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Impact of Red Sea Trouble on Indian Trade

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January 09, 2024

Why in News?

Recent attacks on commercial ships near the Red Sea amidst the ongoing Gaza war impacts India’s global trade.

What is Red sea?

  • The Red Sea is a narrow inland sea between Africa and the Arabian Peninsula.
  • The nearly 2,000-km Red Sea connects the Mediterranean Sea with the Indian Ocean via the narrow Suez Canal (since 1869).
  • It is connected to the Arabian Sea and the Indian Ocean to the south through the Gulf of Aden and the narrow strait of Bab el Mandeb.
  • The Bab-el-Mandeb Strait, also known as the "Gate of Tears" in Arabic, is a crucial trade route that connects the Mediterranean Sea and the Indian Ocean via the Red Sea and the Suez Canal.
  • Bordering countries – Egypt, Saudi Arabia, Yemen, Sudan, Eritrea and Djibouti.

To know about Red Sea, click here

red-sea

Why trade across red sea is important?

  • Historical significance – There are evidences of Indian diaspora in the Middle East even at the time of Meluha (the Indus Valley Civilisation, c. 3300-1300 BCE).
  • In the 1st and 2nd century CE, maritime highway linked the Roman Empire and India through the Red Sea, with many 100’s of ships going in both directions each year.
  • Economic significance – Suez Canal was opened in 1869 and since then, it has become the busiest trade route as it reduced distance between Europe and Asia by 7000km.
  • Geopolitical significance – The narrow Suez Canal is strategically located connecting west and east.

What is the impact of Red Sea trouble on Indian trade?

  • Stopping vessel movements – Major cargo shipping lines decided they would not operate on this route and even small feeder vessels have of late stopped plying in these waters.
  • Re-routing of ships – Almost 90% of western hemisphere cargo, both inbound or shipped from India is now getting re-routed through the Cape of Good Hope.
  • The remaining 10% of Indian import or export cargo is either not moving or using a transit facility.
  • Higher transit time – Trade with Europe, the U.S. east coast and to North Africa is taking the longer route and thus elongating both export and import cycles.
  • Holding back the consignment – Roughly 20-25% consignments are being held up.
  • Increase in freight costs – It may affect all consignments by up to 6-fold in some cases which may also be due to peak season surcharge and contingency surcharge.
  • Increased Insurance costs – They are not sure of what will happen to the ships as more escorts are needed.
  • Higher fuel burning – Long route ships could burn a million dollars’ worth of fuel per trip.
  • red-seaCostlier imports – Final products could turn dearer and it could affect the plans to reduce pump prices of petrol and diesel.

Gross imports of crude oil and petroleum products as a share of India’s gross imports in value terms was 25.8% in 2022-23, and 22.6% in the 1st half of the current fiscal.

  • Affects commodity sectors – The worst affected sectors are chemicals, plastic, petrochemicals, because margins are not there to absorb the hike in freight.

 

What lies ahead?

  • The Indian navy is monitoring the overall situation in coordination with national maritime agencies.
  • Enhanced maritime surveillance – Indian Navy’s destroyers and frigates are undertaking maritime security operations and rendering assistance to merchant vessels in case of any incident.
    • INS Chennai closely followed the hijacked MV Lila Norfolk ship and rescued all 21 crew, including 15 Indians, onboard.
  • Aerial surveillance – A complete maritime domain awareness is done by using long-range maritime patrol aircraft and remotely piloted aircraft.
  • Strengthening ‘Operation Prosperity Guardian’ – US spearheaded multinational operation to keep the sea lanes open and free of threats but India is yet to decide on joining it.

 

References

  1. The Hindu| Red Sea trouble impacts India’s Trade
  2. The Hindu| The Strategic Chokepoint
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