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Impact of the Red Sea Crisis on the Indian Economy in FY25



  Mar 23, 2024

Impact of the Red Sea Crisis on the Indian Economy in FY25



The ongoing Red Sea crisis has significant implications for the Indian economy, especially for the fiscal year 2025. The crisis is primarily caused by heightened tensions and disruptions along one of the world’s most crucial shipping routes, which affects global trade and, by extension, India’s economy.

Key Effects on India:

1. Inflation and Economic Growth: The finance ministry anticipates that the surge in crude oil prices due to the crisis might lead to increased inflation, negatively impacting economic growth and the value of merchandise exports. High inflation erodes purchasing power and can lead to higher interest rates, which slows down economic growth.

2. Trade Route Disruptions: A significant portion of India’s trade with Europe, which includes critical commodities such as crude oil, auto components, chemicals, textiles, and metals, is jeopardized. This situation results from the rerouting of shipping paths to avoid the troubled Red Sea area, leading to longer transit times and higher freight costs.

3. Increased Operational Costs: The detours necessitated by the crisis are not just about longer routes but also entail additional fuel costs, security risks like piracy, and consequently, higher insurance premiums. These factors collectively add to the cost of shipped goods, potentially making Indian exports less competitive in the global market.


4. Sector-Specific Impacts:

► The capital goods sector might experience delays and increased costs in deliveries, affecting order conversions and leading to inventory build-ups.

► The agricultural commodities, marine products, textiles, chemicals, capital goods, and petroleum products sectors could face sectoral impacts due to altered trade routes and increased shipping costs.

 Fertilizer imports, crucial for India’s agriculture, could be disrupted, especially imports of Muriate of Potash from Jordan and Israel, affecting agricultural output and prices.

5. Ripple Effects on Global and Domestic Oil Prices: As the crisis escalates, it could lead to a rise in global crude oil prices, which, in turn, would impact domestic fuel prices, contributing further to inflationary pressures. This rise in fuel prices can affect the cost structure across various industries, leading to an overall increase in the cost of goods and services.

6. Potential for Increased Shipping and Insurance Costs: The crisis might force refiners and exporters to seek alternative routes and strategies for securing steady supplies, which could lead to higher insurance costs and squeezed refining margins.

Mitigation Strategies:

Diversification of Trade Routes: To counter the effects of increased transit costs and maintain the competitiveness of Indian merchandise, there may be a need to explore alternative trade routes and transportation options. However, this could also lead to higher operational costs.

Sectoral Resilience and Adaptation: Industries and sectors directly impacted by the crisis might need to develop strategies to manage increased costs and logistical challenges while ensuring minimal disruption to trade flows.

The Red Sea crisis presents a complex challenge for the Indian economy, requiring coordinated action from both the government and private sectors to mitigate its impacts. Monitoring the situation closely and adapting trade and foreign policy in response to evolving circumstances will be crucial for minimizing the economic fallout.


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