Indian exporters are bearing the brunt of higher freight and special surcharge by private insurers as vessels continue to undertake longer journeys when travelling through the Red Sea.
The effect on global maritime trade has been felt across shipping lines, and especially on the availability of oil—a commodity for which India is primarily import-dependent.
Attacks by the Houthis on shipping vessels began mid-November and have only increased since then, in response to the war in Gaza. A GTRI report, released earlier this month, warned that India might have to diversify its sources of crude oil and liquefied natural gas, and explore alternative trade routes to reduce dependency on the conflict-prone Red Sea passage.
A Bloomberg report estimates that India may see around $30 billion shaved off its total exports in the current fiscal, as threats to cargo vessels in the Red Sea have lead to a surge in container shipping rates and prompted exporters to hold back on shipments.
NDTV Profit reported on Monday that the government has instructed the Export Credit Guarantee Corp. to clarify that it has not increased its rates. Subsequently, the ECGC conveyed the same on social media platform X.
Export credit insurance is not to be confused with the insurance against transit, according to an official with knowledge of the matter, who spoke on condition of anonymity. The ECGC is a government body that offers export credit guarantee to exporters in the event of payment default by buyer, the person said.
The risk arisen due to this crisis primarily pertains to transit risk covered under marine insurance, whereas ECGC covers the credit risk on account of insolvency / default by the overseas buyer. As such there is no premium hike owing to Red Sea crisis.
January 8, 2024
2/n@DoC_GoIThe increase in costs, however, has been felt across shipping lines on freight. Sanjay Budhia, chairman of the CII National Committee on Exports and Imports said that the Red Sea crisis has pushed up freight rates since the main route linking Asia with Europe has become unsafe.
"This is hurting the Indian exporters as majority of them now need to take a longer route through Cape of Good Hope for their exports to reach Europe, Northern Africa, and Americas," he said. Along with the economic slowdown, this situation compounds the worries of the exporters, whose shipments are getting delayed and costlier, he said.
Ajai Sahai, director general and CEO at the Federation of Indian Export Organisations, told NDTV Profit that India's shipments to Saudi Arabia, Yemen and Egypt, which are closer have gone up astronomically.
"These places are actually close to India. And since now a longer route has to be taken, this has had an impact on freight rates. Depending on the destination and the export country, private insurers are also re-evaluating the risks and raising insurance premiums," he said.
The shipments leaving the eastern coast are facing a higher increase as compared with the shipments leaving the western coastline of India to other parts of the world, Sahai said.
Advertisement"Due to the Red Sea crisis, the Drewry Index—which is a container index for eight major shipping routes in the world—has gone up by $1,000 on average. So, there's a huge hike in freight. Besides freight, there are other surcharges. Most private companies have put up a peak season surcharge of $1,500, a contingency/Red Sea surcharge which varies between $1,500 and $3,000," he said.
Costly freight and additional surcharges are impacting the export and import sector, he said.
According to Budhia, the need of the hour is to have a balanced approach, keeping the geopolitical and economic considerations in mind. "While the situation is not very heartwarming for the Indian exporters, we must continue to focus on our own competitiveness development with special focus on standards towards our export target by 2030," he told NDTV Profit, referring to India's aim to achieve $1 trillion of merchandise exports by then.
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