Middle East tensions raise supply chain, logistics cost concerns for India Inc

Trade

Escalating tensions involving Iran and the wider Gulf region have once again brought the spotlight on two critical maritime choke points, the Strait of Hormuz and the Red Sea–Suez Canal route, and the potential knock-on impact on Indian companies through sharply higher logistics and insurance costs.

While fears around a complete shutdown of the Strait of Hormuz primarily raise concerns around oil prices and energy security, recent history shows that even partial disruptions or security threats along key sea routes can quickly spill over into freight inflation, longer transit times and working capital stress for exporters and importers.

“Foreign trade may be affected by increased freight and insurance costs, though India’s diversified trade relationships could help mitigate some of the impact,” said Dr. Manoranjan Sharma, Chief Economist at Infomerics Ratings.

Energy-intensive industries, including aviation, logistics, paints, and chemicals, are likely to experience margin compression due to rising input costs, while upstream oil producers could benefit from higher crude prices, he added.

“If the conflict persists without swift de-escalation, India’s fiscal outlook may face further strain from higher subsidy commitments, subdued disinvestment valuations, and the possibility of expanded social spending to cushion domestic economic pressures,” said Sharma.

Also Read: Middle East airspace closure forces 850+ flight cancellations of Indian carriers

Lessons from the Red Sea crisis

The Red Sea attacks by Houthi rebels on shipping lanes that began in late-2023 offer a ready template for how quickly costs can escalate. According to an ICRA report from January 2024, the Suez Canal, which handles nearly 12 percent of global trade flows, shortens transit between India’s west coast and Europe by about 15 days compared with the Cape of Good Hope route. When shipping companies began avoiding the Red Sea, freight costs surged over 120 percent within a few months, with most global container liners opting for the longer African detour

For Indian exports and imports, the Red Sea-Suez Canal sea route is important. As per the ICRA report cited above, India uses the Suez route for trade with Europe, North Africa and North and South America, which together account for over 35 percent of India’s total foreign trade. Any sustained disruption leads to delays, higher bunker fuel consumption and insurance premia, raising landed costs for companies

Sectoral impact

Similarly, Crisil Ratings, in a report dated January 25, 2024, had underlined that the impact of Red Sea disruptions is uneven across sectors, depending on margins, perishability and the ability to pass on costs.

Sectors such as agricultural commodities and marine foods are among the most vulnerable. Crisil noted that 30–35 percent of basmati rice production is exported to regions accessed via the Red Sea route, while 80–90 percent of marine food output is exported, more than half through this corridor. With lean margins and perishable goods, exporters in these segments struggle to absorb higher freight, forcing some to divert inventory to domestic markets at lower realisations

By contrast, textiles, chemicals and capital goods players were seen as relatively insulated in the short term due to better pricing power or a weak global demand cycle. However, Crisil cautioned that a prolonged disruption over multiple quarters could stretch working capital cycles, delay order execution and dent profitability even in these sectors

A separate Crisil Market Intelligence & Analytics report, from February 2024, highlighted that logistics costs for metals exports to Europe rose by $40–60 per tonne, while scrap-based steel producers saw raw material costs climb 5–8 percent due to higher import freight. In fertilisers, shipment timelines for key imports such as muriate of potash were extended by nearly 15 days, pushing up freight costs and increasing reliance on government subsidies if disruptions persist

Not all sectors will be at the losing end though.

Shipping companies and freight forwarders typically benefit from spiking charter rates, as seen during the Red Sea crisis, when global container freight rates jumped 2.5–3 times from early-December 2023 levels, according to Crisil’s analysis

Even without a full closure of the Strait of Hormuz, heightened geopolitical risk in the Middle East can quickly translate into higher logistics costs, longer cash cycles and pressure on export competitiveness. If the disruptions linger long enough, companies could face a strain on balance sheets and revive inflationary pressures across the economy.