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India-Iran trade declined a sharp 79.4 per cent in the first eight months of the current fiscal to $3.5 billion from $17 billion in the comparable period last year after the lapse of the oil sanction waiver extended by the US to India.
Escalating tension between Iran and the US after the recent killing of Iranian general Qasem Soleimani in a US drone attack could hurt trade further as India’s exports to Iran, which have sustained despite the economic sanctions, could now take a hit. This is true especially with the balance in the rupee-rial account running out, fear exporters.
“The threats and counter-threats exchanged by Iran and the US after the killing of the Iranian general has created an atmosphere of uncertainty for Indian exporters. Exporters are cautious about their long-term orders. This is especially because the balance in the rupee-rial account is drying up. Once the amount in the balance is over, there is no clarity about how exporters would be paid,” said Ajay Sahai, Director-General, Federation of Indian Export Organisations (FIEO).
Iran has been an important trade partner for India with bilateral trade in 2018-19 posting a 23.7 per cent growth to $17.03 billion. Of this, mineral oil and fuel imports were key, accounting for $12.3 billion.
While imports from Iran declined by 90.3 per cent in the April-November 2019-20 period to $1.29 billion because of reduction of petroleum imports to zero, the fall in exports was lower at 36 per cent to $2.23 billion.
Exporters face uncertainty
Exports of cereals, including basmati, in the first eight months of the current fiscal, were valued at $648 million compared to $1.58 billion in the same period last year, while tea, coffee and spices exports were worth $164 million compared to $189 million in the same period of the previous fiscal.
Tea exporters, so far, have been optimistic about their trade with Iran as the country bought a record 50 million kg of tea in the January-December 2019 period but are uncertain about the future. “We are very happy with the Iranian market so far but the recent war-like situation has us worried. We were planning a delegation to Iran in February this year, but are now not sure if that would be possible. We have written to the Commerce Ministry about it and are waiting for directions,” said Sujit Patra, Secretary, Indian Tea Association.
Basmati exporters, too, are cautious about what the future holds. “We are managing to export basmati to Iran despite some payment problems. But once the balance in the rupee-rial account gets exhausted, payments may stop. We are apprehensive that the increase in tension between Iran and the US could also affect transportation of shipments,” said a Delhi-based rice exporter.
The rupee-rial payment mechanism is a barter-like arrangement by the two countries to carry out trade without using international currencies like the dollar. Through this mechanism, payment for Iranian goods is deposited in an account in the UCO Bank in rupees and this money is used to pay exporters who supply goods to Iran.
Payment mechanism
With India forced by the US to stop purchase of oil from Iran since April this year, the balance in the rupee-rial account is drying up as oil was the chief item of import from the country.
“The balance in the rupee-rial account is not likely to pay for Indian exports to Iran beyond 3-4 months. The two governments have to look for alternative mechanisms to sustain trade and exports,” said Sahai.