Sushma Ramachandran

Geopolitical tensions are growing with the Israel- Hamas war looking set to create yet another crisis for the global economy. Initially, it had been felt the conflict would be confined to West Asia and there would be few ramifications for the rest of the world. Oil markets have been showing a downward trend despite efforts of the oil cartel, the Organisation of Petroleum Exporting Countries Plus (OPEC+ ) to firm up prices by cutting output. The situation has now changed rapidly as Yemen-based Houthi rebels have begun attacking merchant ships moving through the Red Sea. These vessels pass through the inlet after emerging from the Suez Canal.

The enormity of these developments can be gauged from the fact nearly 34 percent of global container trade and nine percent of oil shipments go through this route.

The crisis had not made headlines here till the news appeared of drone attacks on cargo ships headed to this country. One was carrying petrochemicals while the other was an oil tanker. The U.S. Central Command declared the first attack was launched from Iran while the second was from Houthi rebels in Yemen. With these incidents, it is clear there are prospects of essential imports being derailed by drone attacks. The situation has assumed grave dimensions as it could affect the availability of critical goods and potentially even threaten the country’s energy security.

The backdrop to these events is that Houthi rebels who control large parts of Yemen and are supported by Iran sought to support Hamas in its conflict with Israel. Till now about 15 such attacks are reported to have been carried out since mid-December leading to most global shipping lines shifting to the longer, more expensive route via the Cape of Good Hope. Special freight surcharges along with higher insurance are being levied on cargoes moving through the region. The result of these higher charges and the cost of longer travel time will be inflationary pressures on the world economy if the situation does not ease up soon.

The U.S. Navy has stepped in to form a coalition of several countries to provide armed protection to vessels moving through the Bab el Mandab Strait, the narrow waterway between Yemen and Eritrea which is where the ships are being attacked. Described as Operation Prosperity Guardian, the formation of the coalition has given confidence to some shipping lines to resume movement through the Suez Canal route. One of the biggest merchant lines, Maersk of Denmark has decided to resume shipping through the Red Sea based on this assurance. This is even though some countries are already backing out of the OPG coalition, for various reasons including the reluctance to be led by U.S. defense forces.

For India, what is significant is that Houthi rebels are not attacking vessels that are linked to Russia or China. This is helpful as far as oil supplies from Russia are concerned as these are likely to remain unscathed. In addition, purchases from leading West Asian oil producers are largely shipped via the Persian Gulf. At the same time, drones have already hit one crude oil tanker indicating there should be no complacency on this score. Besides, other commodities normally arriving through the Suez route may now have to add 6000 nautical miles to their journey if they are diverted via the Cape of Good Hope.

Oil prices are also rising in response to the Red Sea crisis. The increase has not been significant so far but the market could harden further in case there is no end to the problem.

Another major concern is the fate of exports moving to major markets of Europe and the U.S. In case the higher freight and insurance charges continue for a while, it will make Indian goods much more expensive. The volume of exports moving through the Suez Canal is of the order of 200 billion dollars, according to exporters’ estimates. This could affect key agricultural commodities like basmati rice but also a wide range of manufactured products.

To add to the woes being faced by India’s seaborne trade, piracy emanating from Somalia has been growing over the past year. The Indian Navy has been roped in time and again to rescue Indian nationals who form part of the crew in many merchant vessels.

There is no easy solution to deal with the depredations of the Houthi rebels, given that they aim to support Hamas. The only firm resolution to the issue would be a cessation of hostilities, an objective being sought by most of the world. In case the West Asian war continues, however, the outcome can only be adverse for a global economy that has already been facing the fall-out of geopolitical tensions since the Ukraine war erupted last year.

India has shown that it is more resilient than other emerging economies in this regard. It was able to deal with higher oil prices last year by relying on Russian oil that was being provided at discounted prices. Besides, domestic pump prices were kept stable though this put a financial burden on the public sector oil marketing companies. It also ensured that the domestic availability of food grains was kept as a priority and wheat exports were curtailed despite international pressure.

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The result has been that inflation has been contained, unlike in many other countries. Even so, if the Red Sea crisis continues for much longer, the economy may be faced with potential shortages of critical goods as well as growing inflationary pressures. The global economy may also well slip into a fresh crisis. International efforts thus need to be stepped up urgently to bring a halt to the painful conflict between Israel and Hamas.