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

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(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)

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