Agriculture, seafood exports worst hit by Red Sea crisis: CRISIL

New Delhi: Exporters operating in sectors such as agricultural commodities and marine foods have been worst impacted by the ongoing Red Sea crisis as their perishable nature coupled with lean margins limit their ability to absorb the risks from rising freight cost, rating agency CRISIL said on Thursday.

Players in capital goods sector (with exports and imports of over Rs 2 lakh crore each) could be impacted by a sustained disruption in trade route due to delay in deliveries, which can lead to inventory build-up and slowdown in order conversions for engineering, procurement, and construction companies, the rating agency said in a report.

Indian companies use the Red Sea route through the Suez Canal to trade with Europe, North America, North Africa and part of the Middle East. These regions accounted for around 50% of India’s exports worth Rs 18 lakh crore and 30% of imports worth Rs 17 lakh crore last fiscal.

India’s overall merchandise trade (exports and imports combined) last fiscal was Rs 94 lakh crore, with 68% (in value terms) and 95% (in volume terms) shipped through sea.

Increasing attacks on ships sailing in the Red Sea region since November 2023 have forced shippers to consider the alternative, longer route past the Cape of Good Hope. This has not only stretched delivery time by 15-20 days, but also increased the transit cost substantially because of incremental freight rates and insurance premium.

However, the Red Sea crisis has a differential impact. Players operating in sectors like textiles, chemicals and capital goods may not be immediately impacted because of better ability to pass on higher costs, or because of a weaker trade cycle. But a prolonged crisis over the next few quarters can make these sectors also vulnerable as working capital cycles would get stretched with orders put on hold, CRISIL noted in the report.  

A few sectors, such as shipping, could benefit from rising freight rates. Sectors like pharmaceuticals and metals may also not be impacted because companies enjoy healthy profitability and will be able to absorb the higher freight cost.

“While the immediate impact of the crisis would be low for most of India Inc., a prolonged strife can affect the profitability and working capital cycle of export-oriented industries,” the rating agency said.