Despite the ongoing Red Sea crisis, India’s trade has shown resilience with no adverse impact on exports and imports so far, according to official statements. However, the transportation cost has surged as shipping companies opt for longer routes due to the disruptions in the world’s busiest shipping route.
An official stated, “There is no impact in volume terms so far. Only the transportation cost is up. It has risen for all countries. It has not affected the trade adversely so far. We have to see the long-term demand, but it will depend on the EU and the US.” These two regions collectively contribute to over 30 per cent of India’s total exports.
Exporters, while acknowledging the absence of immediate volume impact, express concerns over the significant surge in freight costs, which could potentially affect India’s exports. The trade data for January is scheduled for release by the commerce ministry on February 15. In December of the previous year, exports recorded a marginal one per cent increase, reaching USD 38.45 billion.
The Red Sea crisis, marked by attacks from Yemen-based Houthi rebels on commercial ships, has disrupted the global supply chains. The ripple effects include increased freight costs, mandatory war risk insurance, and significant delays due to rerouting.
According to the think tank GTRI, average container spot rates have more than doubled since early December 2023. Basmati rice exporters are particularly affected, facing a surge in freight costs to USD 2,000 per 20-tonne container for destinations around the Red Sea, marking a significant 233 per cent increase.
The Houthi group’s use of drones and rockets to target ships navigating the crucial shipping route of Bab al-Mandab, connecting the Mediterranean Sea to the Indian Ocean, has raised tensions. The strait, vital for 30 per cent of global container traffic, has witnessed increased incidents in 2023, including attacks and military maneuvers by regional and global powers.
India heavily relies on this route for trade and energy imports, prompting exporters to diversify their trade routes. Attacks have been ongoing for several years but escalated sharply this year, with militants now employing anti-ship ballistic missiles.
To evade attacks, major shipping firms, since December 15 of the previous year, have discontinued the use of the Bab al-Mandab straits for trade with Europe via the Red Sea and Suez Canal. The closure of this route severs a critical trade link between Europe, India, and all of Asia.
Ships destined for Europe are now compelled to take a much longer route around the Cape of Good Hope, the bottom tip of Africa. This alteration increases voyage distances by 40 per cent, leading to higher transportation time and costs.
The two primary shipping routes from India to Europe include the Bab-el-Mandeb Strait, Suez Canal, and Red Sea, as well as the Cape of Good Hope, encircling Africa. The Red Sea route, shorter and faster, is the preferred option for most shipping companies. It starts from major Indian ports like Mumbai, JNPT, or Chennai, heading westward through the Arabian Sea, entering the Red Sea, and navigating through the Suez Canal into the Mediterranean Sea.
In contrast, the Cape of Good Hope route is longer and slower but avoids potential delays or disruptions. It is used for bulk cargo shipments where time is less critical, or when political instability in the Middle East raises concerns about using the Suez Canal. Starting from Indian ports, it heads southward across the Indian Ocean, rounds the Cape of Good Hope at the southern tip of Africa, sails northward along the west coast of Africa, before entering the Mediterranean Sea and reaching European ports.
India’s heavy reliance on this strait for crude oil, LNG imports, and trade with the Middle East, Africa, and Europe underscores the importance of swift resolutions to the Red Sea crisis to maintain global trade efficiency. As geopolitical tensions continue to impact shipping routes, stakeholders closely monitor developments to assess potential long-term implications on international trade.
