Iran may spoil govt's plan to curtail dollar dependence

Petroleum Minister M Veerappa Moily’s grand plan to support the economy by lowering dollar outflows on account of the country’s crude oil purchases might be spoilt, with Iran likely to reject India’s offer of a full payment against trade. A senior official told Business Standard that Iran was taking a hard stand on the issue.

At present, India makes 44 per cent of its crude oil purchases from Iran, as a set-off against that country’s imports from India. With the rupee depreciating around 18 per cent since March, the government is looking to curtail the requirement for dollars, besides reducing its current account deficit. Covering the entire payment against the mechanism put in place could save India $8.47-billion forex outgo.

Iran imported low-value commodities like rice from India. Making payments in return for it did not cover India’s entire import bill from that country. Besides, with Hassan Rouhani taking over as the Iranian President last month, India was keeping its fingers crossed, the official said.

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Under the pressure of sanctions imposed by the US and the European Union, India had to resort to payments through Turkish Halk Bank and its own UCO Bank, since sanctions did not permit EU banks to process dollar purchases.

India was forced to opt for such a mechanism since last year but the domestic currency’s slide turned out to be a blessing in disguise. Currently, payments are entirely made through UCO Bank.

Besides re-routing purchases, India reduced import volumes from Iran. “For the first time this financial year, government-owned Mangalore Refinery and Petrochemicals Ltd (MRPL) and Hindustan Petroleum Corporation (HPCL) imported Iranian crude oil in August. Private sector refiners like Essar Oil, too, import Iranian crude,” said a senior oil company executive.

India is expected to import a reduced quantity of 11 million tonnes of Iranian crude oil this financial year. At an average rate of $105 a barrel, this would be worth $8.47 billion. Iran would need to make purchases from India worth that much.

The West Asian country already has some $5 billion worth of rupee payments lying idle with UCO Bank. India’s total exports to Iran stood at a mere $3.4 billion last year. Besides exporting commodities like rice, tea and pharmaceuticals, it has not been able to expand its barter basket with that country.

“A set of more than 44 per cent is difficult because of the nature of trade,” said B Mukherjee, former director (finance), HPCL.

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Use of Iranian crude oil in Indian refineries came down by over a quarter in 2012-13 from that the previous year — from 18.1 million tonnes to 13.3 million tonnes.

The reduction in volume helped India earn a relaxation for six months starting June 2013. Under a law passed in late 2011, the US can issue sanctions against any company that buys Iranian crude oil. It can grant exemptions to countries that make a “significant reduction” in imports from Iran, though the law does not define “significant reduction”.

Mukherjee said insurance for imports was also a major issue with Iran, since reinsurance was done by banks in the EU. “India’s General Insurance Company does not have the capacity to do re-insurance,” he added.