How Iran-US nuclear deal can affect India’s commodity exports?

Tejinder Narang | Updated on January 23, 2018


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It may be best for Indian trade to deal with Dubai counterparties which may take exposure to Iran

The Iran-US nuclear deal, expected to be concluded by June-end, should pave the way for free trade with Teheran.

This will relatively end preferential treatment accorded to India under the Indo-Iran rupee payment agreement.

Usage of the rupee account will be need-based and will not remain a pressure point on Iran. A way may also be found by Iran to repatriate the balance in the rupee account in hard currency after the sanctions are lifted.

Earlier pacts

Historically, Indo-Iran trade has gone through a metamorphosis after a few years, leaving many issues unresolved. India’s past experience of two earlier pacts with Iran have not been good as both ended abruptly.

First, the Kudremukh Iron Ore Company Limited (KIOCL) barter in 1976, against which Iran invested $630 million in return for iron ore. It was abandoned in 1980 due to changed political realities.

Thereafter, another bilateral trade and payment mechanism – Asian Clearing Union (ACU) - was terminated by the RBI in December 2010 under US pressure. Export of non-basmati rice and wheat in 1994-95 was done under ACU. Thereafter, the Dubai route emerged.

In February 2012, India’s UCO Bank was nominated to deal with four Iranian banks for payment in the ratio of 55:45 of hard currency and rupee respectively.

Rice, oilmeal cases

The accompanying chart shows a significant decline in major Indian commodities after US-Iran “interim” agreement was signed in November 2013. This is not a matter of conjecture but reflected by facts on ground.

Basmati exports to Iran flourished initially between 2012-13 and 2013-14 relying on three major buyers.

But over the last 18 months, some suppliers have their deemed profits wiped out and registered losses in their balance sheets.

The same is true with oilmeal exports. Not only money made in some bargains was lost subsequently – India abandoned its traditional markets due to value distortion created by high priced exports to Iran.

Raw sugar export was somewhat workable at lower volumes in 2014 but there has been no repeat business.

The government made persistent efforts to export wheat by getting relaxation for Karnal but for “negligible percentage” instead of “nil” but the phytosanitary and plant quarantine authorities in Iran have not budged.

Apparently, value-added business of pharmas and rail lines/steel pipes seems to be doing well. Engineering business/oil exploration is also being supported at the political level in view of India’s concerns with Pakistan, Afghanistan and Balochistan.

In commodity trade, trading experience even under rupee trade managed through UCO Bank has not been very rewarding for the Indian counterparties due to two vital factors.

First, Indian traders are competing against one another and sabotaging business by offering varying terms of trade and compromised specifications.

Secondly, Iran knows that the Indian side has made money and they levied customs duty or imposed rigid customs regulations that offered Iranian buyers opportunities to a rebate on contracted prices. In both these cases, Iran called the shots.

Bureaucratic bottlenecks

Indian trade has no contractual recourse because Iranian law is incorrigible. In Government business, bid bonds and guarantees are demanded with unlimited time frame. Letters of credit once issued by Iranian banks are very difficult to get amended.

Government departments are working in silos – for example – commerce department will have no say in agriculture – the type of working relationship we have in India.

Iranian traders cite currency fluctuations or some government regulations for non-performance and Indians are totally at their mercy because the factual position remains veiled. GTC and other traders have very “intimate” contact with MNCs. Their “preference” for commodities lies elsewhere except basmati rice.

Even during sanctions, food items were not under any prohibition, so Iran continued to source elsewhere despite surplus in UCO Bank rupee account.

Iran works according to its priorities with patience – with utter disregard to any agreed provisions – and it is not possible to extract a viable bargain because traders are exposed to rough and tough trading environment.

On a short-term basis, India may find itself isolated from Iran in trade (except basmati rice). Iran will court Western powers/China and other origins for trading and building up its other petrochemical capabilities.

All nations (P5+1) are not signing the nuclear agreement for charity. Trade, in preference to investment, will be foremost in their minds.

Dubai will surely emerge as a vital trading hub. Indian trade will be best served by dealing with Dubai counterparties who may take exposure to Iran.

Iran too will go through the developmental phase. But surely it will rebuild its nuclear capabilities under one pretext or the other.

That will again lead to some sort of disruptive environment in trade.

The on-going Sunni-Shia discord can also go through an expansionary phase which may compel western powers again for interventionist measures. Thus, in long term, India will again be in the reckoning. At this point of time, India has to walk back in trade.

The writer is a grains analyst. Views are personal.

Published on April 15, 2015

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