Since India has stopped purchasing Iranian oil, which accounts for around 90% of its imports from the Islamic nation, since May 2019 to avoid US restrictions, the rupee-rial payment mechanism for exporters is inching closer to a collapse.
By Banikinkar Pattanayak & Prabhudatta Mishra
While the US-Iran tensions have added to the broader global uncertainties about trade, data show Tehran tends to import more from India when it is hit hard by sanctions and reduces its reliance on the country when times are relatively good. But this time around, exporters fear the stakes are much higher if the US imposes fresh sanctions against Iran.
Since India has stopped purchasing Iranian oil, which accounts for around 90% of its imports from the Islamic nation, since May 2019 to avoid US restrictions, the rupee-rial payment mechanism for exporters is inching closer to a collapse. Indian firms have been getting payments for exports to Iran from the oil payments (meant for Tehran) held in rupee balances at UCO Bank after the sanctions against Iran were imposed by the Obama administration. Later in 2019, even IDBI Bank was allowed to have this facility. Two exporters told FE that the state-run banks have informally told them that the balance in these accounts will last only up to April 2020.
This problem wasn’t there up to the last fiscal because India had a goods trade deficit with Iran ($10 billion in FY19), thanks to massive oil imports, so our exporters didn’t face much problem in getting payments via rupee. Thanks to the halt to oil imports from Iran, India’s total imports from the Persian Gulf nation have collapsed 88% in the first eight months of this fiscal from a year before. Uncertainties about payment to exporters, unless sorted quickly, will likely hit bilateral trade very hard.
Compounding exporters’ worries, US President Donald Trump has threatened to impose fresh sanctions like never before if Iran retaliates against the killing of its top general last week in an American drone attack. “As of now, there is not much impact on our exports due to the tension. But if the tension flares up and the US slaps fresh sanctions against Iran, we have to be ready,” said Ajay Sahai, director general and chief executive at exporters’ body FIEO. If the US puts sanctions against supplies of farm items and medicine to Iran, which are now allowed on humanitarian grounds, India’s agriculture and pharma exports could get hit. Cereals, especially basmati, made up for about 40% of India’s exports to Iran last fiscal.
Mohit Singla, chairman of Trade Promotion Council of India, said, “India has been an old and reliable trading partner of Iran since ages and our diplomatic and trade relations are deep and above these pressing issues. As for the impact on trade, Iran imports all the essential commodities from India which will always be sustainable in terms of demand.”
Iran emerged as a very good destination for Indian basmati rice in 2012 and the very next year it became India’s top importer of the aromatic rice variety toppling Saudi Arabia. Last year, basmati rice export to Iran hit an all-time high as many new traders joined the business and had offered the shipments on credit. This resulted in some Rs 1,500 crore of payment default, which was taken up with the Iranian authority by India.
Around 2011-12, a rupee-rial mechanism was put in place where up to 45% of India’s purchases of Iranian crude could be effected in rupees in exchange for items like rice, wheat and medicines that were not sanctioned by the UN.