Oil, Rice, Chabahar: India-Iran Trade Issues Demystified

EghtesadOnline: Economically tied with high volume trade in crude oil and politically tied with similar interests for stability in the Middle East, Afghanistan, India and Iran have traversed a long and tumultuous journey to maintain a healthy trade relationship.

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06 April 2017

This received further impetus after Iran signed the Joint Comprehensive Plan of Action with six world powers, which led to the removal of economic sanctions imposed on Iran.

In an interview with Hassan Nourian, consul general of the Islamic Republic of Iran, Hyderabad, The Dollar Business explores current issues in the India-Iran bilateral relationship.

Speaking about diverse areas from the ambiguity in payment settlement mechanisms to problems in basmati rice exports, the diplomat lucidly explains the dynamics in India-Iran relations. According to Financial Tribune, below is the full text of the interview:

TDB: How are the unresolved issues in payments settlement between India and Iran being dealt with?

NOURIAN:  The JCPOA opened banking routes for Iran and caused the old payment mechanism to become defunct. Opening up of SWIFT to Iranian banks has supplemented current payment methods. Minor issues still exist between Iran and India, which are in the process of being resolved.

Some of the Iranian banks have submitted proposals to the RBI [Reserve Bank of India] asking for permits to open branches in India, particularly Parsian and Pasargad. Opening up of branches in India will go a long way in introducing ease in business between the two countries.

Iran seems apprehensive in the use of dollar for foreign trade. Which currency is being used currently?

There are different categories of sanctions, some imposed internationally and others specifically by the US government. The newly imposed international sanctions have been lifted recently by the United Nations Security Council, but the old American sanctions are not among these international sanctions.

The government of Iran is interested in diversifying its use of various currencies for foreign trade. With many countries, transactions are made in their respective currency, for instance, yuan with China and euro with the EU.

What is the strategic significance of Chabahar Port for India and Iran?

India, Iran and Afghanistan signed a tripartite agreement last year during the visit of [Indian] PM Narendra Modi’s visit to Tehran, to develop the Chabahar Port into a transit hub. India has committed to a $500 million investment for the same.

Until 1947, Iran and India were neighboring countries. Since the separation of Pakistan, India has not had a direct trade route connecting it with Central Asia and Afghanistan. Easy trade access to Central Asia is the prime strategic reason behind India’s investment in Chabahar Port.

Chabahar is not only an economically beneficial area but also an important strategic area. Through investments from countries like India, Iran hopes to bring about the development of many undeveloped villages and cities in the Chabahar region.

What is India’s role in bringing stability to Central Asia, weighed down by terrorism and extremism?

Our region is suffering from problems of extremism. Afghanistan, due to an unstable and weak government, is a breeding ground for terrorist groups to emerge and grow. Poverty and a weak economy are the root causes for the emergence of extremism.

Empowering business environment and economy in these regions can help secure the region from growing terrorism, and that is why investment in the eastern part of Iran, which will provide a direct link to Afghanistan and Pakistan, may help empower small groups of people with productive tools of education and business, cutting off their ties to extremist ideologies.

Japan and China have also expressed interest in investing in the Chabahar region.

What are the supply-demand statistics of basmati rice in Iran?

Per capita consumption of basmati rice in Iran currently stands at 37–40 kg annually, or 104 grams per day. While Iran’s annual production of basmati rice averages 1.8 million-2 million tons, consumption is around 3 million tons. To fill in for this deficit between demand and supply, Iran imports rice to the tune of 1 million tons every year, mostly from India.

What is India’s share in Iran’s total import of basmati rice?

The quality of Indian basmati rice is ideal and suitable for Iranian consumption. As much as 700,000 tons of the Iranian annual basmati rice imports are sourced from India. Pakistan, Thailand, Vietnam and other European and Latin American countries account for the remaining 30% imports.

Many other countries are competing for India’s massive share of the pie. India must keep its prices competitive to secure its edge.

Why has the Rice Importers’ Association in Iran capped import prices at $850/ton?

A price hike of 50% in October 2016 caused Indian exporters to demand high prices for their produce. This compromised affordability for the Iranian citizen.

Iran has off-late cut down import tariffs on rice from 40% to 26%, to boost affordability. With the same objective, the Iranian government recommends a price cap of $850/ton for rice imports.

Why does Iran temporarily ban rice imports for a few months every year?

Iran imposes import restrictions not only on rice but on all agricultural products during their respective domestic harvest season. Averaging 3-4 months, the temporary barring of imports is a policy common for all of Iran’s agricultural produce.

What are some other concerns regarding basmati rice trade between India and Iran apart from prices and temporary import restrictions?

India’s negligence in meeting quality standards raised a few red flags at Iran’s Health Ministry. Instances of some Indian samples being laced with arsenic had aroused some quality concerns.

To override the triple hurdles of quality, price hike and seasonal import restrictions, a trade delegation from India had visited Iran in January 2017. During the high-profile visit, India invited Iran for laboratory visits to perform quality checks.

What impact will the oil price rise due to the OPEC deal have on India-Iran trade?

India, being a fast-developing nation, has a very high demand for energy. Complementing this need, Iran is the most stable and resourceful country in the region for India to import oil reliably from.

Due to a drop in global prices of oil, India-Iran trade volume dropped from $13 billion in 2015 to $9 billion in 2016, despite an increase in the volume of oil imports by India from Iran.

We do not wish for our economy to rely excessively on oil exports. With this objective, Iran has adopted the policy of Resistance Economy.

India-Iran trade is mostly confined to crude oil. What are some other areas of focus for increasing bilateral trade?

More than 70% of the India-Iran trade are currently in crude oil. Rice, dal [pulses] and other edibles make up for most of the remaining trade volume.

Iran would like to go beyond this traditional trade relationship and engage with India in advanced sectors like IT, aerospace, biotechnology and pharmaceuticals.

Hyderabad has immense potential for both industries, pharma and IT. About 70% of India’s manufacturing capacity in pharmaceuticals are housed in Hyderabad.

In fact, Chennai, Hyderabad and Bangalore are three of the southern IT hubs, which fall under our jurisdiction.