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Updated January 1st, 2024 at 15:58 IST

How crisis in Red Sea can impact India’s economy?

The rise in freight charges, container shortages, and this supply chain disruption, will lead to price rises across the board leading to broad-based inflation.

Business Desk
Oil tanker attacked Red Sea
The ship came under attack hours after another ship was attacked off the Gujarat coast. Image used for representative purposes only. | Image: Unspalsh
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The crisis in the Red Sea has emerged as one of the problems that has made the world and global economies jittery.  One of the most crucial trade routes has been affected, the freight is being rerouted, leading to an increase in transit-time and freight cost. Economists and experts opine that if this ongoing crisis flares up even further, it can have huge implications for the economy and inflation. 

The disruption in and around the Red Sea can greatly impact inflation.  Around 12 per cent of global trade passes through the Suez Canal, representing 30 per cent of all global container traffic, and over $1 trillion worth of goods per annum. In 2020, approximately 19,000 ships utilised the route. This represents 50 ships per day making the journey between Suez Port carrying between $3-9 billion worth of cargo. 

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“It's one of the significant routes through which energy, commodities, consumer goods, and components from Asia and the Middle East to Europe are exported and imported. It enables the transfer of an estimated 7-10 per cent of the world’s oil and 8 per cent of liquefied natural gas,” Singh of IIFT said.

“Our cheap Ural oil import from Russia happens through this route, from Black Sea to Bosporus, Aegean Sea and finally through the port of Alexandria to Suez Canal, almost  33000 vessels in a year go through this route which is very important,” Professor Singh said.

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The rise in freight charges, container shortages, and this supply chain disruption, will lead to price rises across the board leading to broad-based inflationary pressure, driven largely by higher oil prices, which will in turn have a cascading impact on the economy. 

According to freight analytics firm, Vortexa, the Suez Canal is the quickest sea route between Asia and Europe and is particularly important in transporting oil and liquefied natural gas (LNG). “About nine million barrels of oil per day were shipped through the Suez Canal in the first half of 2023,” it said. 

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Singh believes that this disruption will have direct and indirect impacts. This will have an impact on energy supply, and commodity prices. “ The biggest impact it can have is on energy prices, which will have a cascading effect on the economy, as the price of oil goes up, inflation also goes up,” Singh summed up. 

On the other hand, Suman Chaudhary, Economist and Head of Research sees only the short-term impact in the near -term.  “ I think there is the impact which might mean shipping line transportation costs for some of the imported goods and exports also, margins may have an impact, not sure whether this will have a long-term impact. The issues are being addressed on the priority, “ Chaudhary said.  According to him, the impact of the Red Sea on crude oil is not significant in India. 

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“Crude oil impact is not significant, the majority of oil comes from Iraq, UAE, and Saudi Arabia, all these are not affected by the Red Sea, they all come through the Persian Gulf, only Russian part will be impacted, and that will have a short term impact on exports and imports,” Chaudhary said. 

 

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Published January 1st, 2024 at 15:58 IST

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