A gamble on Iranian oil

The Indian Government has shied away from encouraging domestic shipping with respect to cargoes from Iran. It has backed off from bearing the cost of insurance claims on such cargos in the event of an unforeseen contingency. The European Union had decided on sanctions against Iran (which will come into effect from July 1) over the latter’s nuclear programme, but India did well not to go along with the global embargo on Iran’s oil. But equally, India should have discharged its responsibility of securing the interests of domestic shipping industry, by finalising suitable arrangements for indemnifying shipping companies carrying such cargo, which it has failed to do these past few months. In the event, it has taken the view that Iran would ship crude at its own risk, with the European insurance industry cutting off their cover to tankers carrying Iranian cargo.

Clearly, the option of getting the domestic insurance companies to underwrite the risk was not a viable one, given their capacity to bear such risk. That would have left the Government with the only option of underwriting the risk on its own, taking a cue from countries like Japan and China. Japan has passed a law to provide a P&I cover of $ 7.6 billion to each of the tankers carrying Iranian crude. China too, has agreed to provide guarantee to its fleet. Granted, the size of the Indian economy or the fiscal resources of the Government at the Centre are not comparable to that of either of these countries. There is also the larger question of whether the Government should be in the business of providing insurance protection to commercial cargo, even if it is one as sensitive as crude. Be that as it may, the net result is that the domestic shipping industry has had to pay the price. The Indian Government is clearly not reckoning with the risk of supply disruptions. Iran’s shipping fleet mainly consists of very large crude carriers, and most Indian ports cannot handle large tankers because of depth restrictions. Also, Iran may not be able to charter any other flag carriers, following the sanctions imposed by the US and the EU.

Until recently, Iran has been the second largest supplier of crude to India, accounting for around 12 per cent of the country’s import. Though we have reduced our dependence on Iran, in the face of some relentless pressure from the United States, the volume of shipments from Iran is still quite sizeable. India can ill afford any supply disruptions because of logistical constraints in handling Iranian supplies. India may have taken a principled stand on oil imports from Iran both from a foreign policy perspective as well as on commercial considerations. Yet, its resort to half measures, as opposed to carrying a principled stance to its conclusion, may have economic consequences that could turn out to be rather serious.

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