Strait of Hormuz closed: For India, exim trade, oil imports remain a key worry

India’s exim trade and crude oil supply are under pressure with the Iranian Revolutionary Guards declaring that the vital Strait of Hormuz is closed. For now, government sources have indicated that India is reasonably comfortable with oil stocks, while the Department of Commerce has also extended relief measures to exporters.

Also read: Hormuz risk may push India toward Russian oil again   Commerce Minister Piyush Goyal on Tuesday said that a consultation meeting was held with all stakeholder ministries, key logistics and trade facilitation partners to review the emerging geopolitical situation and its potential impact on India's Exports and Imports.

Also read: Not China or India, this Asian country faces the highest risk from Hormuz closure   “The 'Inter-Ministerial Group (IMG) for Supply Chain Resilience' has been created, comprising members from Department of Financial Services, Ministry of External Affairs, Ministry of Shipping, Ports & Waterways, Ministry of Petroleum & Natural Gas and Central Board of Indirect Taxes & Customs, to facilitate effective coordination, monitoring and follow-up,” he said on social media platform X.   The government is closely monitoring the situation, and sources said that there remain concerns over a prolonged conflict in West Asia that would impact the fiscal math, with oil imports being crucial to managing the Budget. A depreciating rupee would also add further pressure to the import bill.   “Brent crude, which had hovered around $68–70 per barrel, is now reflecting rising geopolitical risk premiums. Analysts estimate that even a limited conflict lasting more than a week could add $10–15 per barrel,” said Ajay Srivastava, founder, Global Trade Research Initiative, adding that a serious disruption to Gulf exports or tanker traffic could push prices above $90 per barrel.   India imports close to 85% of its crude oil imports – primarily from West Asia and Russia. The Strait of Hormuz accounts for nearly 50% of India’s crude oil imports. As per estimates, a $1 increase in crude oil prices increases India’s crude oil import bill by $2 billion.   Exporters are looking at delayed shipments and higher freight costs with ships once again going through the Cape of Good Hope, but for now, are keeping their fingers crossed.   India’s export exposure to West Asia is relatively modest, with the Gulf Cooperation Council (GCC) countries accounting for only 13% of exports. These exports are primarily concentrated in gems and jewellery, mineral fuels, electrical equipment, and industrial machinery. 

The Strait of Hormuz is, however, crucial for shipments going to North America and Europe, which are key export markets for India.   “The impact on account of the closure of the Strait of Hormuz is likely to be temporary. However, in the event of a long-term closure, it is likely that ships will have to take a longer route through the Cape of Good Hope. This could lead to input cost escalation through a rise in the freight cost by 3%-5%, assuming around 10% increase in bunker fuel costs is fully passed on longer voyage time and the associated freight costs; increased insurance premiums ranging from 0.1%-0.5%; and additional costs such as war insurance premium, which have historically spiked during such supply chain disruptions,” said Prashant Tarwadi, Director, Corporates, India Ratings and Research.   Overall, logistics costs of imports and exports are likely to increase, though volumes are unlikely to be affected based on past experiences, he said.