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Mint Primer | India and the Red Sea sharks: crisis without an end?
Summary
- As the Red Sea crisis enters its fourth month, Mint looks at the impact on India and the sectors that have been hit
Houthi attacks on commercial ships in the Red Sea, in reprisal for Israeli bombing of Gaza, continue unabated and the disruption they are causing is beginning to pinch. As the crisis enters its fourth month, Mint looks at the impact on India and the sectors that have been hit.
What is the latest on the Red Sea crisis?
There are no signs at all of any improvement. On Tuesday, a British registered cargo ship, ‘Rubymar’, which was on its way to Bulgaria from the United Arab Emirates, was hit by two ballistic missiles fired by Houthi rebels. The damage was significant and, for the first time since the crisis broke out in November, a ship had to be abandoned and is now at risk of sinking. This, despite the US and Britain resorting to bombing Houthi positions in Yemen. Now, most shipping lines continue to avoid the Red Sea. Since mid-December, the number of crude carriers transiting through the Red Sea is down 60%.
What are the chances of a quick resolution?
Slim at the moment. Houthis say the disruption to global trade will force the world to persuade Israel to halt hostilities and announce a ceasefire in Gaza. A Houthi spokesman posted on the social media platform X the need was for an “urgent and comprehensive ceasefire" in Gaza and not militarization of the Red Sea. The opposite is happening. The Israeli operation in Gaza continues. The US and Britain have started air strikes on Houthi positions in Yemen. The EU has launched a naval mission to protect ships. A swift resolution looks improbable considering the geo-political standings of various countries.
What has been the financial impact so far?
Freight rates, be it for containers or for carrying crude, have risen sharply as ships take a detour around Africa. Experts peg the rise at 30-50%. Insurance costs have risen too. The transit time has increased by about two weeks on average. Containers leaving China are taking longer to return, triggering fears of another supply chain disruption.
How has the crisis hurt Indian interests?
It’s beginning to bite—almost 80% of all exports, as much as $8 billion a month, to Europe passes through the Red Sea. In fact, 25% of India’s foreign trade uses this route. Sustained disruption could hurt India’s merchandise exports in 2023-24. According to India Ratings & Research, freight rates for Indian companies have seen a jump of 150% in the last 45 days. Higher freight costs are making Indian players uncompetitive in select sectors, and they are losing out to competitors who are located closer to the buyer.
Which are the sectors that are affected?
Sectors with significant exposure to Europe have been hit hardest. They include textiles, leather, spices, engineering goods and gems & jewellery. Importers are not reimbursing higher costs and are demanding faster delivery cycles to make up for longer transit time. A lot depends on the size of the players and the type of goods they export. Smaller players are losing out as they are unable to service the higher freight and carrying costs. Exporters of low value-add and large volume products are also hit.
