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July 11, 2018

July 11, 2018 @ 09:02 AM

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Oil Imbroglio on Iran, Implications for India

Oil Imbroglio on Iran, Implications for India

Post MBA entrance exams in 2019 onward when you will face WAT, GD & PI and during that period, your information on current affairs will prove to be very handy, not only content wise but you will remain a confident personality.

Read Following article on - Oil Imbroglio on Iran, Implications for India

Background

Iran, North Korea, Libya, India, Pakistan, Israel etc are the selected few countries in the world which have either acquired the nuclear weapons or are in the state of developing them. India and Pakistan openly claim the presence of nuclear weapons while Israel doesn’t boast of existence of such weapons but everyone believes that it possess these weapons. The defamed Pakistani nuclear scientist AQ Khan had once admitted of selling nuclear secret to Libya, Iran and North Korea.

In order to discourage the aforementioned countries from pursuing their nuclear programmes, the various countries like the US, Japan or organizations like EU and UN have imposed sanctions.

 

Nuclear Deal With Iran

In the year 2015, the EU and five permanent members of the UN Security Council (also known as P-5) signed an agreement with Iran, referred as the Joint Comprehensive Plan of Action (JCPOA). Under this agreement, Iran agreed to eliminate its nuclear programme and gave access to International Atomic Energy Agency (IAEA) and in return, it will receive a relief from the sanctions.

 

Unilateral Withdrawal of US From Nuclear Deal

On May 8, 2018, the US President Donald Trump announced that it will unilaterally withdraw from the agreement and it will impose sanction on Iran and the countries and the companies trading with Iran in defiance of US sanctions. Though the EU said that it will continue to honour the nuclear deal with Iran, however, many European companies who made huge investments in Iran post the nuclear deal are jittery over the sanctions as they also have investments in the US as well. The re-imposition of sanctions would deny access to financial systems in the United States to any company doing business with Iran.

 

Implications For India

The US has asked India to bring down all the trade with Iran to zero by November 4, 2018. India is the second largest buyer of Iranian crude after China while Iranian share in India crude basket is 10.4%. Apart from the trade, the US sanctions may also affect geopolitical ambitions of India. The major impact on India courtesy to the Iranian imbroglio are as under:

  • As in March 2018, Iran produced 3.8million barrels per day of crude oil. The US sanctions on Iranian trade partner countries will reduce by global crude supply by at least one million barrel per day and will consequently put upward pressure on the international crude price. This may further the inflationary forces in the country.
  • Non-oil trade with Iran, which stood at about $2.69 billion of the total trade figures of $12.89 billion in 2016-17 may not be impacted as much, as New Delhi and Tehran have instituted several measures in the past few months, including allowing Indian investment in rupees, and initiating new banking channels, between them.
  • Over the past few years, India has invested heavy in Chahbahar port of Iran in order to gain access to Afghanistan and central Asian countries bypassing Pakistan.  However, with US sanctions expected to hit Iran hard, Chabahar’s transition to a bustling trade and transport hub will remain unfulfilled for some more time. It is believed that the US sanctions may not hit the connectivity to Afghanistan as the economic activity and development in Afghanistan is also in the interest of the US.
  • India has been a founder of the International North South Transport Corridor (INSTC) since it was ratified in 2002. It starts from Iran and aims to cut right across Central Asia to Russia over a 7,200-km multi-mode network, cutting down transportation and time taken by trade by about 30%. Plans for INSTC sped up after the JCPOA was signed in 2015 and sanctions on Iran were lifted. New U.S. sanctions will affect these plans immediately.
  • If India toes the Washington’s line, India will concede more space to China in Iran as China had already indicated that it will continue to trade with Iran and will not oblige the unilateral sanctions.
  • US is the second largest trading partner of India where trade surplus is in favour of India. If India continues to buy the Iranian oil post November 2018, US may not allow many Indian companies trading in the US and its impact will be felt in lower trade volume, deterioration on balance of trade and the consequent depreciation of Rupee. This will further strengthen the inflationary forces.

 

The new scenario has complicated the challenges for India. Though in May 2018, the External Affairs Minister Shushma Swaraj said that India will follow sanctions prescribed by the UN only, not by any individual country. Consequently, on June 26, a US state department official said India or China would receive no waiver of sanctions and their companies risk secondary sanctions if they continued importing oil from Iran from November 4. Thus, whether India obliges the US sanctions or not, it will be impacted by one way or other. The unilateral withdrawal by the US from Iran deal has complicated the challenges for India.

Prior to the lifting of sanctions in 2015 also, India was buying Iranian crude through Rupee payment mechanism thus evading the US financial system. In the current challenge also, India may bifurcate any existing company or create a new entity for Iranian trade only under Rupee payment mechanism.

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