Relief and opportunity

The window created by Iran accepting rupees for oil

It now appears that Indian refiners will be able to pay for their imports of crude oil from Iran entirely in rupees. The payment route being used before February 7 ran into trouble. Then, 45 per cent of the money was routed through Kolkata-headquartered UCO Bank, and 55 per cent in euros through a bank in Turkey. More stringent sanctions imposed by the United States then shut down that Turkish route completely. Thus, for the subsequent months, the refiners were holding on to the excess payments. Meanwhile, the Iranians scouted around for other ways to avoid paying in rupees. Russia was tried. But, in the end, paying entirely in rupees was the only viable option.

The problem, of course, is that while India imports at least $10 billion (almost Rs 60,000 crore at the current exchange rate) worth of crude oil from Iran, its exports to that country are a tiny fraction of that. The balance of trade is vastly in Iran's favour, unlike with many of Iran's other trading partners such as Japan or China. It is, however, the largest purchaser of Indian rice, buying over a million tonnes of the basmati variety a year - a number that is only likely to grow now. Other countries that have similar deals with Iran include China, which has flooded the Iranian market with its manufactured-goods exports. Of course, few have faith that Indian manufacturing will be able to do the same thing. However, the point remains that Iran's stock of rupees will need to be spent somehow. There are several possibilities: the export of bulk medicines, in particular, as well as opportunities for Indian infrastructure companies. The government has also permitted the import of goods for re-export to Iran as long as there is at least 15 per cent value addition. This is an important opportunity to enter a captive market, and Indian producers and traders should not fail to seize it. Further, although oil from Iran is not as large a component of the crude oil bill as it used to be, payment entirely in rupees will at least take some pressure off the current account deficit. The first disruption in supplies from Iran, in 2011, was when the current account deficit originally began to spiral out of control.

India has won at least another 180 days before the US looks again at the enforcement of sanctions. This is because it has cut crude oil imports from Iran by over 27 per cent. Till 2010-11, Iran was India's second-largest source for crude oil. Today, it is not even in the top five. However, there is little doubt that this process has gone far enough, perhaps too far. India is in a tough position when it comes to financing its oil imports, and needs to think realistically. Oil imports from Iran create the breathing space and an important opportunity, and India should seize both.