Since India is not earning enough foreign exchange either to substantially reduce its external debt or pay for costly imports, it should thank Iran for such a gesture, even if it attaches some hidden strings of indirect co-operation in international relations especially with regard to its somewhat shady nuclearisation agenda, at this juncture.

The RBI’s fear about a possible rise of the India’s already large trade imbalance with Iran due the rupee-oil offer from Persia is totally unacceptable. India runs heavy trade deficits with most countries from which it imports large quantities of oil. A Rupee-oil deal may only reverse the trend as Iran would like to spend its non-convertible rupee income to import more goods and services from India. It may even help resurrect the moribund Irano-Hind Shipping Company sharing cargo in the bilateral trade. It was a 50:50 joint venture company set up in the 1970s with a lot of fanfare by the Shipping Corporation of India and the Arya National Shipping Company of Iran. The trade investment relations between the two countries changed since the mid-1980s for a number of reasons and developments, mainly at the Tehran end.

The barter trade is a good option to boost trade and economic cooperation especially between countries facing currency problem although the oil-rich Iran never had one. The history will vouch that the bilateral Rupee-Rouble trade in the 1960s and ‘70s was extremely beneficial to both India and the erstwhile Soviet Union. It helped India to create a moderately good export base for goods and services, including shipping, to pay for technology and capital goods imports from Russia which India was unable to procure from the western world, those days. The barter trade helped strengthen Indian economy and Indian defence. A new export culture emerged in India, which sold tea, leather goods, soaps and detergents, chemicals, textile, carpets, spectacle frames, copiers and light engineering products among many others. The increasing Russian imports lured even some technology companies from the West such as Rank Xerox to set up shops in India to export their wares on the sly to the USSR.

A Rupee oil trade with Iran will certainly open a big barter opportunity for both the countries and raise direct Iranian investment (FDI) in India’s manufacturing and services sectors. The two sides will have to sit together to chalk out a long term programme to make the rupee trade work. Generally speaking, it is a good news that Iran’s central bank had expressed their confidence in Indian Rupee during its recent meeting with top RBI officials. The Central Bank of Islamic Republic of Iran had suggested last month that it was ready to operate through a State Bank of India branch in Mumbai where state oil firms can make Rupee payments. However, India seems to be under pressure to reject the Iranian offer even at a great risk of pushing up its oil import bill and trade deficits.

India, the world’s fourth largest petroleum crude importer, imports annually over 21 million tons of oil, or about 4,00,000 barrels a day, from Iran for state-owned oil companies and Essar Oil. The oil import bill is around US$12 billion. Compared to this, India’s annual export to Iran is only around $1 billion. Last month, the RBI said deals with Iran must be settled outside the long-standing Asian Clearing Union (ACU) system. In other words, RBI wants Iran to settle payments for either Euro-denominated currency or Dollar systems. Following this prohibitive new RBI rules, presumably under pressure from the USA, Iran had refused to sell oil to Indian importers. The two sides are likely to meet again this month to discuss the payment problem.

Incidentally, the position maintained by Chana with regard to the purchase of oil from Iran is in sharp contrast of India’s. China, the world’s largest energy consumer, continues to be a big customer of Iranian crude. During April-September, 2010, China had imported at the rate of 4,15,000 barrels of Iranian crude per day. Although the Chinese off-take had dropped from the previous corresponding level of 4,99,000 barrels of Iranian crude in 2009, the country has so far practiced its independent trade and economic policy with Iran to its advantage. China has a big economic engagement with Iran, a major trade partner. Iran is said to be agreeable to accept payment even in Chinese Yuan against crude oil imports by India if it is okay with the RBI.

There is no United Nations embargo on oil supplies from Iran, at least for now, for its alleged nuclear proliferation programme. However, the UN is in favour of trade and economic non-cooperation by its member countries with Iran to force Iran and other West Asian countries, which are sitting on huge oil reserves, not to pursue aggressive nuclear programmes ostensibly to improve their energy mix. Iran is cornered. That is why it does not mind engaging itself in Rupee trade with India. There is no reason why India should tow the US line to dump the opportunity of experimenting with a barter trade with Iran. A good relationship with Iran is to the advantage of India, both politically and economically, especially when Iran is in trouble. Whichever way India decides to deal with the current issue, Iran will remember it for a long time.

A break-down in oil trade with Iran may prove to be too costly for India, which is overwhelmingly dependent on petroleum import to meet its ever increasing energy demand. Oil prices, hovering at $ 90 a barrel, and transport costs are further shooting up. The international oil price will receive a further boost if Indo-Iran talks on payment mode for supplies fail. If India opts for Euro, Japanese Yen or even Chinese Yuan at this stage, it will harden these currencies that may make India lose large sums even on exchange rate. The good thing is that the union petroleum ministry, which is openly critical about the RBI’s position, is inclined to accept the Iranian central bank’s offer.

Considering the importance of the matter and its wide ranging ramification on India’s economy and international relations, it is time that the Union cabinet takes a call on the subject and decides what is best for the country. It should be an impassioned decision. Once it is taken, the government can explain its position to its friends in the West, which itself is against any drastic step to hurt Iran’s oil export that may further fuel the global oil price inflation and slow down economic growth. (IPA Service)