Gadkari says payment mechanism in 8-10 days; analysts say imports from Iran this year may be far less than projected.
As the US sanctions on Iran are to resume on November 4, India may cut down on import of crude oil from the Persian Gulf country but would pay for whatever quantities it would still buy from it entirely in rupees. A payment mechanism, similar to the one which prevailed during the last incidence of the sanctions (till 2015), is being set up between the two countries, official sources said, adding that state-run Indian Oil Corp and Mangalore Refinery and Petrochemicals (MRPL) could make the payments through the Iran Federal Bank branch in Mumbai.
Speaking at an event here, road transport and highways minister Nitin Gadkari said the mechanism would be finalised between the two countries in 8-10 days.
The sources said Iran, which has emerged as the third largest supplier of crude to India in recent months, is open to accepting rupee payment for oil and may use the money to pay for equipment and food items it buys from India.
Currently, India makes the payment to Iran in euros using European banking channels.
While some reports suggested that the payments could be routed through UCO Bank and IDBI Bank, official sources told FE a decision has not yet been taken in this regard. During the phase of last sanctions, Indian firms used to get payments for exports to Iran using the oil payments held in rupee balances at UCO Bank.
India imports around 10% of its crude oil requirement from Iran. For 2018-19, India had planned to import about 25 million tonne of crude oil from Iran, up from 22.6 million tonne imported in 2017-18. But the actual volumes could turn out to be far less as companies like Reliance Industries have totally stopped buying oil from Iran and others too are scaling it down in hopes of winning a sanction waiver from the US.
However, reduced purchases from Iran would indeed have an impact on India’s crude import bill and trade deficit.
It is more lucrative for Indian oil importers to buy from Iran as they get a credit of 60 days compared to around 30 days by other suppliers. India’s oil purchases from Iran, worth around $9 billion accounted for over 80% of its total imports from the Persian Gulf nation in 2017-18.
In a recent report, Congressional Research Service (CRS) said, “During 2011-2015, India reduced its purchases of Iranian oil — at some cost to its own development — in order to receive from the US administration exemptions from sanctions. India has increased oil purchases from Iran to nearly pre-2012 levels after sanctions were lifted, and in May 2016, India agreed to transfer to Iran about $6.5 billion that it owed for Iranian oil shipments but which was held up for payment due to sanctions.”
India has a goods trade deficit of over $8 billion with Iran (thanks to massive oil imports), so our exporters may not face much problem in getting payments via rupee, said analysts. Farm commodities make up for a half of India’s $2.6 billion in goods exports to Iran. In fact, at $900 million, basmati rice alone accounted for over a third of India’s total exports to Iran in 2017-18, payments for which were made mostly in the euros by Iran.
US President Donald Trump had in May withdrew from the 2015 nuclear accord with Iran, re-imposing economic sanctions on the Persian Gulf nation. Some sanctions took effect from August 6 while those affecting the oil and banking sectors will start from November 4.
During the last phase of sanctions, India first used a Turkish bank to pay Iran for crude oil. However, starting February 2013, it paid almost 50% of the oil import bill in rupees and kept the rest pending till opening of payment routes. India started clearing the dues when the restrictions were eased in 2015.
Currently, Indian oil firms first transfer funds to State Bank of India (SBI), which, in turn, uses Germany-based Europaeisch-Iranische Handelsbank to pay in euros to Iran.
As reported recently, SBI has told Indian oil refiners that the euro payment route to Iran for crude oil import will not be available after November 3. This would effectively mean that the last physical transaction between Iran and Indian refiners — Indian Oil, BPCL and HPCL — will happen around the first week of September, giving refiners get a 60-day credit window.
“As far as quantity of import from Iran is considered, there are alternatives. Also, comparable grade of oil is also available. However, there were discounts given by Iran (which others may not offer),” MK Surana, chairman and managing director, HPCL, had told FE earlier.