Why India should prefer the preferential trade agreement with Iran

As per ITC Trade Map UN Comtrade, crude oil import increased from 148 million tonnes in 2009 to 225.5 million tonnes in 2018, rising at 4.8% per annum.

Why India should prefer the preferential trade agreement with Iran

By Abhishek Jha & Seema Bathla

India and Iran have been important trading partners. With the US imposing sanctions on Iran, and pressure on other economies to cooperate, India has perhaps entered into a cobweb. The sanctions are likely to put pressure on her trade deficit. While importing oil from Iran, India has the advantage in being able to pay partially in rupees, and partially settled with food and pharma exports. Secondly, for four months, global crude oil price has been on a surge, by almost $18 per barrel. This may exacerbate our CAD and domestic market prices, if not cushioned adequately. Thirdly, Iran oil is relatively cheaper, but US officials have assured its adequate supply from Saudi Arabia, the UAE and the US to avoid shortages, if any, after the sanctions.

Iran is India’s third-largest oil supplier. It is beneficial for India to import oil from Iran as it includes free shipping and insurance, besides payment in domestic currency, which others are unlikely to offer. Oil imports surged from $4.6 billion to $11.7 billion during 2015-16 to 2018-19 (April-February). As per ITC Trade Map UN Comtrade, crude oil import increased from 148 million tonnes in 2009 to 225.5 million tonnes in 2018, rising at 4.8% per annum. If India restricts oil imports from Iran, it may hurt agricultural exports. During 2018-19, the export of basmati rice to Iran was worth $1.35 billion, which will have to be sold to others. It may adversely affect domestic prices, hence farmers’ incomes. Also, the time required to cultivate basmati rice is much longer than that needed to grow non-basmati varieties, which is likely to make it expensive for farmers in terms of opportunity costs foregone. Like basmati, tea exports worth $130 million will also be under threat due to sanctions.

Earlier, when the US put sanctions on Iran, India did not stop trading. Britain, France and Germany had issued a joint statement to maintain economic ties with Iran despite the threat of American retribution. Now, Iran is aware that the EU, Russia, China and India are its allies, but will not be vocal in support due to scepticism about the nuclear programme. These economies may also feel they cannot do much to protect Iran’s economic interests without risking their own business. It appears the sympathy these countries have for Iran on political grounds is not enough to outweigh their own economic interests. This may add to Iran’s frustration as its economy has shrunk by 6% this year, after having contracted 3.9% last year.

A preferential trade agreement (PTA) with Iran would act as a catalyst for India. Initiated in 2016, India will discuss the fifth phase of negotiations with Iran. The PTA will be distinct from the existing one due to the scope of reducing tariff rates by 25-45%. Since Iran is not a WTO member, there is no obligation to keep tariffs in accordance with the specified bound rates, and bilateral trade flows will benefit both.

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India’s total value of trade with Iran is estimated at $18 billion (2018). The export basket consists of rice (46.4%), tea (4.4%), soybean oil cake (4.3%), carbon electrodes used for electrical appliances (3.3%), extracted oil essence (3%), uncoated paper and paper board (1.8%), and medicaments (1.4%). In contrast, key imports worth $12.85 billion include 88% crude oil, with the remaining share comprising of chemicals (organic and inorganic chemicals) and fertilisers. Iran offers 10% import tariff or less on only 37.2% tariff lines, whereas still 17% of tariff lines are under 50% tariff and above. Major products of India’s interest facing high tariffs are basmati (45%), black fermented tea (30%), motorcycles (65%), textiles (65%), glass microspheres (45%), new pneumatic rubber tyres (30%), filament yarn of polyester (40%) and woven fabrics (70%). A germane design of truncating tariffs through normal track under the prospective PTA will help India increase exports.

Another reason for favouring PTA is the Trade Intensity Index (TII) with Iran, which has remained more than one and increased from 3.4 to 4.13 during the last three years. It signals Iran to be a vital trading partner compared to China and Turkey where the TII has plummeted. In January 2014, Iran entered into an agreement with Turkey. Under this, Turkey granted concessions to Iran on 140 agricultural products, while the latter reciprocated the same on 125 industrial products. Entering into such an arrangement would be mutually beneficial for India and Iran.

From the above, it might appear that India has been caught, where choosing one possible scenario will create a bad taste for another. However, India can be diplomatic with the US in pursuing trade relations with Iran.

Consultant, Trade Promotion Council of India, and Professor, Centre for the Study of Regional Development, JNU, Delhi

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First published on: 17-06-2019 at 02:08 IST
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