How a Red Sea crisis could become India's next economic headache

The conflict across West Asia is increasingly becoming a test of the world's trade networks.

After all the disruptions in the Strait of Hormuz, the focus is now on a potential threat to the Red Sea.

Iran has reportedly instructed Yemen's Houthi political and military organisation to remain prepared to shut down the Bab el-Mandeb Strait, the southern gateway to the Red Sea.

If that were to happen, the global economy could face simultaneous disruption at two of the most critical shipping passages connecting energy producers in West Asia to consumers across Asia, Europe and beyond.

For India, the stakes are particularly high.

Why are the Strait of Hormuz and the Red Sea so important?

The current crisis revolves around two maritime passages that serve as vital links in the global trading system. The first is the Strait of Hormuz, a narrow waterway connecting the Persian Gulf to the Arabian Sea.

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For decades, it has functioned as one of the world's most important energy corridors, carrying large volumes of crude oil, petroleum products and liquefied natural gas from Gulf producers to international markets.

The second is the Bab el-Mandeb Strait, located between Yemen on the Arabian Peninsula and Djibouti and Eritrea in the Horn of Africa.

This passage forms the southern entrance to the Red Sea, which in turn connects to the Suez Canal and provides the shortest maritime route between Asia and Europe.

Under normal circumstances, ships leaving the Indian Ocean and entering the Red Sea through Bab el-Mandeb can reach European ports through the Suez Canal without having to sail around the African continent. The route significantly reduces travel time, fuel consumption and transportation costs.

Together, the Strait of Hormuz and the Bab el-Mandeb form a chain that allows energy exports from the Gulf and merchandise shipments from Asia to reach markets across Europe, North Africa and North America.

The significance of these waterways has become even more pronounced since the outbreak of the current Iran war.

Following attacks on Iran by Israel and the United States on February 28, Tehran partially disrupted traffic through the Strait of Hormuz. The resulting restrictions affected a substantial portion of oil and commodity exports from the Gulf region, contributing to higher energy prices and creating fresh uncertainty in international markets.

How did the Red Sea become the world's energy lifeline?

As conditions around the Strait of Hormuz deteriorated, Gulf producers increasingly turned to infrastructure that could bypass the troubled waterway. Saudi Arabia emerged as the most prominent example of this shift.

Rather than relying exclusively on exports moving through Hormuz, Riyadh expanded the use of its East-West pipeline network, which transports crude oil across the Arabian Peninsula to the Red Sea port of Yanbu.

From there, tankers can enter the Red Sea and continue towards international markets without passing through Hormuz. The result has been a dramatic increase in the volume of oil moving through the Red Sea corridor.

Data from Kpler and Signal Ocean indicate that Saudi Arabia redirected more than 70 per cent of its normal crude exports to Yanbu following the disruption in the Gulf. Shipments from the Red Sea port averaged approximately four million barrels per day in recent weeks.

The scale of this increase becomes clearer when compared with the same period a year earlier. During that period, exports from Yanbu stood at roughly 973,000 barrels per day.

The wider Red Sea route has also witnessed a substantial rise in petroleum traffic. According to Kpler data, total petroleum volumes transiting the Bab el-Mandeb Strait reached 7.4 million barrels per day in June. That figure represents about 7 per cent of global oil production.

In comparison, petroleum flows through the same route amounted to approximately 4.2 million barrels per day during the corresponding period last year.

The diversion of Gulf exports away from Hormuz and towards the Red Sea has helped prevent a deeper energy shock. Without that alternative route, global oil supplies would have faced far greater disruption.

The corridor has become so crucial that Saudi Arabia is reportedly evaluating plans to further expand crude transportation capacity to its Red Sea coastline through additional pipeline infrastructure.

Why are fears growing over a second chokepoint in Bab el-Mandeb?

The prospect is making stakeholders anxious following reports that Tehran instructed the Houthis in Yemen to remain prepared to close the Red Sea export route if the conflict widens further.

Such a move would effectively create a "dual-chokepoint" scenario in which neither the Strait of Hormuz nor the Bab el-Mandeb could operate normally.

Unlike earlier episodes of Houthi attacks in the Red Sea, the circumstances today are significantly different.

When the Houthis began targeting commercial shipping in November 2023, oil exports from the Gulf were still moving relatively freely through the Strait of Hormuz. Although attacks created security concerns, energy supplies retained alternative pathways.

On June 1, Revolutionary Guards Quds Force commander Esmaeil Qaani stated that the Houthis could choke off the Red Sea.

Despite such warnings, the Houthis have so far maintained a relatively limited role in the wider conflict. Their military activity has largely consisted of a small number of missile and drone attacks directed at Israel during late March and early April.

Some observers believe the group may have intentionally preserved the threat of disrupting Red Sea shipping as a strategic option in the event of broader escalation. Others point to the possibility that the Houthis have sought to avoid jeopardising their extended ceasefire with Saudi Arabia.

How dependent is India on the Red Sea corridor?

The overwhelming majority of India's international commerce depends on shipping. Around 95 per cent of the country's trade by volume moves by sea, while approximately 70 per cent of trade by value also relies on maritime transport.

Within that broader framework, the Red Sea corridor occupies a uniquely important position.

For trade heading towards Europe, North America, North Africa and parts of West Asia, the route through the Arabian Sea, Bab el-Mandeb, the Red Sea and the Suez Canal remains the most efficient maritime pathway available.

Roughly half of India's merchandise exports are transported through the Red Sea corridor. On the import side, around 30 per cent of incoming trade relies on the same route.

India's dependence becomes even more pronounced when examining trade with Europe.

Approximately 80 per cent of India's commerce with European countries moves through the Red Sea and Suez Canal system, making the route indispensable for one of New Delhi's largest trading relationships.

This trade together accounts for trade flows valued at approximately Rs 35 lakh crore, or more than $400 billion.

The route is therefore not merely another shipping lane in India's broader trade network.

According to estimates cited by the Research and Information System for Developing Countries (RIS), a sustained shutdown of the Red Sea route could expose India to export losses approaching $30 billion.

Such a decline would represent a reduction of around 6.7 per cent compared with historical export levels.

A disruption would also affect a wide range of industries, from agriculture and textiles to chemicals, petroleum products and manufacturing supply chains. It would also place additional pressure on an economy that remains heavily dependent on imported energy.

How vulnerable is India's energy security to a Red Sea crisis?

Because India imports between 85 and 90 per cent of its crude oil requirements from overseas suppliers, any development that pushes global oil prices higher quickly becomes a domestic economic concern.

Although a significant portion of India's crude traditionally reaches its western coastline directly from producers in the Persian Gulf through the Arabian Sea, the ongoing conflict has altered the broader dynamics of global oil transportation.

After disruptions in the Strait of Hormuz, Gulf producers increasingly relied on Saudi Arabia's East-West pipeline to move crude across the Arabian Peninsula to the Red Sea port of Yanbu.

If the Bab el-Mandeb Strait also becomes inaccessible, that fallback option effectively disappears.

India possesses strategic petroleum reserves that provide an important buffer against temporary disruptions. Those reserves offer greater resilience than is available to some neighbouring countries.

However, strategic reserves are designed to cushion temporary supply shocks rather than replace normal commercial imports indefinitely.

A prolonged closure of both maritime corridors would eventually require India to procure larger volumes of crude from more distant suppliers, increasing transportation costs while simultaneously exposing the country to elevated international prices.

Higher crude prices would ripple through the domestic economy, affecting petrol, diesel, LPG, aviation fuel, freight costs and eventually consumer prices.

Transportation costs as well will influence almost every sector of the economy, meaning sustained increases in oil prices eventually feed into broader inflation across manufacturing, agriculture and consumer goods.

Which export industries face the greatest risks?

Security concerns arising from missile and drone attacks in and around the Red Sea in the past had already altered global shipping patterns.

Approximately 95 per cent of Indian cargo vessels have already shifted away from the Red Sea corridor, opting instead to sail around Africa via the Cape of Good Hope. Although this detour allows goods to continue reaching international markets, it comes at a considerable cost.

For vessels departing Indian ports such as Mundra or Nhava Sheva, rerouting around southern Africa adds approximately 3,500 to 6,000 nautical miles to the journey.

Depending on destination, voyage times increase by between 14 and 21 days, while some shipping movements now require between 21 and 28 additional days compared with the traditional Red Sea route.

Longer voyages inevitably increase fuel consumption, vessel operating costs and crew expenses. At the same time, insurance premiums have risen sharply because commercial vessels are operating in an increasingly volatile security environment.

Combined, these factors have pushed freight charges significantly higher, with shipping costs in certain cases increasing by as much as three times. Trade research organisations estimate that prolonged logistical disruption could ultimately reduce India's exports by nearly $30 billion.

The burden is not distributed evenly. Industries operating on low margins, exporting perishable goods or relying on strict delivery schedules face the greatest challenges.

Marine products illustrate this vulnerability clearly. Between 50 and 60 per cent of India's shrimp and prawn exports move through the Red Sea corridor.

Because seafood has limited shelf life and exporters compete against suppliers located much closer to European markets, additional transit time significantly weakens India's competitive position.

Textiles and ready-made garments are another major concern. Around 75 per cent of production exports from this sector normally travel through the Red Sea.

Unlike commodities, fashion products operate according to seasonal retail calendars. Missing delivery windows can reduce the value of shipments regardless of product quality.

Even when manufacturers are able to absorb temporary freight increases, prolonged shipping delays place increasing pressure on working capital because inventory remains in transit for much longer periods.

Agricultural exports face a different set of problems. India exports more than 4.5 million tonnes of basmati rice annually. Shipping delays have resulted in inventories accumulating at processing facilities instead of reaching overseas buyers on schedule.

The excess supply entering domestic markets has contributed to an estimated 8 per cent decline in local prices, reducing returns for exporters and processors.

Buffalo meat exports are equally exposed. Around 60 per cent of India's buffalo meat shipments destined for Russia and North Africa normally transit through the Red Sea.

Tea and spice exporters have experienced another consequence of the crisis. Logistics costs for tea exports have reportedly risen by more than 60 per cent, sharply reducing margins in sectors that already operate with limited pricing flexibility.

India's refined petroleum exports also face uncertainty. The country ships approximately 250,000 to 425,000 barrels per day of refined petroleum products, with Europe representing an important market.

When tankers are forced to travel around Africa instead of using the Suez route, delivery schedules lengthen considerably, encouraging buyers to seek suppliers located closer to European markets.

Chemical and agrochemical manufacturers confront another challenge. With approximately 25 to 30 per cent of industry revenue linked to markets served through the Red Sea, prolonged transit times leave inventories tied up for longer periods, stretching cash flows and increasing financing requirements.

What would the impact be on imports?

One of the immediate concerns involves fertilisers. India imports substantial quantities of fertilisers and agricultural raw materials from the Euro Mediterranean region.

Although the government currently maintains emergency domestic reserves that help safeguard immediate food security, prolonged shipping delays increase transportation costs and could eventually contribute to higher agricultural input prices.

Over time, those higher costs could feed into broader food inflation.

Industrial production faces similar vulnerabilities. Many capital goods, industrial machines, automotive components and specialised manufacturing equipment imported from Europe reach India through the Suez-Red Sea corridor.

When deliveries are delayed by three to four weeks because vessels must sail around Africa, assembly lines face the possibility of inventory shortages or temporary disruptions.

Manufacturers may be forced to hold larger inventories, increasing operating costs and locking up working capital. Electronics production is also vulnerable because imported components often arrive according to carefully planned schedules.

Longer shipping times reduce supply chain efficiency and increase uncertainty for manufacturers. Other imported commodities — including sunflower oil — are likewise exposed to delays created by the longer maritime route.

What alternatives does India have if the Red Sea becomes inaccessible?

Should the Red Sea route become completely unusable, India would have no single replacement capable of matching its efficiency. Instead, policymakers and logistics providers would be forced to rely on a combination of imperfect alternatives.

The most immediate solution is the Cape of Good Hope. By sailing around southern Africa, commercial vessels can continue reaching Europe, North Africa and the eastern coast of the United States.

This option ensures that trade does not stop altogether. However, it effectively imposes an additional economic cost on every shipment. For exporters already operating with narrow margins, these additional costs become increasingly difficult to absorb.

A second possibility involves multimodal transport networks. Cargo can be shipped from India's western coastline to ports in Oman such as Salalah or to major UAE logistics hubs including Jebel Ali and Khor Fakkan.

From there, goods can travel overland through Saudi Arabia by road and rail before reaching northern Red Sea ports such as Jeddah or Yanbu, or continuing towards Jordan.

Although this approach bypasses the southern entrance to the Red Sea, it depends on stability across the northern section of the route. It also introduces additional handling, transshipment requirements and logistical complexity.

Most importantly, road and rail networks cannot replicate the carrying capacity of large container vessels.

Air freight represents another alternative. High-value products such as pharmaceuticals, electronics and information technology hardware can be transported by air when delivery schedules are critical.

Yet this option remains economically viable only for limited categories of goods. The cost of air transport is substantially higher than maritime shipping, while aircraft capacity is insufficient for bulk exports such as rice, chemicals, textiles or petroleum products.

Can India's long-term trade corridors provide relief?

India has invested considerable diplomatic effort in developing alternative connectivity projects intended to reduce dependence on traditional shipping routes. However, current geopolitical realities limit their usefulness during the present crisis.

One such initiative is the India-Middle East-Europe Corridor (IMEC). The corridor was conceived as a multimodal network linking India with Europe through the United Arab Emirates, Saudi Arabia, Jordan and Israel.

In theory, IMEC would diversify trade routes while reducing dependence on existing maritime chokepoints. In practice, the broader conflict across West Asia has effectively stalled implementation for the time being, leaving the project unable to provide immediate relief.

The International North-South Transport Corridor (INSTC) presents a different picture. This route connects India with Iran's Chabahar Port before continuing north through Azerbaijan into Russia.

The corridor remains valuable for India's bilateral trade with Russia and parts of Central Asia. However, it does not provide a practical alternative for commerce destined for Europe or North America because the current geopolitical crisis itself centres on Iran.

Consequently, neither IMEC nor INSTC can presently replace the commercial importance of the Red Sea.

How is India responding to the crisis?

With external alternatives offering only partial solutions, New Delhi has increasingly focused on strengthening domestic resilience. At sea, the Indian Navy has expanded Operation Sankalp.

The operation now involves the deployment of more than a dozen warships tasked with protecting shipping lanes in the Arabian Sea, conducting anti-piracy patrols and escorting Indian-flagged commercial vessels operating in vulnerable waters.

The expanded deployment reflects India's transition from simply participating in regional maritime commerce to actively contributing to its security. These operations inevitably impose financial and operational demands on the country's defence establishment.

The Ministry of Commerce and the Reserve Bank of India are also working to extend low-cost credit support for micro, small and medium enterprises whose working capital remains tied up because goods now spend much longer periods in transit.

Trade organisations are simultaneously encouraging exporters to diversify towards markets where shipping routes remain unaffected.

Greater emphasis is being placed on ASEAN economies, East Asia, Australia and parts of Africa, allowing exporters to reduce dependence on corridors exposed to conflict in West Asia

With inputs from agencies