At the interbank foreign exchange market, the rupee opened at 96.30 against the U.S. dollar. File
| Photo Credit: Reuters

External Affairs Minister S. Jaishankar with Iran Foreign Minister Seyed Abbas Araghchi. File
| Photo Credit: ANI

New Delhi:

As the conflict in the Middle East escalates with Israel vowing to retaliate after the missile attacks by Iran, India Inc is bracing for a wider trade disruption across the key Red Sea route.

The conflict can lead to higher cargo freight rates as Lebanon’s Iran-backed Hezbollah militia has close ties with the Houthi rebels in Yemen — responsible for most attacks on ships travelling via the Red Sea route, say industry experts, adding that a direct conflict between Israel and Iran may severely disrupt the crucial trade route for the Indian exporters.

The Red Sea crisis started in October last year, with Iran-backed Houthi rebels disrupting trade in the area.

This has affected India’s petroleum exports which dropped 37.56 per cent to $5.96 billion in August this year, down from $9.54 billion in the same month last year.

As per a recent Crisil Ratings 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.

The report mentioned that these regions accounted for 50 per cent of India’s exports worth Rs 18 lakh crore and 30 per cent of imports worth Rs 17 lakh crore in FY23. The country’s overall merchandise trade (exports and imports combined) in FY23 was Rs 94 lakh crore, with 68 per cent (in value terms) and 95 per cent (in volume terms) shipped by sea.

The attacks on ships sailing in the Red Sea area since November last year have forced companies to look for alternative, longer routes past the Cape of Good Hope.

The Crisil report further said that 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 premiums.

Industry experts say that India’s trade with the Middle East still remains healthy due to friendly regional players such as Saudi Arabia, the UAE, Kuwait, and Qatar. The bilateral trade between India and the Gulf Cooperation Council (GCC) countries reached $162 billion last year.

As per the latest government data, the GCC now contributes 15 per cent of India’s total trade and sectors like energy, defence, security and health are growing in the region.

Moreover, according to the latest International Monetary Fund (IMF) data, the trade via the Egyptian Suez Canal nosedived by 50 per cent (year-over-year) in the first two months of the year. In FY24, the Suez Canal’s annual revenue dropped by about 23.4 per cent due to the Red Sea crisis. According to Osama Rabie, Chairman of the Suez Canal Authority (SCA), “revenues fell to $7.2 billion in the fiscal year 2023/2024 that ended in June from $9.4 billion a year earlier”.

According to experts, the rising tensions in the Red Sea area are not only affecting the Suez Canal but also the maritime transportation market, trade movement and international supply chains.

On Wednesday, India issued a travel advisory for its citizens, advising them to avoid all non-essential travel to Iran due to the escalating tension in the region.
 

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

Israeli Prime Minister Benjamin Netanyahu.
| Photo Credit: REUTERS

Benjamin Netanyahu, Israel’s longest-serving Prime Minister, built his political career promising security to Israel. He claimed in the past that only he could stand up to the Iranian threat. Yet, the worst attack in Israel’s history, as well as a massive missile and drone strike by Iran breaching its borders took place on his watch. After the October 7 Hamas attack, Mr. Netanyahu vowed to crush Hamas and went for an all-out war on Gaza. Six months later, the war remains unfinished. And after the April 14 attack by Iran, his government as well as the military have promised a forceful response, but the Prime Minister does not have any easy choices before him. 

Until April 14, Israel was acting freely in Gaza, Lebanon and Syria, targeting Iranian assets or its proxy networks, including Hamas and Hezbollah. A shadow war has been raging between Israel and Iran for years in West Asia. Iran lost dozens of nuclear scientists and military officers in this shadow war and its response had largely been muted. This emboldened Israeli operations further in its immediate neighbourhood. Israel has carried out more than 400 air strikes against Iran-linked militias in the region. But the April 1 bombing of Iran’s embassy compound in Damascus, in which seven Revolutionary Guard officers were killed, including Gen. Mohammed Reza Zahedi, seemed to have altered Iran’s strategic thinking.

Analysis | By attacking Israel, Iran turns shadow war into direct conflict 

New equilibrium 

By launching a massive direct attack on Israel, Iran seeks to build a new strategic equilibrium. It wants to tell the Israelis that the attacks they were carrying out targeting Iranian interests would no longer be cost-free. This is dangerous gambling as any direct Israeli retaliation would prompt Iran to launch another attack, triggering a cycle of violence or an all-out war.

Israel says it managed to intercept “99%” of the Iranian projectiles. But there is a catch. Israel did not do it alone. The U.S., the U.K., France and Jordan all joined Israel in shooting down Iranian missiles and attack drones. And none of these partners want a regional war with Iran. They have all urged Israel to consider the remarkably high interception rate as a victory and stand down. Antony Blinken, the U.S. Secretary of State, has publicly urged Israel to show restraint. John Kirby, a spokesperson for the U.S. National Security Council, said Israel would decide whether, when and how it should respond to the Iranian attack and that the U.S. would not be a part of that decision. President Joe Biden told Mr. Netanyahu that the U.S. would not participate in any Israeli counterattack on Iran, according to the White House.

Bibi’s dilemma 

This leaves Mr. Netanyahu in a dilemma. He always wanted to act tough on Iran, but without America’s support, it would be risky to go to war with Iran. Also, despite Israel’s multi-layered defence system, Iranian ballistic missiles still hit an Israeli base and in the event of a full-scale war, both sides can wreak havoc on each other. Mr. Netanyahu also cannot back off. The Iranian attack breached Israel’s sovereignty, though the damage it caused was little. For a country with existential anxiety and whose strategic doctrine is rooted in deterrence and escalation dominance, not responding to a direct attack on its territory would have far-reaching consequences. Iran is also seeking to change the status quo. If Israel does not retaliate and looks weak, an emboldened Iran will pose more challenges to Israel’s future operations in Lebanon and Syria.

Timeline: Iran and Israel’s open warfare after decades of shadow war

So the challenge before Mr. Netanyahu, who is ‘King Bibi’ for his supporters, is to retaliate without escalating. Israeli media have reported that Mr. Netanyahu’s War Cabinet has agreed to respond to Iran’s attack but the time and the scale of the attack is to be decided. According to NBC, Biden administration officials believe Mr. Netanyahu would not hit Iran directly. Instead, he would target Iranian proxies such as Hezbollah in Lebanon and Shia militias in Iraq and Syria. But Israel is already attacking Iranian proxies and how would another round of attack in Syria and Lebanon help Israel boost its deterrence against Iran?  

The ball is in Mr. Netanyahu’s court. He has to make one of the several bad choices. He cannot afford to look weak; he cannot completely ignore his allies who are asking him to exercise restraint and he cannot fight a regional war without his allies.