How the Israel–Hamas ceasefire could impact global trade and India’s economic interests

Suez Canal connects the Mediterranean Sea and the Indian Ocean, reducing the distance it took to travel from Europe to Asia via the South African coast route. (Express graphic, data via Reuters)

Amid fears of a widening conflict in West Asia, global shipping companies saw supernormal profits. Maersk last year raised its profit forecast three times, citing higher freight rates due to the Red Sea crisis and solid container shipping demand. This particularly impacted India’s trade, of which around 90-95 per cent is supported by foreign carriers.

With freight rates now expected to ease, as investors bet on shipping companies soon returning to the shorter and cheaper Suez Canal route, India’s exports of low-margin products such as agricultural goods, textiles, footwear, and marine products could find easier transit to Europe. India relies heavily on the Suez Canal route for its trade with Europe, the US, Africa, and West Asia.

However, much will depend on the Houthis’ reaction to the ceasefire and whether the hostage release deal translates into a long-term solution. The Houthis are yet to comment on the agreement, and shipping giants like Maersk are unlikely to resume operations until security along the route is guaranteed.

Impact of the shipping crisis on India

Longer routes around the Cape of Good Hope resulted in vessels spending more time at sea than usual. This impacted the profit margins of Indian companies, particularly those exporting low-end engineering products, textiles, garments, and other labour-intensive goods. As a result, exports declined.

As India has been reliant on global shipping companies for trade, Indian exporters complained of “arm-twisting” by shipping lines during the crisis. Exporters told the government that India’s outward remittance on transport services has been increasing alongside rising exports, and even before the Red Sea crisis began, Indian exporters remitted over $100 billion annually as transport service charges.

The widening of tensions also risked the progress of the India–Middle East–Europe Economic Corridor (IMEC). The IMEC plan comprises an Eastern Corridor connecting India to the Gulf region and a Northern Corridor connecting the Gulf to Europe. The IMEC plan, seen as a response to China’s Belt and Road Initiative (BRI), includes a railway and ship–rail transit network, as well as road transport routes. It was conceptualised to reduce dependence on the Suez Canal and create a route that could be 40 per cent faster.

Renewed focus on shipbuilding after the Red Sea crisis

In response to the crisis, the government began focusing on shipbuilding to reduce dependence on foreign vessels. From containers to shipbuilding, China holds complete dominance in the sector, causing a strategic worry for India. The Union Cabinet last month approved a Rs 69,725 crore package to revitalise India’s shipbuilding industry. Pitching for self-reliance in the sector, Prime Minister Narendra Modi also said that India pays a staggering $75 billion to foreign shipping lines every year.

The Cabinet, “recognising the strategic and economic importance of the maritime sector”, said that under this package, the Shipbuilding Financial Assistance Scheme (SBFAS) will be extended until March 31, 2036, with a total corpus of Rs 24,736 crore. The scheme aims to incentivise shipbuilding in India and includes a Shipbreaking Credit Note with an allocation of Rs 4,001 crore. A National Shipbuilding Mission will also be established to oversee the implementation of all initiatives.

The overall package is expected to unlock 4.5 million Gross Tonnage of shipbuilding capacity, generate nearly 30 lakh jobs, and attract investments of approximately Rs 4.5 lakh crore into India’s maritime sector, the Cabinet said.