January 9, 2024
📰 FEATURE STORY
Is the Red Sea crisis India’s next big economic challenge?
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India could face some economic challenges from different quarters in 2024. Over the past year, the war in Ukraine certainly had some effect. Now, it’s the Middle East. In the aftermath of the war between Israel and Hamas, tensions in the region are at an all-time high.
With other countries in the region standing guard, one space has come to the fore recently. The Red Sea is now a hotbed of activity following a spate of attacks on cargo ships by the Houthi militia of Yemen. This crucial maritime route that links Europe and Asia through the Suez Canal is now unsafe. That means global trade has taken a hit. Will this become India’s next economic challenge?
Context
Since the Suez Canal opened in 1869, the importance of the Red Sea has significantly increased. The Canal links the Red Sea with the Mediterranean Sea and is one of the most important routes for world trade. To understand just how much, when the HMS Ever Given, a large container cargo ship, got stuck in the Canal in 2021, it sent ripples through the global economy.
The Red Sea is also of strategic importance to countries in the region. In the past few years, regional and other countries decided to establish military bases in the littoral states like Egypt, Sudan, and Djibouti. The heavyweights in the region are Egypt, Israel, and Saudi Arabia. Russia has plans for a naval base in Sudan. China has a military base in Djibouti.
There are two important points to note concerning the Red Sea in recent years. First, the decision by the US to set up a new multinational task force to prevent the smuggling of arms and narcotics around the waters of Yemen. Second, Israel’s uneasiness about Iranian military presence in the Red Sea region.
As the war in Yemen intensified post-2105, Iran has increased its military presence in the region, partly to support the Houthi rebels. For countries like Israel, Saudi Arabia, and others, the goal has been to curb the power of the Houthis and the Iranians. The Houthis control large parts of Northern Yemen. The war between Iran-armed Houthis and a Saudi-led coalition has killed over 3 lakh people, according to UN estimates.
So, where does trade come into all of this? Well, the region oversees about 12% of global trade and nearly one-third of global container traffic. 19,000 ships pass through the Canal every year. With the recent attacks on cargo ships, companies and shipping firms are looking at alternate routes and even suspended operations.
Take AP Moller-Maersk, the world’s second-largest container ship company. It first ordered its ships to be on standby and later managed to get US Navy protection. After facing a drone attack and an attempt by Houthis to board the ship, it again halted operations along the Red Sea. Another shipping giant Hapag-Lloyd also stopped using the Red Sea.
All this is a big deal for India and global trade, which have emerged from the pandemic and continue to feel the heat from the war in Ukraine. Commodities seem to be the worst affected since the margins aren’t there to absorb any hike in freight charges. Is there trouble ahead for the Indian economy, given how important this region is for trade?
VIEW: It’s going to get rough
Understandably, cargo and shipping companies are looking at alternate routes or stopping operations altogether. However, that’s going to have a ripple effect for countries, including and especially India. Almost 90% of western hemisphere cargo, to and from India, that used to go through the Red Sea, is getting re-routed through the Cape of Good Hope. Exporters who have to bear the freight have requested buyers to hold the consignment due to higher costs.
All consignments are likely to be impacted by the higher freight cost. In some cases, that’s up to sixfold. What does this all mean? Not good things, that’s for sure. Imports will become costlier due to longer routes. If there were plans to reduce petrol and diesel prices, that’ll have to wait. India has a big import dependence on petroleum products. In 2022-23, crude oil and petroleum products as a share of India’s gross imports were nearly 26%.
The Global Trade Research Initiative (GTRI) said India must prepare for long-term shipping disruptions. With increased shipping costs, about 40-60%, prices of commodities will certainly become dearer. The disruptions have already affected basmati rice exports and price fluctuations in commodity prices. That’s not good news for India as it continues to deal with inflation.
COUNTERVIEW: Not much of an impact
As the Indian government keeps a close watch on the Red Sea region and does not get dragged into a geopolitical spat, officials are confident that the current crisis won’t affect the Indian economy. Ports, Shipping and Waterways Secretary TK Ramachandran has stated that there won’t be any “significant impact” on Indian maritime trade.
India’s exports in 2024 are expected to increase by 3-4% to about $800 billion. While there may be some disruption to this, the impact isn’t likely to be something to keep policymakers up at night. There could be some export deficit this year. However, the government expects an increase in exports of certain farm commodities to balance things out. Rajesh Agarwal, an additional secretary in the trade ministry, said exports are growing by over 4%.
We know India needs a lot of coal to meet its domestic power demand. This isn’t at risk with the events at the Red Sea. The majority of coal imports come from Indonesia and Australia. Broadly speaking, the affected route accounts for only about 2-3% of global coal trade. Most of India’s non-coking coal imports are from within the Indian Ocean stretch. Also, based on current policy, coal can be freely imported by consumers themselves based on their needs.
Reference Links:
- The US and changing geopolitics of the Red Sea – ORF
- The Red Sea Crisis, Explained – Foreign Policy
- Freight rates have doubled due to Red Sea disruptions: Official – The Indian Express
- Red Sea disruption: Costs have gone up, crisis may deepen, says official – The Indian Express
- How Red Sea attacks could raise export prices of Indian basmati rice – Firstpost
- Suez Canal closure worries industry but government confident of minimal impact – Moneycontrol
- Red Sea crisis: Little impact on India’s coal imports, say analysts – Moneycontrol
- Red Sea attacks disrupt global trade, experts weigh in on potential impact on freight costs – CNBC TV 18
What is your opinion on this?
(Only subscribers can participate in polls)
a) The Red Sea crisis could become an economic challenge for India.
b) The Red Sea crisis won’t become an economic challenge for India.
🕵️ BEYOND ECHO CHAMBERS
For the Right:
Back to Stagnancy? Modi Govt Has Performed Poorly on the Goods Export Front
For the Left: