- The Research and Information System for Developing Countries projects a substantial setback for Indian exports, estimating a $30 billion impact due to the threat of Houthi attacks in the Red Sea.
- This potential 6.7% decline adds to existing challenges, as heightened risks prompt exporters to withhold shipments, impacting the oil and auto sectors and raising inflation concerns.
Escalating Threats and Economic Impact
The Houthi threat in the Red Sea is poised to deliver a significant blow to Indian exports, potentially subtracting $30 billion in the current fiscal year. This projection, amounting to a 6.7% decline based on the previous fiscal year’s $451 billion total, underscores the economic consequences of heightened geopolitical risks.
Government Response and Uncertain Estimates
While the Research and Information System for Developing Countries provides an initial assessment, the Indian government has not released official estimates on the impact of the Red Sea crisis on exports. Prime Minister Narendra Modi’s administration engages with export promotion councils to safeguard trade routes, signaling a proactive response to the escalating situation.
Shipping Routes Disruption and Naval Intervention
With a 44% reduction in ships passing through the Suez Canal, the disruption in the Red Sea prompts concerns about the flow of goods. The Indian Navy’s recent intervention, successfully rescuing a hijacked vessel near Somalia’s coast, highlights the severity of the threats and the need for active measures to ensure maritime security.
Exporter Reactions and Contract Renegotiations
Heightened risks have led Indian exporters to adopt a cautious approach, holding back approximately 25% of outbound shipments transiting through the Red Sea. Exporters and buyers are engaging in contract renegotiations to navigate surging freight charges, reflecting the adaptability required in the face of evolving geopolitical challenges.
Impact on Container Shipping Rates and Trade Dynamics
The Red Sea crisis triggers a surge in container shipping rates, with the spot rate for a 40-foot container from Asia to northern Europe experiencing a 173% jump. This disruption affects various sectors, including petroleum products, cereals, and chemicals, with potential implications for the oil and auto industries, further contributing to the existing 6.5% contraction in exports from April to November.
Inflation Concerns and Economic Ramifications
Madhavi Arora, a lead economist with Emkay Global Financial Services Ltd, points out potential concerns for India’s oil and auto sectors, anticipating margin impacts. Moreover, the looming threat of inflation, fueled by higher global freight and insurance rates, underscores the broader economic ramifications of the Red Sea crisis. As cost-push inflation pressures rise, the economic landscape becomes increasingly challenging for India.
Did you subscribe to our daily Newsletter?
It’s Free! Click here to Subscribe
Source: Fortune
