India Braces For Trade Disruptions Amid Escalating Middle East Conflict

As tensions escalate in the Middle East following missile attacks attributed to Iran, Israel has vowed to retaliate. This situation has prompted concerns within India Inc about potential trade disruptions along the crucial Red Sea route.

Impact on Cargo Freight Rates

Industry experts warn that the conflict could lead to increased cargo freight rates. The close ties between Iran-backed Hezbollah in Lebanon and the Houthi rebels in Yemen, responsible for numerous attacks on ships in the Red Sea, exacerbate these concerns. A direct conflict between Israel and Iran could severely impact trade for Indian exporters relying on this vital shipping lane.

Significant Decline in Petroleum Exports

The crisis in the Red Sea began last October when Houthi rebels disrupted trade, significantly affecting India’s petroleum exports, which dropped 37.56 percent to $5.96 billion in August compared to $9.54 billion during the same month last year.

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Crucial Trade Routes at Risk

According to a recent report by Crisil Ratings, Indian companies utilize the Red Sea route through the Suez Canal for trade with Europe, North America, North Africa, and parts of the Middle East. These regions accounted for 50 percent of India’s exports worth ₹18 lakh crore and 30 percent of imports valued at ₹17 lakh crore in FY23. Overall, India’s merchandise trade for the fiscal year reached ₹94 lakh crore, with 68 percent by value and 95 percent by volume transported via sea.

Alternative Routes and Increased Costs

The ongoing attacks on vessels in the Red Sea since November have forced businesses to seek longer, alternative routes around the Cape of Good Hope. The Crisil report indicates this diversion has stretched delivery times by 15 to 20 days and significantly raised transit costs due to higher freight rates and increased insurance premiums.

Resilience in Trade with the Middle East

Despite these challenges, industry experts note that India’s trade with the Middle East remains robust, supported by strong ties with regional players such as Saudi Arabia, the UAE, Kuwait, and Qatar. Bilateral trade between India and the Gulf Cooperation Council (GCC) countries reached $162 billion last year, with the GCC now contributing 15 percent of India’s total trade. Sectors like energy, defense, security, and health are experiencing growth in the region.

Decline in Suez Canal Trade

Recent data from the International Monetary Fund (IMF) shows a stark decline in trade via the Suez Canal, which fell by 50 percent year-over-year in the first two months of the year. The Suez Canal’s annual revenue dropped by approximately 23.4 percent in FY24, with revenues falling to $7.2 billion in the fiscal year ending June, down from $9.4 billion the previous year, according to Osama Rabie, Chairman of the Suez Canal Authority.