Houthi attacks on ships passing through Red Sea: How it will impact Indian economy

The Houthi attacks on ships passing through the Red Sea because of the Israel-Hamas war will have a bearing on the Indian economy. An expert explains to ETV Bharat’s Aroonim Bhuyan why exports being affected will impact the Indian economy more than imports.

New Delhi: Amidst the continuous attacks started by the Yemen-based Houthi militants earlier this month targeting ships passing through the Red Sea, concerns have been rising about the impact this will have on the Indian economy.

The Iran-aligned Houthis have been targeting ships carrying cargo passing through the Red Sea. The Houthi attacks with drones and missiles is a manifestation of the expansion of the Israel-Hamas war that has claimed over 22,000 lives so far, a majority of them civilians in the Palestinian territory of Gaza.

The Houthis have said that they would not stop their attacks on ships having ties with Israel passing through the Red Sea to exact revenge for the war against Hamas. This came after US Secretary of Defense Lloyd Austin announced the formation of a 10-nation naval coalition and the launch of Operation Prosperity Guardian to protect commercial vessels passing through the Red Sea. Apart from the US, the coalition comprises the UK, Bahrain, Canada, France, Italy, Netherlands, Norway, and the Seychelles.

The Red Sea, linked to the Suez Canal, stands as one of the globe’s busiest maritime pathways, providing an alternative to the longer route around the Cape of Good Hope in South Africa. This waterway is indispensable, playing a critical role in upholding the political and economic stability of numerous nations. Positioned strategically between Asia and Africa, the Red Sea serves as a significant conduit that separates the Middle East from the Far East and Europe from Asia.

The geopolitical significance of the Red Sea is underscored by its natural role as a border between the eastern coast of Africa and the western coast of the Arabian Peninsula. It functions as a crucial passage for the secure transportation of oil, extending from the Bab el-Mandeb in the south to the Suez Canal in the north. Given that oil remains a primary global energy source, this shipping lane retains its pivotal status as a fundamental channel for the transportation of oil from the Gulf.

Among the vessels that the Houthis have attacked was a tanker carrying a shipment of India-manufactured jet fuel. The vessel narrowly managed to evade two missiles fired by the Houthis near Bab el-Mandeb a week ago. Then again, MV Chem Pluto, a Liberian-flagged chemical and oil tanker, carrying 21 Indian and one Vietnamese crew, was attacked by a suspected drone on December 23. Earlier, in November, the Galaxy Leader, a cargo vessel en route from Turkey to India with 25 people on board was hijacked in the southern Red Sea by the Houthis.

Such incidents have raised serious concerns in New Delhi as the Red Sea shipping route is vital for India’s trade, energy security, and geopolitical influence. The Red Sea serves as a pivotal maritime pathway linking the Indian Ocean to the Mediterranean Sea, through which Indian commodities, encompassing crucial oil and gas imports, traverse. A substantial segment of India's trade, notably with Europe and North Africa, hinges on the seamless operation of the Red Sea shipping route. Ensuring the security and stability of this route is imperative for India's economic prosperity.

The Red Sea route not only grants India entry to markets in the Middle East, Europe, and North Africa but also stands as a fundamental conduit for Indian exports and imports. This fosters economic connections with nations in these regions, enhancing India’s global trade footprint.

According to Subrata K Behera, Senior Manager (Ports and Container Research) at Drewry Maritime Research, there are two dimensions to the impact of the Houthi attacks on the Indian economy – exports and imports. Speaking to ETV Bharat, Behera said that Indian exporters suffering will have a bigger impact on the Indian economy.

“Indian exporters are holding their cargo shipments back,” he said. “There is an increase of $500-1,000 per TEU (twenty-foot equivalent unit) container passing around the Cape of Good Hope instead of through the Red Sea. This will ultimately increase commodity prices in the US and Europe.”

Behera said that this would also increase the insurance cost of the goods being transported. India’s main exports are garments, textile items and pharmaceutical products. “It depends on how much margin an exporter holds,” he said. “Some exporters will see how to shift cargo via air. Air transportation is costlier. They will look at comparison with cost of shipping cargo around the Cape of Good Hope.”

Exports contribute significantly to a country's economic growth. If Indian exporters face losses, it can lead to a decline in export earnings, negatively affecting the overall economic growth. Many industries, especially in sectors like manufacturing and textiles, depend heavily on exports. If these industries face losses, it may lead to production cutbacks and layoffs, impacting employment levels.

Export earnings contribute to a country’s foreign exchange reserves. A decline in exports can reduce these reserves, affecting the India’s ability to manage its balance of payments and impacting the stability of the currency.

Export-oriented businesses are crucial for a country’s economic confidence. Losses in the export sector can lead to a decline in business confidence, affecting investment decisions and overall economic sentiment. Reduced export earnings can lead to lower tax revenues for the government, impacting its ability to fund public services and infrastructure projects.

The impact of export losses is not confined to the export sector alone. It can have ripple effects on other related sectors, such as transportation, logistics, and support services, affecting a broader range of economic activities.

Persistent losses in the export sector may signal a loss of competitiveness for Indian goods and services in the global market. This could necessitate strategic interventions to improve productivity, innovation, and the overall business environment. “Since exporters don’t have high margins, they will suffer a lot due to the conflict (in West Asia),” Behera said.

In terms of imports, he explained that India doesn’t necessarily import food items and essential commodities. “We mainly import crude oil,” Behera said. “If crude oil prices increase, then there will be a rise in prices of essential commodities.” He added that, from the trade perspective, the impact of the Houthi attacks on Indian imports and the subsequent consequences for the country’s economy will depend on how long the conflict continues.

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