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Red Sea crisis: Costs up, but no adverse impact on India’s trade so far, says official

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MUMBAI : There is no adverse impact on India’s exports and imports so far due to the Red Sea crisis, an official said. The official said that the transportation cost has increased as the shippers are taking a long route.

“There is no impact in volume terms so far. Only the transportation cost is up. It has risen for all the countries. It has not affected the trade adversely so far. We have to see the long term demand, but it will depend on the EU and the US,” the official added.

These two regions account for over 30% of India’s total exports.

However, exporters said that they are keeping their fingers crossed as due to the significant jump in freight cost, India’s exports may be impacted. The trade data for January will be released by the Commerce Ministry on February 15. In December last year, exports rose marginally by one per cent to $38.45 billion.

Due to the attacks by Yemen-based Houthi rebels on commercial ships, the movement of goods from the Red Sea, the world’s busiest shipping route, has disrupted the global supply chains as vessels have to take long routes for exports and imports.

The immediate ripple effects are seen in increased freight costs, mandatory war risk insurance, and significant delays due to rerouting.

According to think tank GTRI, the average container spot rates have more than doubled since early December 2023. Basmati rice exporters face freight costs soaring to $2,000 per 20-tonne container for destinations around the Red Sea, marking a 233% increase, it has said in a report.

Houthi group has been using drones and rockets to target ships, which are transporting goods through the strait of Bab al-Mandab, which is a crucial shipping route connecting the Mediterranean Sea to the Indian Ocean.

The strait, vital for 30% of the global container traffic, has seen increased tensions with various incidents in 2023, including attacks and military manoeuvres by regional and global powers.

India is heavily reliant on this route for trade and energy imports and due to the disruptions, exporters here have to diversify their trade routes.

Strikes have been continuing for many years but escalated this year sharply, with militants now using anti-ship ballistic missiles.

To avoid attacks, most large shipping firms, since December 15 last year, have stopped using the Bab al-Mandab straits for trade with Europe via the Red Sea and Suez Canal. The closure of this route snaps a critical trade link between Europe and India and all of Asia.

Ships going to Europe will now move via a much longer route around the Cape of Good Hope, the bottom tip of Africa. This change increases voyage distances by 40% and raises transportation time and cost.

Change in shipping routes

The two main shipping routes from India to Europe are via Bab-el-Mandeb Strait, Suez Canal and Red Sea; and via Cape of Good Hope, encircling Africa.

The Red Sea route is shorter and faster, making it the preferred option for most shipping companies. It starts from major Indian ports like Mumbai, JNPT, or Chennai, heads westward through the Arabian Sea, enters the Red Sea, and navigates through the Suez Canal into the Mediterranean Sea. From there, ships can reach various European ports depending on their destinations.

India is heavily reliant on this strait for its crude oil, LNG imports and trade with West Asia, Africa, and Europe.

The Cape of Good Hope route is longer and slower than the Suez Canal route, but it avoids the potential for delays or disruptions. It is used for bulk cargo shipments where time is less critical or when political instability in West Asia raises concerns about using the Suez Canal.

It starts from the Indian ports, heads southward across the Indian Ocean, rounds the Cape of Good Hope at the southern tip of Africa, and then sails northward along the west coast of Africa before entering the Mediterranean Sea and reaching European ports.

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