Recently, Indian exporters of rice and marine products have found themselves at the forefront of challenges posed by the unrest in the Red Sea. The ongoing crisis in this critical shipping route has raised concerns about the potential repercussions on export-oriented industries’ profitability and working capital cycle, giving rise to supply chain issues that may renew inflationary pressures, according to insights from CRISIL Ratings.
The Red Sea route via the Suez Canal is a crucial passageway for companies engaged in trade with Europe, North America, North Africa, and parts of the Middle East. These regions constituted nearly half of India’s exports and 30% of imports during the 2022-23 fiscal year. A staggering 95% of India’s goods trade volumes are transported by sea.
Since November 2023, escalating attacks on ships in the Red Sea region have prompted shippers to explore alternative routes, particularly the longer path around the Cape of Good Hope. This shift has not only extended delivery times by 15-20 days but has also resulted in a substantial increase in transit costs, including higher insurance premiums.
In a recent credit alert, CRISIL highlighted the adverse effects on Basmati rice exporters, responsible for shipping a third of India’s produce to the affected regions. These exporters are now feeling the pressure and resorting to selling part of their inventory in the domestic market. Marine foods, such as shrimp and prawn, are also expected to face a significant impact, given that 80%-90% of the production is exported, with over half passing through the Red Sea.
While certain sectors like textiles and chemicals may not be severely impacted, CRISIL warned that prolonged disruption of trade channels could increase working capital needs and erode operating profits. This holds not only for these sectors but also for capital goods players.
On the import side, sectors heavily reliant on imports, such as non-urea fertilizers, may experience limited impact at this juncture due to a period of lean consumption. However, if sourcing costs continue to rise, sustained efforts may be needed, including higher subsidy payments from the government, CRISIL noted.
“While the immediate impact of the crisis may be relatively low for most of India Inc., a prolonged period of strife could significantly affect the profitability and working capital cycle of export-oriented industries. The degree of impact will vary based on sector-specific nuances. Supply chain disruptions could intensify, leading to a reduction in trade volume and the resurgence of inflationary pressures,” concluded CRISIL.
