India is staring at another round of supply disruptions, after the Covid-induced chaos in container movement in 2020 and 2021, if the Iran-backed Houthi militia in Yemen continues targeting cargo ships that ply the Red Sea and Suez Canal — to and from North Africa, Europe, West Asia (including Israel) and beyond. At least two commercial vessels bearing Indian cargo, including oil, have been attacked. Clearly, India has been scarred by this spillover of the Israel-Hamas conflict into the Israel’s southern neighbourhood.
The Centre should take stock of the situation and consider steps for exporters and import-dependent industries and sectors. These could be fiscal concessions or incentives to exporters to defray a part of their higher shipping and insurance costs. To assess the impact in value or volume terms alone could be misleading. Sectors such as machinery, electronics and auto, which rely on crucial equipment that could seem insignificant in value or volume terms, can be badly hit. GVC-driven production, depending on diversified global supplies, such as auto and phones, are part of this category. Production and inventory management can take a beating, as during the height of the semi-conductor crisis; for instance, it would be quite useless to stock inputs from suppliers in East Asia, if inputs from Europe have been held up at sea.
Back-of-the-envelope calculations are quite disconcerting. About half of India’s crude oil imports in FY2023, worth $105 billion, from countries like Russia, Congo, Nigeria and the Americas is likely to have passed through the Suez Canal. In 2023 (January-October), India sourced about a third of its oil from Russia, or about 1.7 million barrels per day. Its other key suppliers, Iraq (20 per cent of all supplies), Saudi Arabia (17 per cent) and UAE (6 per cent) are not reliant on the Red Sea, but Nigeria (2 per cent) certainly is. It remains to be seen whether India sources more of its oil through the Persian Gulf. India’s petroleum product exports to Europe could lose out, while the bill for exports and imports will rise on account of higher freight and insurance cost, even as crude prices are likely to rule firm for sometime. As for exports, high volume and low margin items such as bulk chemicals could be rendered uncompetitive with the re-routing of vessels around Africa.
Broadly speaking, according to the Global Trade Research Initiative, 25 per of India’s merchandise trade is routed through the Red Sea, which amounts to roughly $25 billion every month. This could be regarded as the value of the consignment that will see an escalation in freight and insurance costs for as long as the crisis persists. The conflict, according to estimates, could lead to a 40-60 per cent increase in shipping costs as well as 15-20 per cent higher insurance premiums, as vessels traverse an extra 3,000-4,000 nautical miles to Europe. The Export Credit Guarantee Corporation should cover for this insurance spike, to begin with. In the medium-term, ways to reduce vulnerability of shipping lines to global shocks should be considered.