The Indian government has recently gone on record stating that India is sufficiently prepared to deal with the impact of the US decision to end waivers that allowed India to buy Iranian oil without facing sanctions. The Ministry of Petroleum and Natural Gas said in a press release, “The Government of India has put in place a robust plan to ensure that there is adequate supply of crude oil to Indian oil refineries from May 2019 onwards. The Indian refineries are fully prepared to meet the national demand for petrol, diesel and other petroleum products in the country.”
US President Donald Trump on April 22, 2019 announced his decision of not granting sanction exemptions to any oil importer dealing with Iran. The US has also demanded that all importers of Iranian oil must stop importing oil from Iran from May 1, 2019 or face tough economic sanctions.
The Indian External Affairs Department spokesperson, Raveesh Kumar said, “The government has noted the announcement by the US government to discontinue the ‘significant reduction exemption’ to all purchasers of crude oil from Iran. We are adequately prepared to deal with the impact of this decision.”
How will the US decision impact India
India meets more than 80% of its oil needs through imports. Iran is India’s third largest supplier of crude oil after Iraq and Saudi Arabia and meets around 10% of its total oil needs. India had imported about 24 million tonnes of crude oil from Iran in 2018-19. Due to the US sanctions, India restricted its monthly purchase to 1.25 million tonnes (15 million tonnes per year) to get the exemption. After the US decision to end the sanction exemptions, India is now required to reduce its imports of oil from Iran to zero. Following the US decision, the price of Brent crude has already touched $74.46 a barrel, the highest in almost six months. This will increase the import bill of India and push up the crude prices up in the country. Furthermore, the volume of trade between Iran and India stands between $10 -13 billion. Iran gives India the option to import crude oil on cost, insurance and freight (CIF) basis, as against a free-on-board (FOB) model followed by other countries. Under the CIF model, the seller pays freight and insurance charges. Under the FOB model, the buyer has to charter its own vessel and manage the cost of shipping. One of the major advantages of buying Iranian crude oil is the additional credit period of 90 days that the country gives to India, compared to the credit period of 30 days given by other countries.
Can India evade the US sanctions
India’s goods and services trade with the US totaled an estimated $142.1 billion in 2018. Exports were $83.2 billion and imports were $58.9 billion. India’s goods and services trade surplus with the US was $24.2 billion in 2018. India is currently the ninth largest goods trading partner of US with $87.5 billion in total goods trade during 2018. According to the US Department of Commerce, U.S. exports of goods and services to India supported an estimated 197 thousand jobs in 2015. Prof Rajagopal Dhar Chakraborty, Director of Indian Institute of Social Welfare and Business Management (IISWBM) and former Head of the department of South and South-East Asian Studies at the University of Calcutta, informed BE, “Indian economy, being less capital intensive as compared to the US, our job impact is larger than theirs. So, India will not do anything that will jeopardize these many jobs.”
Alternative sources of oil available to India
With the US sanctions in force, securing insurance for crude oil and refineries, payments, and finding alternative crude sources would be the major concerns for India. Chakraborty added, “India may opt for a partial rupee or euro payment model, like in the case of previous sanctions. The government has already lined up alternative plans of payment in rupee terms through Iranian private lender, Bank Pasargad. As far as alternative sources are concerned, India will have to look at increased imports from Saudi Arabia and also look at more supply from countries like Qatar.”
India and Iran relation after India’s move to stop oil’s imports from Iran under US pressure
India has strong diplomatic ties with Iran. India has also invested billions of dollars towards the development of Chabahar port in Iran. Indo-Iran trade has tremendous potential. Additionally, Iranian firms have huge opportunities to invest in profitable sectors in India such as banking and tourism. “I don’t think that Indo-Iran international relations will suffer much in the long run, as both countries are familiar with the cause for such turmoil. Sanctions are short-term restrictions to exhibit power. Whenever sanctions are lifted, there will be a huge flow of pent up demand,” stated Chakraborty.