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Economy Aug 13, 2013

India’s plan to buy more Iran oil will irk US, but it’s good economics

By Uttara Choudhury

New York: Finance Minister P Chidambaram indicated on Monday that India wants to buy more Iranian crude to offset the hit that oil imports impose on India's international balance of payments and help shore up the rupee which hit a record low of 61.80 against the dollar last week.

"Within the UN sanctions and fully complying with the sanctions, there may be more space for imports from Iran," Chidambaram told parliament as he unveiled proposals to narrow the current account deficit to defend the rupee.

Finance Minister P Chidambaram

Finance Minister P Chidambaram

Chidambaram told parliament on Monday that India would seek to reduce imports of gold, silver and "non-essential" imports, while also curbing demand for oil to contain the current account deficit at $70 billion for the fiscal year ending in March, or an estimated 3.7 percent of GDP.

Chidambaram's remark comes weeks after the US State Department exempted New Delhi from sanctions. India has been forced to cut supplies from its most economical oil supplier Iran and make up for the shortfall by buying Iraqi crude, and Brunei and Nigerian oil from the spot market.

But cataclysmic changes in the rupee to record lows has put India in a severe bind, making it increasingly difficult for the finance ministry to ignore Iran's willingness to be paid in rupees, as dollar-priced oil imports grow frighteningly expensive.

Economics are better with Iranian crude

Chidambaram didn't disclose details of the government's Iranian oil purchase plan, one of a series of steps aimed at dealing with the persistent current-account deficit. But sources say that under the plan, Iran is willing to engage in barter arrangements. Iranian oil would be purchased with rupees, which Iran would then use to buy Indian goods like food, consumer products, auto parts, pharmaceuticals and health care products in lieu of hard cold cash.

India is likely to step up to the plate by sending Iran life-saving medicines as a lot of Western-made medicines are no longer shipped to Iran. Hundreds of thousands of Iranians with serious illnesses have been put at risk by Western sanctions, which have led to shortages of key chemotherapy drugs for cancer and bloodclotting agents for haemophiliacs. An estimated 23,000 Iranians with HIV/Aids have had also their access to the drugs they need to keep them alive severely restricted.

Hindustan Petroleum (HPCL) along with MRPL had to halt imports from Iran since April because of problems in securing insurance for their refineries after European firms backed out over sanctions. That cut India's imports from Iran by more than half in June. Industry sources say India is thinking of providing a 20 billion rupee state guarantee to back local insurance for plants using Iranian oil. HPCL and MRPL will resume buying Iranian oil as soon as the government unveils the back-up plan for local insurers.

US Congress increasing sanctions on Iran

The Obama administration and Congress are threatening to increase sanctions on Iran if nuclear diplomacy doesn't show results, potentially putting Washington and New Delhi at loggerheads.

The US House of Representatives passed a bill this month to cut Iran's oil exports by another 1 million barrels per day over a year to near zero, in an attempt to reduce the flow of funds to Iran. The bill still has to be passed in the Senate and signed by Obama before becoming law. It would empower the White House to sanction foreign companies still purchasing Iranian oil. It could block sanctioned Indian firms from conducting US dollar transactions or using the American financial system.

The stranglehold of any sanctions will depend on China and India, Iran's top customers. China has repeatedly said it opposes unilateral sanctions outside the purview of the United Nations, such as those imposed by the US. China reduced oil purchases from Iran by 21 percent last year, but that was partly on account of delays over the renewal terms of annual contracts and shipping delays.

"I don't think the Chinese government will give in to this kind of pressure," an official with a Chinese refinery that processes Iranian crude told Reuters. "There is no chance that Iranian supplies would come to a halt."

Analysts say further sanctions risk pushing up oil prices and damaging the economies of US allies. If very little Iranian crude is available, overall oil prices would rise.

The US has tried to pressure India to alienate old friend and oil supplier Iran but it hasn't really worked. On the strategic side, it's important for India to have a close relationship with Tehran as Iran is India's only corridor for land access to Afghanistan, through which is routed most of its development and reconstruction assistance to Afghanistan. Both India and Iran oppose Pakistan's attempts to influence policy in Afghanistan, especially as America gets ready to leave the country next year.

Still, India has repeatedly voted against Iran at the International Atomic Energy Agency, and encouraged it to abide by the provisions of the non-proliferation treaty it signed. But India endured its own years of sanctions and isolation over the nuclear issue; it doesn't like the policy, and it doesn't believe it works.

The Indian government feels it is unfair for the West and the US in particular, to put India in a position where it has to choose one friend over another. However, India realizes it also needs to keep on the right side of the US with whom its interests have aligned more closely in recent years due to closer cooperation on regional security.

Indian refiners are targeting an 11 percent overall reduction in crude imports from Iran this fiscal year. Indian refiners plan to import around 15.5 million metric tons of crude from Iran in the 2012-13 fiscal year, down from the 17.44 million tons purchased in 2011-12 and 18.50 million tons in 2010-11, according to Minister of State for Petroleum and Natural Gas RPN Singh.

by Uttara Choudhury

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