Replicating the “structured bilateral trade” with Russia could help make rupee a better-traded currency
Despite the economic sanctions that the world powers (P5+1) have imposed on Iran and the fact that Indo-Iran relations have seen their fair share of ups and downs, there is ample evidence of India and Iran having maintained a steady trade tempo by conceptualising creative barter mechanism through “structured bilateral trade”.
The two-way commerce has remained around $14-15 billion. The credit goes to the two nations’ governments and financial institutions for the introduction of the rupee payment mechanism, as also trade elements such as sustained export of a novel variety of basmati rice, greater emphasis on iron & steel and the attempt to undertake third-country deals for permissible commodities.
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Since FY12, Indian exports to Iran have climbed 90%, from $2.4 billion to $4.5 billion, while imports are down 28%, from $13.8 billion to $10 billion. Crude oil constitutes 85-90% of Indian import from Iran. The first notable instrumentality is the agreement of FY12, under which the import of crude oil to India was conceived for payment in a 55:45 ratio of global currency and rupees, respectively. This policy generated substantive rupee reserves with the nominated lead bank from Indian side, UCO Bank, for the disbursement of export proceeds. After initial hiccups, the mechanism has fairly smoothed.
Another factor was Iran’s preference for the best hybrid variety of Pusa Basmati 1121 rice developed by the Indian Agricultural Research Institute (IARI). This variety has an exceptional grain length of 8.3 mm, as compared with other basmati and non-basmati varieties, which have a typical grain length of 6-7.5 mm. Even Thailand’s Hom Mali rice (a fragrant variety) cannot match its characteristics. It also has a very high kernel elongation ratio. Its commercial exploitation peaked when Iranian buyers lapped it up.
Its export to Iran spiked from 0.6 million tonnes ($595 million) to 1.44 million tonnes ($1,835 million) in the last three years and the Iranian market captured 37% share of India’s basmati exports in FY15. During the Iran visit of an Indian rice-trade delegation in February, India was assured of purchase of 1 mt of rice from March 21. For ensuring acceptable quality/quantity of rice, the good manufacturing practices (GMP) notified by APEDA will continue; under this, the counter-parties (sellers/buyers) will be pre-approved by the Iranian authorities. So far, 64 such counter-parties are operating and registration remains open.
Export of iron and steel has flourished, increasing from $203 million in FY12 to $500 million in FY15. The deal for supply of steel plates got a unique design, with the National Iranian Oil Corp, its affiliate, Iranian Gas Engineering Development Corp, and Essar Steel (acting on behalf of Essar Oil). Essar approached the Indian government to free it from paying its share of oil dues to Iran, and instead offset them against a $2.5 billion deal to supply steel plates to an NIOC affiliate. Such barter deals may be encouraged.
There is a consensus emerging within the Indian government regarding the facilitation of Iran’s demand of merchant-trading of food stuff, pharma and medical equipment from other countries. These could be paid for in dollars or euros to supplier countries by the Indian-side and Iranian side will credit the value in rupee equivalent in the account maintained with UCO Bank.
Iran requires palm oil, soy oil, corn and raw sugar from a third country such as Brazil, Indonesia, Malaysia or Argentina. The proposal is to authorise UCO Bank to debit $100 million (R620 crore) per month or R7,440 crore per annum out of the $4 billion (R25,000 crore) currently lying in the Indo-Iran rupee account.
There have been concerns of over-invoicing and value addition. These can be taken care of by a supervisory framework, but the RBI requirement that goods must touch/enter Indian shores first to qualify for shipment to Iran cannot hold because all food, pharma and medical equipment are not debarred under sanctions by the US or the P5+1, and are freely imported. Double freight and port costs will render the third-country trade unviable.
A detailed procedure should be notified by RBI and UCO Bank as to how a permissible transaction is to be monitored, including the listing of the documents required in the letters of credits—one that is to be opened by the Iranian buyer on the Indian supplier and the other that is to be established by Indian entity on the third-country counter-party.
Like Iran, Russia too is under western sanctions. Should there be continuation of sub-optimal values of crude oil over an extended period, a squeeze in its FX reserves and the rouble snapping to new lows becomes likely. In that case, Russia too could be willing for a rupee-account structure with India like Iran has. Getting defence items and crude oil from Russia and paying in rupees would be a bonanza for India. Why not be ready for another creative deal? It will also make rupee a better-traded currency.
The author is a grains trade analyst