Following the initiation of a much feared pre-emptive strike by US and Israel against Iran, the entire middle-east has been engulfed in the chaos of war. Following the daylight strike from Israel and US, Iran has retaliated by targeting US military bases in Qatar and Bahrain alongside major destinations in Israel.
The ongoing war has led to widespread closure of airspaces across the gulf and resulted in multiple strategic trade losses. Amidst these harrowing developments, a fresh wave of Houthi vows to “resume and escalate” attacks on commercial ships in the red-sea linked Bab el-Mandeb Strait has flared widespread economic concerns.
For India, this development is not just a geopolitical tremor but a major economic problem. The Bab el-Mandeb Strait is a crucial 30 km (20-mile) wide maritime chokepoint connecting the Red Sea to the Gulf of Aden and the Indian Ocean, separating Yemen on the Arabian Peninsula from Djibouti and Eritrea in the Horn of Africa.
In early 2026, the Red Sea remains a critical and volatile maritime corridor for India. The Red Sea and Suez Canal route are vital for India’s global trade, with roughly 50% of India’s exports and 30% of its imports historically flowing through this corridor.
With over 80% of India’s merchandise trade with Europe and the US East Coast dependent on this route, ‘a potential closure’ of the strait threatens to derail the export momentum of the final quarter of FY26.
A renewed wave of Houthis attack on commercial shipping in the red-sea can affect the Indian economy in significant ways from diminishing trade to adding risk based costs. Some of the ways in which this latest development borne by Israel and USA’s attack on Iran can offset the Indian economy have been listed as follows:
Export anxiety: Time tax
The Red Sea-Suez Canal corridor handles roughly 12-15% of global trade and nearly 25% of India’s total foreign trade. The threat of a fresh wave of attacks is likely to prompt major shippers to revert to the Cape of Good Hope route.
Rerouting around the southern tip of Africa adds 14 to 20 days to the voyage. This delay is particularly lethal for India’s perishable exports (grapes, buffalo meat) and seasonal textiles where delivery windows are non-negotiable.
The $30 billion export hit
When threats to India’s commercial shipping in the red-sea had first surfaced under Houthis attack in 2024, a report authored by the Research and Information System for Developing Countries, a New Delhi-based thinktank suggested that such volatile conditions on the red sea could strip 30 billion dollars from India’s export economy.
In their analysis, researchers employed at the Delhi-based think tank had stated that the added risk of travelling via the red sea would lead to a massive surge in container shipping rates and prompt exporters to hold back on shipments.
Notably their analysis presently mirrors the on-ground reality as Freight rates, which had seen a brief stabilization in 2025, are again showing signs of a “risk premium” spike in the backdrop of the ongoing war for other major sea-based trade routes.
As per the National Marinetime Foundation, goods worth billions, including approximately ₹18 trillion ($217 billion) in exports and ₹17 trillion ($205 billion) in imports, rely on this route to reach Europe, North America, and North Africa.
Energy Security
While the Houthi action targets the Red Sea, the market’s bigger fear is a “spillover” into the Strait of Hormuz. Reportedly, crude prices have already ticked up to the $72-$75 per barrel range. Analysts at ICRA warn that every $10/barrel increase in global crude adds approximately $13-14 billion to India’s annual import bill.
While India has diversified its sources to 41 countries (including Russia and Brazil), the Middle East remains its bedrock. Any physical disruption in the Gulf would mark a major disruption to India’s energy supply chain.
While most Russian crude arrives via the Persian Gulf, a significant portion of India’s refined oil exports and fertilizer imports (essential for the upcoming Kharif season) rely on the Red Sea corridor.
Added cost: Sectoral Impact
When the route is effectively blocked or deemed unsafe, the primary alternative is the Cape of Good Hope.According to a report by Business Standard, rerouting can add approximately 10–14 days to a one-way journey. This can increase freight costs by 40–60% and insurance premiums by 15–20%.
These added costs are then further expected to disproportionately affect exporters depending upon their sectors. Small and Medium Enterprises (SMEs) in the engineering goods, chemicals, and auto-ancillary sectors are the hardest hit, as they lack the margin cushions to absorb these “war surcharges.”
“We are looking at a total disruption of the global supply chain that relies on Middle Eastern stability,” a senior analyst told Reuters. “For India, this means delayed shipments, higher inflation, and a serious hit to the trade deficit.”
Exporters of Basmati rice and tea are also expected to face higher logistics costs, potentially raising prices of these goods by 10–20%. According to a Reuters report, if the situation persists for longer, multiple nations including India may have to consider expanding their military presence in the red-sea to safeguard their exports and imports.