houthi attacks have not only economic but geopolitical ramifications too for India. The detractors of India’s growth trajectory don’t want to see India growing as a super power. The proximity between China and Iran too can be behind such things, India getting close to America can also get reaction from Iran, China and other countries, on the other side India can’t afford to lose its relations with Iran and, so the reaction from India by not mentioning Iran conveyed the maturity of our foreign policy. India has to be cautious in the Arabian sea to restrict the growing influence of China through Pakistan, Iran etc
Any disruption in maritime transport is a crucial concern for the world economy and if the attacks prolong, global trade will be hit hard, as over 80 per cent of the global goods trade is carried through sea. It can create supply chain problems and restrict the growth of developing countries like India. While the US-led maritime security coalition has swiftly announced countermeasures, indicating the importance of the route for world trade. The recent shipping crisis in the Red Sea can add to the economic slowdown of the world and may further deteriorate economies.
Follow our WhatsApp channel
