The Iran Conundrum: Either Way India Goes, Oil Will Play Spoilsport 

by Jayant Mundhra - Jun 2, 2019 03:56 PM +05:30 IST
The Iran Conundrum: Either Way India Goes, Oil Will Play Spoilsport Iran President Dr Hassan Rouhani with PM Narendra Modi in New Delhi.  (Vipin Kumar/Hindustan Times via Getty Images) 
  • India imports 85 per cent of its oil requirements.

    With Iranian oil being affordable, US insistence on India banning imports from the Islamic nation can hit our economy very hard.

    If India does go ahead and snub the US, Indo-US ties risk severe damage.

    What will Team Modi do in this situation?

India and the United States (US) witnessed great synergies being achieved in the foreign and defence domains under the first term of Prime Minister (PM) Narendra Modi, while the trade and economic issues witnessed some tribulations which mostly started cropping up after the assertive and capricious President Donald Trump took to the helm of affairs at Washington DC in January 2017.

Under President Trump, the US administration has postured a radical stance on trade and economic issues which hold grave consequences for Indian interests. The Indian administration under PM Modi managed to navigate the tides with deft Indian diplomats doing all the heavy lifting and stretching in their capacity to keep the White House mollified for as long as they could. However, as PM Modi's first term came to an end, President Trump threw a hardball as the US went on to impose stringent unilateral sanctions against Iran, erecting severe barriers for the buyers of Iranian oil by threatening them with adverse sanctions too.

Initially, when the sanctions came into effect in November 2018, eight nations namely, India, China, Turkey, Taiwan, South Korea, Japan, Italy and Greece were given an exemption to import reduced volumes of oil from the Persian nation for 180 days. Good news as it was, it didn’t last long. The exemption came to an end on 4 May 2019. As a result, India stopped purchasing Iranian oil to comply with the US decree for the time being.

Now, this is where PM Modi finds himself in an immediate problem to address in his second term which he won on 23 May 2019.

Let's begin with the Iranian oil problem.

The tale of oil and falling consumption.

The Indian economy is an oil guzzler which meets 83-85 per cent of its oil needs from imports. In 2018-19, it sourced as much as 11 per cent of this volume from Iran alone. That makes the Persian nation India's third-largest oil supplier after Iraq and Saudi Arabia. Append to that the weight of the fact that the Iranian crude came at a discount on price with added benefits like lower cost of shipping, insurance and a longer 60-day credit period.

Now, if one of the biggest and more importantly, the most cost-effective oil suppliers to India were to disappear all of a sudden, the supply-demand mismatch is bound to push up the cost of oil from all other remaining sellers. That costlier oil would mean higher cost of every good or service, essential or non-essential, is frightening. This would result in unwanted inflation, depressing the already stressed and falling consumption drive in the economy. People will, therefore, have to spend more on buying essentials like costlier fuel, vegetables and pulses while being left with a much lesser amount in their pockets. That's bad news for the economy.

And, given how extensively India consumes oil which it doesn't produce enough at home, the impact of price rise is only going to widen the Current Account Deficit (CAD). Thus, the cost of turning the back on Iranian oil could be severe. Alas, scary as it already is, this is not it. The problem is much bigger and there is more to be lost by saying no to Iranian crude.

I mentioned above that there is an angle to this problem which is usually talked about, while there is one more that's not discussed. It's time to bring up that nugget.

The tale of UCO Bank and other things

After the US declared Iranian sanctions in November 2016, the payment channels to Iran were frozen globally. Thus, paying back for Iranian oil in the exempted period of 180 days was going to be an issue. At that moment, the Indian and Iranian establishments came up with a smart alternative to form an escrow account mechanism whereby Indian refiners and oil purchasers would deposit the dues to Iran in an account in India's UCO Bank from where the Iranian administration could then pay for all things it imported from India.

This was great news for India not only because India had devised a way to buy cheaper Iranian oil, but also because this mechanism would ensure that for all the amount India will be spending on Iranian oil, it would end up benefiting Indian exporters as Iran would be bound to spend the money on Indian imports.

The outcome was that the Indian exports of rice (especially basmati), bovine meat, ferro-alloys, tea and several more products witnessed a commensurate rise in this period since the UCO Bank-based escrow payment mechanism came alive. But, in the scenario in which India will no longer be importing Iranian oil, this account in UCO Bank is bound to dry up in the next few months post which there will be no reason left for Iran to continue to purchase and import products from India.

At the same time, in the scenario that India continues to import Iranian oil, the account in the UCO Bank is bound to swell up, making room for even larger sums of Indian exports to the Persian nation.

The complete picture in a nutshell.

Thus, saying no to Iranian oil would deliver a double whammy to the Indian economy alone. My assessment doesn’t even take into account the geopolitical cost with respect to Afghanistan, India's connectivity to Central Asia and Russia, Chabahar port and developing it as a major regional port to bypass Pakistan and sundry other concerns in the middle east. Yet, the situation with no Iranian oil being bought by India sounds pretty bad. All the problems discussed above only highlight the domestic economic issues that would bog India down if it says no to Iranian oil.

The complete picture of the problem thus grows even bigger taking into account the aforementioned geopolitical issues.

When the Iranian Foreign Minister, Mohammad Javad Zarif, visited India on 14 May 2019 to ensure that India continued to purchase Iranian oil, the then Minister for External Affairs, Sushma Swaraj, had apprised her counterpart that an apt decision on the issue will be taken by the next elected government after the elections were over. As the elections have ended in favour of PM Modi, it’s time for him to decide on oil imports from Iran.

This is going to be a big imbroglio for PM Modi and his team to navigate. Convincing US President Donald Trump on this matter will not be easy as Trump prefers his allies to work on a “transactional, quid pro quo mechanism”.

Abiding by the US command would mean to tie an albatross around one's own neck. Not abiding by the US decree could mean a major blow to Indo-US relations and investments from abroad, apart from the wide-ranging sanctions whose true impact and extent remain an unknown threat.

What path PM Modi's new government will take will soon be known.

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