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Red Sea Crisis Disrupts India’s Trade: But Economy Shows Signs of Resilience

Red Sea Crisis Disrupts India's Trade: But Economy Shows Signs of Resilience

Red Sea Crisis Disrupts India’s Trade: But Economy Shows Signs of Resilience

The ongoing conflict in the Middle East, particularly around the Red Sea, is creating significant challenges for India’s trade sector. This article explores the impact of the crisis and the underlying health of the Indian economy.

Red Sea Woes: Higher Costs and Disruptions

  • 80% of India’s trade with Europe travels through the Red Sea, making it a vital trade route.
  • Products like crude oil, vehicles, chemicals, textiles, and steel are all affected by the disruptions.
  • Higher freight costs, insurance premiums, and longer transit times are pushing up import prices for consumers in India.
  • Fertilizer imports from the Middle East, particularly potash from Jordan and Israel, are also facing difficulties.

Longer Routes, Higher Costs

  • Due to the crisis, container ships are forced to take the longer route around the Cape of Good Hope in South Africa.
  • This has resulted in a significant drop in traffic through the Suez Canal.
  • Container tonnage crossing the canal has fallen by 82%, while traffic around the Cape of Good Hope has seen a 60% increase.
  • The extra distance translates to higher fuel costs and lost value for time-sensitive cargo.
  • Security concerns like piracy have also driven up insurance and legal costs.

Despite Challenges, Economy Shows Strength

  • The Finance Ministry acknowledges the challenges but highlights the stability of India’s external account.
  • The trade deficit is narrowing due to falling international commodity prices.
  • Strong services exports are contributing to a rise in net service receipts.
  • However, the current account deficit in the next fiscal year (FY25) will require monitoring.

Government Investment Boosts Capital Formation

  • The Finance Ministry emphasizes the importance of domestic savings to finance private sector investments.
  • Government capital expenditure has been the primary driver of investment in recent years.
  • This spending is expected to increase significantly in FY25, potentially crowding-in private investment.
  • Gross Fixed Capital Formation (GFCF), a measure of investment, has shown a 10.6% growth in the third quarter of FY24.
  • The share of GFCF in GDP has also risen, reflecting a broader-based pick-up in investment.

The Finance Ministry of India has taken note of this issue. They pointed out that the conflict in the Middle East and the Red Sea has affected India’s imports of fertilizers from that region. Specifically, imports of a particular type of fertilizer called Muriate of Potash from Jordan and Israel have been hit.

The Ministry also warned that if the situation continues, it could lead to a rise in oil prices. And since India, along with other Asian countries like China, Japan, and South Korea, heavily relies on imported oil, this could spell trouble. Higher oil prices could push up inflation, making things costlier for everyone and potentially slowing down economic growth.

Because of the problems in the Red Sea, ships have had to find alternative routes. Many are now going the long way around the Cape of Good Hope in Africa. By early 2024, there was a drastic drop in the number of ships using the Suez Canal, while there was a significant increase in those taking the Cape route. This diversion means extra miles, extra fuel costs, and delays, which all add up to more expenses for businesses.

Apart from the financial toll, there are security concerns too. With piracy being a risk in some areas, ships need more insurance, and legal issues can arise, adding even more costs.

So, why is all this happening? Well, it started with conflict. Yemeni militants called Houthis began attacking ships in the Red Sea in support of Palestinians during the Israel-Hamas conflict. This created tension and disruptions in the Suez Canal, which is a major shipping route.

Despite these challenges, India’s Finance Ministry says the country’s financial situation is still stable. The gap between what India imports and what it exports is narrowing because of falling prices of goods globally. Plus, India’s service exports are doing well, bringing in more money from abroad.

Looking ahead, though, the Ministry is keeping an eye on things. They say there might be concerns about the balance of trade in the coming year, so they’re watching it closely.

To tackle these issues and keep the economy growing, the Ministry suggests that Indians need to save more money. This would provide funds for businesses to invest in new projects and help drive economic growth.

Speaking of investments, the government has been playing a big role in spending money on infrastructure and other projects. They plan to keep this up, believing it will encourage private companies to invest too.

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