BERNANKE’s “TAPERING” HITS INDO- IRAN RUPEE TRADE AGREEMENT

FEDERAL RESERVE HUMBLES ‘SPECIAL TRADE ARRANGEMENT’

Tejinder Narang

a)   Iran lost about 20% of value basket due to recent rupee depreciation. Put simplistically, Iran sold crude oil 20% cheaper to India in 2012-13. India benefits while USA’s sanctions against Iran also get partly justified.

b)   In principle, Iran can be supplied goods imported by Indian trade in hard currency from third countries with value addition of 15%. Implies that US Dollars are to be “over invoiced” by 15%. Procedurally that remains ineffective.

c)   If  provision at (b) is allowed to become operational, Iran will be any way paying 35% extra (20% deprecation+15% value addition).

d) India remains hesitant for investments of exploration in crude oil in Iran due to US sanctions.

e)   Iran may therefore rethink on rupee arrangement. A set- back for India.

f)     Will rupee agreement fade away?

Pursuant to US trade sanctions on Iran, a bilateral payment agreement between India and Iran was signed in 2011-12. The mechanism provided payment of crude oil to Iran by India in non-convertible Indian rupees and Euros in the ratio of 45:55. On 6^th February 2013, this agreement was extended to 100% payment in rupees for such imports. (See box 1 below). Iran agreed to utilize rupees so credited with an Indian Bank—UCO bank –for sourcing imports of capital goods/engineering items, agro items like rice, wheat, sugar, soy-meal, corn, tea, textiles and pharmaceuticals etc. Recent reports indicate that Iran intends to revert to 45:55 ratios.

In 2012-13 India exported $2.5billion of goods and imported $13.55 billion of crude oil. Under current dispensation Indian oil importing companies effect payments in rupees equivalent to the Euro value against a letter of credit on the rate of exchange (ROE) prevailing on the date of transaction. The net amount in Indian rupees gets crystallized with the Indian UCO bank to the a/c Central Bank of Iran or Bank Markazi.

Speed of exporting Indian goods to Iran has roadblocks. Some of the procedural complications/delays are attributable to Tehran in authorizing “debit advice” to Indian account of Iranian banks. This has affected prompt utilization of trade surplus. Iran has consistently shown its unwillingness to source Indian wheat on zero tolerance on some phyto-sanitary issues. Wheat import per annum could have been about 3 million tons with a debit entry in the rupee account for mitigation of surplus and beneficial to Iran.

Iran’s loss by 20% in value

Had the amount kept in Nostro dollars/euros a/c, its absolute value would have remained unchanged. But that was not the case. Trade balance favoring Iran, of about $11 billion in eq.Indian Rupees @54  to a USD is about  Rs.59400 crores or Rs 594000 million remained in Indian bank.  But rupee deprecation to @65 to a dollar of $11 billion (as of 7^th September 2013) amounts to Rs 71500crores or Rs. 715000 million. Iran lost about 20% of rupee value basket.  No interest is payable on the outstanding amount.

Loss of (Rs.715000-594000) or Rs 121000 million to Iran reflects hammering of buying power worth $2.25 billion. Put simplistically, Iran sold crude oil 20% cheaper to India in 2012-13. India benefits while USA’s sanctions against Iran also get partly justified.

Two prime factors that caused steep deprecation of rupee are Bernanke/Federal Reserve of US intention (openly expressed in July-Sep2013) to taper down supply of monthly bonds of $85 billion and India’s higher current account deficit (about 5% of GDP). India’s twin deficits—fiscal and current account deficits-- which is spending beyond reasonable means by the Indian Government and importing much more than export of goods/services/invisibles, have eroded rupee’s value which unfairly hits Iran.

Third country imports

There is also another notification dated 10^th June 2013 (copied below) under which Iran may seek goods through India, imported by Indian trade in hard currency with value addition of 15%. Goods imported by India in US Dollars are to be “over invoiced” by 15%. Reserve Bank of India (RBI) has not permitted Indian banks to operationalize this notification. RBI insists that exporter must furnish “certificate of origin as India” for the good exported. This is not feasible.

Procedural protocol for Implementation of this facility has not been spelt out e.g. whether the goods will be first shipped in and then shipped out of India or whether the vessel has to mandatory touch any port in India or not.  Third country import provision thus remains on paper.

If this provision is allowed to become operational, Iran will be any way paying 35% extra in Indian rupees (20% deprecation+15% value addition) for goods ( soybean, corn  sugar, soy oil, palm oil etc) imported by them from hard currency areas against crude oil revenues generated in 2012-13. Even Chinese companies intend to route some FX business through value addition route.

Indian policy makers will not allow Iran to buy assets in India out of Indian rupee account on the principle of national sovereignty and also for the fear of offending US.

Weaker rupee to deter Iran

Indian macro-economic reforms are stagnating; CAD and fiscal deficits are not are not manageable due to impending elections; domestic inflation of about 10% will remain unchecked; USA will continue with some monetary tightening; rupee will continue to be weaker currency at least for next two years. The rupee a/c of Iran will continue to depreciate.  Iran may therefore rethink on the rupee arrangement.

Indian oil Ministry’s attempts to source higher crude imports from Iran are likely to get a setback, unless India’s decides to make sizable investments out of the rupee account in Iran—which may also be exposed to uncertainty of Iranian politics, lack of legal remedies and international isolation. Any investments by India in Iran to Farzad oil field or any other area for oil exploration, though unlikely, will also be at the displeasure of USA. The Cha Bahar port cooperation between the two countries has already been contentious matter with USA. 

The issues that need to be considered are

a)   Is this a temporary set- back to Indo-Iran Bilateral agreement?

b)   Can the utilization of surplus rupees be expedited by both sides?

c)   Is this the beginning of the end of this special trading agreement?

d)   Will the entire arrangement be renegotiated?

Option (c) appears to be most likely route. In the meantime imports of crude may slow down. This is contrary to Indian requirement and consistent with US mandate. Indian export will continue out of the surplus available in the rupee account of Iran.

BOX 1

India and Iran have put in place an enabling bilateral payment and settlement arrangement. Under this arrangement, UCO Bank has been allowed to open “Special Non-Resident Rupee Vostro Account” in the name of Iranian Banks, viz. Parsian Bank, Bank Pasargad, EN Bank and Saman Bank, subject to certain permissible credits and debits.

These include, among others:

1. Permissible Credits – Funding by inward remittances in foreign currency of the account of the Iranian banks for meeting payment obligations arising out of  exports of goods including project exports to Iran;

2. Permissible Debits – (i) Payment towards export proceeds realization; (ii) Repayment of Line of Credit extended by Exim Bank to Iran; (iii) Other debits for meeting payments towards statutory  dues, levies, cess, bank charges, etc, and (iv) Any other credits / debits specifically permitted by RBI.

Under this Rupee Payment  Mechanism, Indian exporters are allowed to receive export payments in Indian Rupees. Indian exporters are also allowed to receive advance payment against exports from Iranian importers in Indian rupees though the above Rupee Payment Mechanism, subject to certain conditions / modalities. Further, ‘Setting-off’ of export receivables against import payables in respect of the same overseas buyer and supplier with facility to make / receive payment of the balance of export receivables / import payables, if any, through the Rupee Payment Mechanism, may also be allowed, subject to certain conditions.

BOX 2

MINISTRY OF COMMERCE AND INDUSTRY

DEPARTMENT OF COMMERCE

Notification No. 17  (Re 2013)/2009-2014

New Delhi, Dated The 10^th June, 2013

Subject: Notification of Iran under Para 2.35 (b) of Foreign Trade Policy, 2009-2014.

S.O. (E): In exercise of powers conferred under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992 read with paragraph 2.1 of the Foreign Trade Policy, 2009-2014, as amended from time to time, the Central Government hereby notifies Iran under paragraph 2.35 (b) of Foreign Trade Policy, 2009-2014

2.       Accordingly, exports of such goods to Iran which have been imported against payment in freely convertible currency would be permitted against payment in Indian Rupees also, subject to at least 15% value addition.

3.       Effect of this Public Notice:

          Countries eligible to avail benefits of Para 2.35 (b) of Foreign Trade Policy, 2009-2014 have to be notified. Iran is being notified now as eligible.

(Anup K. Pujari)

Director General of Foreign Trade

Email:dgft@nic.in