Analysts warn a ban on imports from the Persian Gulf nation to increase CAD.
Even as analysts warned the US’s decision to eliminate sanction waivers for importers from Iran from May 2 could worsen India’s current account deficit, the government on Tuesday said a ‘robust plan’ was in place to ensure adequate supply of crude oil to Indian refineries.
“There will be additional supplies from other major oil-producing countries; Indian refineries are fully prepared to meet the national demand for petrol, diesel and other petroleum products,” petroleum minister Dharmendra Pradhan tweeted.
Iran is currently the third largest source of crude oil imports for India in volume term and the fourth largest in value term (implying the Persian Gulf country offers cheaper crude to the country). A complete embargo on importing oil from Iran would mean that India has to shift to other markets.
“A permanent increase in crude oil prices by 10% under ceteris paribus conditions could translate into the current account deficit increasing by 0.4-0.5% of GDP,” CARE Ratings wrote. “If the crude oil price remains around $75/barrel for another month, the MPC may postpone a rate cut in the June bi-monthly committee meetings,” it added.
The decision of the US administration led to a 3% jump in Brent crude oil price on Monday followed by another 0.6% on Tuesday to $74.46 per barrel.
India’s crude oil imports from Iran was growing at a scorching pace when the US re-imposed sanctions on the Persian Gulf nation in November (nearly 80% of the FY19 imports from Iran took place by October). India, however, used the leeway of restricted imports (up to a ceiling of 3 lakh barrels/day) to continue to source crude from Iran even after the sanctions. The toughening of the US stance will have an adverse impact on India’s crude import bill – apart from an overall price spike, New Delhi may have to tap costlier options to source the crude varieties that best suit its main refineries.
A spokesperson for the ministry of external affairs said New Delhi would be working closely with partner nations such as the US to ensure India’s energy security remains intact. “We are adequately prepared to deal with the impact of this decision,” the spokesperson added.
US President Donald Trump re-imposed sanctions on Iran last year by revoking the deal between the Persian Gulf nation and other European nations apart from the US signed in 2015. While some sanctions came into effect immediately on August 6, 2018, oil sale-related sanctions came into force from November 2, 2018. However, eight nations, including India, were given waiver till May 2 to import restricted quantity of crude oil from Iran. Trump, however, on Monday declared the country will not extend the waiver to existing importers of Iranian oil.
While the top supplier for India is Iraq and Saudi Arabia, others include UAE and Nigeria. India is likely to increase its import from these countries apart from others such as Kuwait with which Indian refiners such as Indian Oil have optional additional volume agreement. India imports more than 80% of its crude oil requirements, and Iran meets about 10% of the total needs. India is the second-biggest buyer of crude oil from Iran after China. Iran offered India oil at lucrative terms such as 60-day credit period unlike 30 days offered by others.