Explained | Upside risk on inflation to export value, here's how the Red Sea crisis will impact Indian economy in FY25
Change in trade route: Container ships routing through the Suez Canal are shunning and rerouting around the Cape of Good Hope. By the first half of February 2024, container tonnage crossing the Canal fell by 82 per cent, and vessel tonnage passing through the Cape of Good Hope increased by 60 per cent. • Increase in the distance and operational shift due to rerouting of ships: The extra miles travelled and days lost due to trade diversion has translated into additional costs such as fuel costs and lost value of time-sensitive cargo.
The other additional costs are arising from the security considerations, including the risk of piracy, which generates a surge in insurance and legal claims. • Signs of rising inflationary pressures: The current container freight rates are approximately half the peaks recorded during COVID-19. Sustained increases in shipping costs due to disruption can drive up inflation.
The crisis is also reverberating in global food prices. Disruptions in grain shipments from the Russian Federation, Ukraine, and Europe pose risks to global food security.
• 80 per cent of India’s merchandise trade with Europe passes through the Red Sea, with key products such as crude oil, auto & auto ancillaries, chemicals, textiles, and iron and steel being affected. The combined impact of higher freight costs, insurance premiums, and longer transit times could make imported goods significantly more expensive.
