How a geopolitical crisis like the Houthi attacks in the Red Sea hits Mr Gupta of Kolkata
The problem that Indian exporters face is existential — trade bottlenecks, rising costs and terror threaten to upend gains made over the years to secure markets
Yogesh Gupta has been witness to the ebb and flow of global trade for decades. When India’s economy boomed in the 2000s, he was among the thousands of business owners who set their sights on securing a portion of the global markets to sell their goods. Since 2009, Gupta, who is managing director at the Kolkata-based Megaa Moda Private Limited, has sold shrimps — king prawn, black tiger prawn, sea tiger prawn, whiteleg shrimp, and deep sea shrimp — to clients in Europe and the United States.
Other than the occasional issue of demand and supply, Gupta’s company has not faced any major headwinds, and its exports have only grown over the years. Between 2013 and 2016, the government promoted investments in hatcheries, feed mills and shrimp processing plants, and later focussed on quality and disease control. India’s shrimp production increased by about five times between 2010 and 2019 to more than 800,000 tonnes. India is one of the world’s top shrimp exporters, and about three-quarters of its exports go to the US and China, according to the Marine Products Export Development Authority. Covid-19 hit exports, as “sluggish demand in its major export markets caused by the pandemic, led to the cancellation of several orders, reduced and delayed payments, slowdown of cargo movements and difficulty in getting new orders,” the ministry of commerce and industry body stated.
Then, in mid-November 2023, Yemen-based Houthi rebels began attacking commercial ships passing through the Red Sea. More than 80% of India’s goods trade with the West goes through it. The rebels vow to continue the attacks until Israel ends its war in Gaza. In January 2024, as the Houthis fired missiles and drones at cargo ships, global shipping companies announced they would pause the passage of ships through the Red Sea, thereby upending global trade.
Today, shipping vessels out of Indian ports are re-routed via the Cape of Good Hope, around the African continent, considerably increasing transit times and freight costs for exporters. On January 25, the Drewry World Container Index (WCI) — sampled for a 40-foot container — rose to about $3,964 from $1,382 on November 30 last year. On March 28 2024, it climbed down to about $3,000 but remained high compared to last year’s levels.
“For Europe, we are paying $5000-$6000 per refrigerated container. For the US, about $7000-$8000. This is almost three to four times the regular price. [Additionally] we regularly scramble for containers because supply is not smooth,” Gupta said. “Revenues are down by 10%. I had targeted a growth of 30%. We have retained all of our employees but if the situation continues we have to start restructuring.”
Hitting where it hurts most
For exporters such as Gupta, the larger problem is existential: it threatens to upend the gains they have made over the years to secure markets for their goods in the global economy as they are faced with rising geopolitical tensions, a trade bottleneck that they have not experienced before.
In the shrimp industry, most of the production is destined for export because domestic consumption is low. After the pandemic-era shipping disruptions, the 2021 Suez Canal obstruction, Russia’s invasion of Ukraine, and now the attacks in the Red Sea, buyers in the West are responding to the situation by sourcing shrimp from Ecuador, denting India’s export market share. “Our goods take longer to reach the destination. Orders are getting diverted to Ecuador, for shrimps, which is closer to the EU and US markets,” Gupta said. “We have lost market share.”
Adding to Gupta’s woes, buyers are not sharing high costs of shipping because orders are contractually agreed on a Cost, Insurance and Freight (CIF) basis, a trading agreement where the seller pays for all three.
“Job losses are bound to happen because [domestic] shrimp prices are so low that farmers are not even recovering costs. In such a scenario, farmers will diversify farming. [And] markets are difficult and choppy. We cannot go for a lot of capital investment. It is risky. People who are in the seafood export business are scared. If the farmers don't farm, the factories will shut down. It is a vicious cycle that may result in a bad scenario,” Gupta said.
“Only hope is the end of war.”
Other industries hit too
For all the gloom among shrimp exporters, there is a silver lining for manufacturers and exporters of garments in Tiruppur, a textile hub in Tamil Nadu. Unlike the shrimp industry, about 80% of orders with garment exporters in Tirupur are agreed on a Free Board (FOB) basis, where the costs and risks related to shipping are borne by the buyers, who are global fast fashion retail giants such as H&M, GAP, and Zara.
It is a relief, Kumar Duraiswamy, joint secretary at the Tirupur Exporters Association, said.
However, he noted that as months have passed without any improvement in the Red Sea situation, buyers are increasingly pushing exporters in India to share the high shipping costs. Even as transit times have increased by about 10-14 days for European ports such as Rotterdam, some buyers are responding to it by quickly approving orders, Duraiswamy said, which he said is good for producers in Tirupur. “Market demand needs fast shipping.”
Yet, exporters in Tirupur who wish to retain their clients and market in the West, are agreeing also to share shipping costs at a time when freight rates have spiked up by 80%-85%. For Tirupur-based exporters, who, according to Duraiswamy, are facing difficulty in securing containers at optimum cost, this poses a problem. One reason exporters have agreed to share costs is owing to the threat of losing orders to Chinese exporters, who have a geographical advantage over the United States, a top garment importer. “The transit times are shorter [from China’s east coast ports to the US],” Duraiswamy said.
The industry is facing geopolitical trade risks at a time when exports of textiles and apparel from India registered a sharp spike in 2021-22 over the previous fiscal year ($42.3 billion over $29 billion), and then a drop in exports of textiles and apparel in 2023 fiscal ($35 billion), according to provisional data provided by the Director General of Commercial Intelligence and Statistics.
Weeks of sustained high shipping costs, container shortages and uncertainty regarding order flow is beginning to show macroeconomic impact in factory clusters in Tirupur.
“We have seen small factories shutting down because they cannot face these financially lean periods. It depends on the nature of [their] buyers. Our only hope is the end of wars in the Middle East because then our buyers will start placing large orders with us,” Duraiswamy said.
Is India affected more than China?
According to a March 6, 2024 research note by Fitch, an American ratings agency, Chinese exporters are relatively less impacted by trade disruptions in the Red Sea owing to a relatively smaller share of China-EU trade passing through the Suez Canal, and higher domestic container capacity. China is also routing low-value goods to Europe via the China-Europe railway line.
“[India] needs to focus on logistics-related issues. These global trade disruptions are the new normal. Today this is happening in the West; tomorrow it could happen in the South China Sea. This is why it becomes so important for us to look at how we can counter some of the disruptions that we are facing,” Biswajit Dhar, a trade expert and professor at the Centre for Economic Studies and Planning in Jawaharlal Nehru University in New Delhi, said.
Dhar said that India is facing global trade shocks at a time when its merchandise trade deficit has gone up. Another concern is the share of medium and small sized industries. “They operate on thin margins. So if they face any risks to their business, their competitiveness suffers considerably,” Dhar said.
Even as governments scramble to stabilise the crisis in the Red Sea, there is no end to the firefighting. On March 27, the United States Central Command announced that it destroyed four long-range drones launched by the Houthis in Yemen; and on March 31, the US military shot down two more drones over the Red Sea.
“There are [already] a lot of headwinds. And the ongoing wars are not helping us,” Gupta said, adding that the government could step in and share higher costs of shipping with exporters should shipping costs continue to remain elevated.
“It would be a relief for the industry.”
Continue reading with HT Premium Subscription
