Red Sea impact: Who would a price rise hurt the most?

The Indian economy will not remain untouched by the effect of Houthi attacks. Indian exports and imports will be adversely affected if the Red Sea route cannot be used

As the "Ram lehar (Ram wave)" builds up, it could be threatened by counter-currents rising in the Red Sea. The Indian economy will not remain untouched by the effect of Houthi attacks. Indian exports and imports will be adversely affected if the Red Sea route to Europe, parts of Africa and the US East Coast cannot be used.

As the war in Gaza between Israel and Hamas expands to a larger regional theatre, the Houthis have joined on the side of Hamas. They are members of the Ansar Allah movement, a Shia militia believed to be backed by Iran. Their targeting of commercial ships with any connection to Israel and the US has forced shipping companies to take the longer route via the Cape of Good Hope to Europe and beyond.

The Houthis control the 70 km long and 20 km wide Bab-el-Mandeb Strait abutting Yemen, which connects the Red Sea to the Gulf of Aden. At the other end, the Red Sea shipping route leads through the Suez Canal to the Mediterranean Sea. Media reports claim that since the Houthi attacks began in November last year, 95 per cent of vessels have rerouted around the Cape of Good Hope. This route would add 4,000 to 6,000 nautical miles and two to three weeks to the time taken to Europe from India.

Two recent attacks on Gabon-flagged MV Saibaba and Liberia-flagged MV Chem Pluto on December 22/23 -- both bringing Indian cargo of crude oil and with an Indian crew -- have brought the Israel-Hamas war closer home. MV Saibaba was attacked in the Southern Red Sea, but MV Chem Pluto was hit by a missile-carrying drone in the Arabian Sea, just about 200 nautical miles off the coast of Veraval in Gujarat. Initial reports suggested that the missile was a suicide drone, an Iranian Shahed 136 loitering ammunition.

Perhaps the danger to India-bound ships was one of the issues motivating External Affairs Minister S Jaishankar to visit Moscow in December, as Russia has considerable influence over Iran. In his two-day visit to Tehran in January, ostensibly to reset ties with Iran, he probably also raised these concerns.

However, it is unlikely that Iran would have given any assurances on safe passage to India-bound commercial ships. The regime can hardly admit that it backs the Houthis. It has recently claimed that the Houthis may be working autonomously.

According to Reuters, the cost of Indian exports has already more than doubled due to Houthi attacks on ships in the Red Sea. About 80 per cent of Indian exports to Europe, valued at US $14 billion a month, pass through the Red Sea. More than 30 per cent of the global container trade and 9 per cent of oil shipments also go through this route.

Indications are that the Houthis cannot be subdued quickly. The six attacks by the US and UK on them between January 12 and 19 have not had the desired effect. The Houthis, in fact, retaliated with attacks on three US-linked ships in retaliation between January 15 and 17. Therefore, the situation in the Red Sea is likely to worsen considerably. 

An assessment by Research and Information Systems for Developing Countries claims that if the Red Sea crisis continues, Indian exports may decline by US$30 billion this fiscal year. This would be a 6.7 per cent drop, based on last fiscal year's total of $451 billion.

Industry experts point out that container shipping costs have surged 30 to 400 per cent, depending on the destination. Rising container costs have forced exporters to either absorb the additional cost or lose competitiveness. As freight and insurance charges skyrocket, it is estimated that many Indian exporters are holding back outbound shipments. Freight charges have also increased on the non-Red Sea shipping route because fewer ships are available.

The Indian economy can ill afford a rise in the cost of imports following the disruption of shipping routes. It will impact energy security as 16 per cent of India's LNG comes from the US using the Red Sea route. India would not remain unaffected by the likely rise in oil prices triggered by the Red Sea crisis. The only solace for India is that the Houthis are not attacking Russian ships, leaving Indian oil supplies from Russia unaffected for now. World Economic Forum (WEF) President Borge Brende recently observed that even a US $10-20 per barrel increase in oil prices would negatively impact India's economy. Any rise in oil prices would have a knock-on effect on the prices of all essential goods.

Who would a price rise hurt the most? The same people who are being sought to be diverted from economic hardships by the "Ram lehar". Former Finance Minister P Chidambaram, in a recent article, identified the forgotten poor as primarily the 228 million Indians, or 16 per cent of the population, which the UNDP has identified as suffering from multi-dimensional poverty (Niti Ayog's figure is 168 million or 11.28 per cent). These, according to him, include 154 million workers registered under MGNREGS who, instead of the promised 100 days of work in year, get only 49-51 days of work; LPG beneficiaries who can afford to buy only 3.7 cylinders in a year, daily wage workers in agriculture, homeless people and pavement-dwellers, single women old-age pensioners and the 81.2 million small farmers who get Rs 6000 a year "Kisan Samman" pension.

However, if prices go up, they will also affect those Chidambaram identifies as "The 21-50 percent of the people who earn below the median income (Rs 32,000 or less per month) and are only slightly better off than the bottom 20 per cent. They don't go hungry or without shelter but they live on the edge of uncertainty."

Will the potent mixture of piety and Ram Bhakti continue to blank out the precariousness of daily existence from the voters' minds when confronted by price rise and inflation? One will have to wait and see.