Gaza war spillover hits trade, prices

Fears that Israel’s Gaza war will spill over to a wider regional conflict are, unfortunately, maturing with grave economic consequences. Israel has refused international calls for a ceasefire; Hamas’s allies have been retaliating by targeting ships going through the Red Sea and Suez Canal. It is no more ill-equipped Somali pirates with A-47s and small skiffs. The Houthis, Yemeni rebels aligned to Iran, are armed with drones and long-distance missiles. They have attacked more than 25 Israel- and US-linked vessels over the last two months. Some of the largest shipping firms—Maersk, Hapag-Lloyd and MSC—have suspended their Red Sea sailings and rerouted traffic via South Africa’s Cape of Good Hope. The result: freight costs between Asia and northern European ports have more than doubled.

The total hit for India may be of around $30 billion in exports this financial year, as the increasing freight rates are holding back exporters. One independent estimate puts the drop in exports to be around 6.7 percent of last fiscal’s $451 billion. While the movement of crude oil has so far been largely unaffected, high-value traffic moved in containers has taken a big hit, sending goods prices soaring. Last month, the US launched a multinational protection flotilla called ‘Operation Prosperity Guardian’; but the fact is that traffic through the Red Sea is down to a third of the usual levels shows international commerce has little faith in American promises.

Besides the impact on India’s trade, we are also likely to see a major disturbance on our supply chains because of shortages and price increases, as well as ‘shrinkflation’ (when the size of goods decreases, but costs remain the same). As much as 15 percent of global seaborne trade passes through the Red Sea and 30 percent of consumer goods are shipped through the Suez. Manufacturing processes in India were severely impacted due to supply shortages during the pandemic. We are likely to the see the same scenario as shipments are delayed. Companies such as IKEA and clothes retailing giants are already lamenting production delays and rising costs. Higher input costs from pharmaceuticals to complex goods such as computers and cars, which depend on international supply chains, will ultimately be borne by the common man. It is therefore in everybody’s interests that the Indian government plays an active role in containing and ultimately extinguishing the Gaza war.