Despite deal, India's payment issues with Iran persist

India owes Iran around $8.8 billion primarily on account of crude oil imports.

The US and Iran may have reached an agreement on reduction in the latter's uranium enrichment programme and lifting of sanctions, but trade payment issues between India and the West Asian nation are far from over. 

India owes Iran around $8.8 billion, primarily on account of crude oil imports, even as its exports have grown by 48 per cent in 2013-14. 

Iran was until 2006 India's second-largest supplier of crude oil. But it dropped to number seven by the end of 2013-14, though India continues to be Iran's second-largest buyer, next only to China.

Forced by sanctions, India has reduced its oil imports from Iran but it has continued to maintain good relations with the West Asian nation, which has been reeling under US and EU sanctions for over three years now. 

A trade delegation under commerce secretary Rajeev Kher is leaving for Tehran on Saturday.

On top of the agenda is the resumption of rice exports. India is planning to again export rice to Iran now that the country is short of inventory.

"Iran had increased the duty on rice to up to 45 per cent last year as it had a solid inventory in 2014-2015. However, now since its inventory is almost over it is planning to reduce the duties again and start procuring from India as it did in 2013-14," Ajay Sahai, CEO and DG, Federation of Indian Export Organisations (FIEO), told Business Standard. 

India also plans to develop the Chabahar port in Iran through a joint venture of the Jawaharlal Nehru Port Trust (JNPT) and the Kandla Port Trust (KPT) and, if required, a local Iranian partner and an Indian private company. 

Since EU and US sanctions disallow transactions with Iranian entities, India and Iran had put in place a payments mechanism through Turkish Halk Bank and its own UCO Bank.

Currently, Iran makes rupee payments to India for its purchases entirely through UCO Bank, which are set off against what India owes to Iran for crude oil. Low-value export items such as rice and pharamaceuticals limit the scope to set off rupee payments against India's dues to Iran. 

The balance in Iranian commercial banks' accounts with UCO Bank was Rs 17,895.5 crore ($2.86 billion) as of March 16, 2015, while Indian refiners owed Tehran $5.943 billion as of February 28, minister of state (independent charge) for commerce and industry Nirmala Sitharaman said last month. Despite an 11 per cent fall in India's imports from Iran to $10.30 billion, its exports are still half of its purchases from the country. 

Besides re-routing purchases, India also reduced crude volumes from Iran. It has narrowed the trade gap with Tehran to $5.40 billion, and has allowed Indian exporters to import non-sanctioned goods into India for sale to Iran. 

"The Ministry of Finance has decided that payments to the extent of $100 million per month for such third-country exports to Iran would be allowed from the 45 per cent rupees vostro account held with UCO Bank," Sitharaman said in a reply to Parliament.