BREAKINGVIEWS - Indian economy could gain from Iran sanctions

Tue Jan 24, 2012 6:33pm IST

An Iranian man works on an oil production platform in the Persian Gulf, July 25, 2005. REUTERS/Raheb Homavandi/Files

An Iranian man works on an oil production platform in the Persian Gulf, July 25, 2005.

Credit: Reuters/Raheb Homavandi/Files

Related Topics

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Jeff Glekin

MUMBAI (Reuters Breakingviews) - Beggars can't be choosers. Iran would prefer to sell its oil for dollars, but sanctions mean it might have to take rupees from India, its second largest customer.

New Delhi objects to sanctions on Iran on political grounds -- it is willing to follow the United Nations, not the United States. But about 12 percent of India's oil currently comes from Iran. That gives it good economic reasons for dealing with the increasingly isolated Islamic Republic.

A discount to the market price of oil, which accounts for two-thirds of India's import bill, would be welcome. Lower prices help corporate profits and reduce the government's subsidy bill. And this is no time for New Delhi to play nice, not with expected GDP growth this year revised down to 7 percent and the fiscal deficit ready to breach 6 percent of GDP.

As desperate as India may be, Iran is in an even worse fix. If it lost India as a customer, it would be forced to rely even more on the Chinese to mop up its production. Chinese oil majors are tougher negotiators than their smaller Indian counterparts. So Iran's negotiating position is weak.

Plan A is for India to continue to pay in dollars, using a Turkish bank as an intermediary. But if that falls through, plan B could involve payment in rupees. Iran would prefer Japanese yen, which can be spent everywhere. India is balking. So Iran could end up with a big slug of hard-to-convert rupees. Its annual trade surplus with India was $10 billion in 2011 -- that comes to a whole lot of rice and tea, or Indian assets.

India stands to gain twice, in cheap oil and a captive customer. But diplomatically it could be too clever by half. Although India could argue that the Iranians are still feeling the pinch of sanctions and being forced to hold a currency they don't want, that's not likely to convince, especially when India gets all the upside. And U.N. sanctions on Iran could void the whole deal -- leaving India sore and scrambling for oil.

CONTEXT NEWS

-- An Indian government delegation in Tehran last week agreed with the Iranian government that India could use its restricted rupee currency to pay for Iranian oil, a government source said on January 20.

-- India wants to take as much Iranian oil as it can because terms are "favourable", Oil Minister S. Jaipal Reddy said on January 23.

-- India buys around 12 percent of its oil from Tehran. It currently pays in dollars through a Turkish bank after a previous clearing mechanism was shut down in December 2010. But tougher U.S. sanctions signed into law on December 31 make the route through Turkey look vulnerable.

-- The United States also wants buyers in Asia, Iran's biggest oil market, to cut imports to put further pressure on its economy.

(Editing by Edward Hadas and David Evans)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

Public Health

REUTERS SHOWCASE

Airtel Profit Jumps

Airtel Profit Jumps

Bharti Q2 net profit more than doubles   Full Article 

Maruti Earnings

Maruti Earnings

Maruti Suzuki net profit up 29 percent, beats estimates.  Full Article 

ICICI Results

ICICI Results

ICICI Bank Q2 profit up 15 percent, beats estimates.  Full Article 

Cost Cutting

Cost Cutting

PM Narendra Modi boots officials out of the first class cabin  Full Article 

Market at Record

Market at Record

Sensex, Nifty hit record highs; reforms outpace hawkish Fed.  Full Article 

Moody's on India

Moody's on India

Moody's welcomes India's policy steps, but wants to see more.  Full Article 

End Of QE

End Of QE

U.S. Fed ends bond buying, exhibits confidence in U.S. recovery.  Full Article 

Samsung Results

Samsung Results

Smartphone woes drag Samsung Elec Q3 profit to more than 3-year low.  Full Article 

Refining Margins

Refining Margins

BPCL aims to double refining margins with refinery expansion.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage