Red Sea crisis: Government cautions on crude oil and supply chain issues, but India's FY25 outlook remains bright

India may need to weather the impact of the Red Sea crisis in some of the sectors, the union finance ministry said on Friday (March 22) in its monthly economic review. To deal with the challenges, India may need to diversify its trade routes and transportation options, which could affect export competitiveness.

The finance ministry said, "India may face a sectoral impact on agricultural commodities, marine products, textiles, chemicals, capital goods & petroleum products." Consequently, it will need to be seen if the value of merchandise exports is impacted in the next fiscal, the ministry said.

India will also need to be "watchful" of its current account deficit in FY25, said the monthly review. In the current fiscal, strong receipts from exports of services and a fall in prices of global commodities have narrowed India’s trade deficit despite lower exports. This will also help the current account deficit to stay in balance. However, in FY25 the current account deficit will “bear a watching," the finance ministry noted.

Elaborating on the likely economic impact of the Red Sea situation, the finance ministry observes, "Sustained increases in shipping costs can drive up inflation. The crisis is reverberating in global food prices and disruptions in grain shipments from Russia, Ukraine and Europe pose risks to global food security. All these could be signs of rising inflationary pressures."

However, for now, the finance ministry has summed up the situation by observing, "There are headwinds like indications of hardening crude oil prices and global supply chain bottlenecks to trade, India on the whole looks forward to a bright outlook for FY25."

80% of India's merchandise trade with Europe passes through the Red Sea, with key products such as crude oil, auto and auto ancillaries, chemicals, textiles, and iron and steel being affected. The combined impact of higher freight costs, insurance premiums, and longer transit times could make imported goods significantly more expensive.

Asian economies such as China, Japan, India, and South Korea are among the largest net oil importers globally. Hence continued shipping disruptions could hit Asia. A rise in oil prices may pose upside risks to inflation and consequently, to growth.