Headwinds impact exports

Merchandise exports, which declined year-on-year by 3.4%, faced the brunt of the weakening international trading environment and creeping protectionism. Services exports remained relatively unscathed as they rose by 6.7%. The good news is that the overall deficit was lower by 35% as imports of goods and services shrank. Exemplifying the adverse global factors affecting our trade flows is the attacks on shipping vessels during the last five months by Yemeni Houthi forces in the Red Sea, which is the route to and from the Suez Canal and the quickest way for goods to transit between Asia and Europe.The Red Sea accounts for 15% global sea trade, including 8% of grain, 12% and 8% of seaborne oil and LNG respectively. India’s exports of goods and services amounted to $ 709.8 billion in April-February 2024, which is not very far from the $770 billion achieved in FY23 as a whole. India’s commerce and industry minister, Piyush Goyal, in recent interviews to the media, has stated the goods and services numbers in FY24 to be the same as in FY23.

India’s exports of goods and services holding their ground is an achievement considering that most developing countries witnessed a fall in their international trade. But the outlook this year is unlikely to improve. Besides the persisting global uncertainties, the ongoing tensions in the Red Sea are likely to hit India’s trade even harder. The Houthi attacks have prompted global shipping companies to reroute their vessels around Africa via the Cape of Good Hope which inflate costs as vessel journeys take one to two weeks longer. Transit times have risen by 30% and container shipping capacity has fallen by 9%.

Indian exporters, for their part, face higher shipping costs of 40-60%, higher costs of insurance of 15 to 20% besides delays due to re-routing shipments. Longer time at sea by vessels would also lead to shortages of containers which further add to costs. According to the Global Trade Research Initiative, re-routing is leading to congestion in key ports like Cape Town, Ngqura, Richards Bay, and Durban in South Africa. There are delays in loading and unloading cargo, worsening the severe disruption to supply chains.

All this is not good news from India’s point of view as merchandise shipment growth is shrinking. The commerce minister ruled out support measures arguing that the approach of being dependent on the government is something that Indian industry or exporters also do not desire. “What we are doing is of course working through the military and the Navy to see that we can give protection to the ships traversing the Red Sea. We are also continuously in dialogue with countries in that region and with our own exporters and very, very mindful and watchful of the situation”. The Red Sea disruption can end only through international diplomatic efforts. While the efforts of the US-led group of NATO and regional allies to provide naval protection has infused greater confidence in shipping through the Red Sea, it is not known whether the plans of leading shipping companies to re-route their vessels around Africa have changed. This does not augur well for India’s export drive as it only inflates costs.