KOLKATA (Reuters) - U.S. Secretary of State Hillary Clinton leaned on India on Monday to cut its imports of Iranian oil further, and said Washington may not make a decision on whether to exempt New Delhi from financial sanctions for another two months.
Clinton, on a three-day visit to India, said the United States was encouraged by the steps its ally had taken to reduce its reliance on Iranian oil, but that "even more" was needed.
As Tehran's second-biggest crude customer, India is crucial to U.S. efforts to squeeze Iran's economy until it agrees to curb its nuclear programme, which the United States and other Western nations suspect is a cover to build atomic weapons.
The issue has become an irritant in ties between India and the United States. New Delhi does not want to be seen to be caving in to U.S. pressure and also has to satisfy the fast-growing energy demands of its economy, Asia's third-largest, and look after its own strategic interests: Iran provides it with access to Afghanistan.
Clinton's trip coincided with a visit by a large Iranian trade delegation, which was in Delhi to discuss how India and Iran can trade via a rupee mechanism set up to skirt sanctions. U.S. officials played down the timing.
"We think India, as a country that understands the importance of trying to use diplomacy to try to resolve these difficult threats, is certainly working toward lowering their purchase of Iranian oil," Clinton told a townhall-style meeting in the eastern city of Kolkata.
Publicly, India has rejected Western sanctions. But privately, it has pushed local refiners to start cutting imports. India's refiners signed new yearly contracts with Iran running from April 1 and Reuters calculations suggest imports could fall about 25 percent in 2012/2013.
Finance Minister Pranab Mukherjee said in April that India had already substantially cut oil imports from Iran. But Clinton's comments suggested Washington expected more before it would agree to exempt India from financial sanctions.
The sanctions threaten to shut out importers of Iranian oil from the U.S. financial system unless they make significant and continuing cuts to their purchases by the end of June.
"We commend the steps that they have taken thus far. We hope they will do even more," said Clinton, who was expected to raise the issue when she met Prime Minister Manmohan Singh in Delhi later on Monday.
The United States in March granted exemptions to Japan and 10 European Union nations. India and China, Iran's biggest crude importer, remain at risk.
Clinton held up Japan as an example, saying it had cut imports despite having suffered an earthquake and tsunami that crippled its Fukushima nuclear reactor. Japan's cuts of between 15 and 22 percent were enough to get a waiver.
Washington has not stated specifically what cuts it expects from each country, only that they must be substantial.
Clinton noted that Saudi Arabia, Iraq and other oil-producers were supplying more crude to the market to offset a loss of supply from Iran.
"If there were not the ability for India to go into the market and meet its needs, we would understand that. But we believe there is adequate supply and that there are ways for India to continue to meet their energy requirements."
She said Washington would decide whether to exempt India from sanctions in "about two months from now".
A senior U.S. official said on Sunday that Carlos Pascual, the U.S. negotiator who has been pressing Iran's customers to cut imports, would visit India in mid-May to discuss the issue.
The 56-member Iranian trade delegation, led by the president of Iran's chamber of commerce, was able to strike only a few small animal feed deals. Indian traders blamed the difficulty of using a new mechanism to pay suppliers using the rupee, which is not yet fully functional.
India has been trying to boost exports to Iran as it looks for ways to defray an $11 billion-a-year bill for Iranian oil.
President Barack Obama has held up the relationship with India as one of the defining partnerships of the 21st century, but trade disputes and U.S. complaints that it is difficult for American companies to do business in India have strained ties.
Ambiguously worded Indian proposals to crack down on tax evasion and tax indirect investments have also alarmed Washington and sown confusion among foreign investors.
Finance Minister Mukherjee announced in parliament on Monday that he would delay by one year, until fiscal 2013/2014, the introduction of the tax evasion measures.
In her meeting with Singh, Clinton was expected to urge him to open India up to foreign supermarkets such as Walmart - a major economic reform that has stalled and become emblematic of the policy paralysis gripping Singh's government.
Clinton held talks earlier with Mamata Banerjee, the firebrand chief minister of West Bengal and Singh's key ally in government, who has blocked the retail reform. Clinton said before the meeting that she planned to raise the issue, but Banerjee said afterwards that it had not been discussed.
Writing by Ross Colvin, additional reporting by Matthias Williams in New Delhi; Editing by John Chalmers and Jeremy Laurence