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India-Iran Trade: Looking Beyond Crude, Pushing For Barter

Undeterred by U.S. economic sanctions, India and Iran are working together to put in place a barter mechanism to boost bilateral trade. Additionally, the two sides are also close to finalising a Preferential Trade Agreement (PTA) which is expected to give a fillip to trade between the two countries.

Seeking to circumvent U.S. sanctions that have made payments for commodities difficult, New Delhi and Iran have also decided to shore up the rupee payment mechanism, currently in use for India’s purchase of Iranian crude.

While India has decided to open a branch of IDBI bank in Tehran—UCO Bank is already present there—Iran is opening a branch of Pasargad bank in Mumbai. The IDBI, like UCO bank, will be handling rupee transactions.

The barter system, currently in use for oil trade between India and Iran, is expected to cover other commodities, said sources. While New Delhi got a temporary U.S. waiver for importing Iranian oil, the unilateral sanctions have led to a dip in imports. This waiver ends early May but New Delhi that recently said it’s in discussions with the Trump administration on this matter expects to get an extension.

The need to expand and diversify the trade basket which is currently dominated by crude imports from Iran is learnt to have prompted the two sides to explore a barter mechanism and explore the possibility of a PTA.

The sanctions-hit Iranians are keen on having the barter system for commodities other than oil. India-Iran bilateral trade during the 2017-18 fiscal was worth US $13.8 billion with the balance tilted in Iran’s favour due to its oil exports. India imported US $11.11 billion worth of goods—around $ 9 billion constituted oil imports—and exported commodities worth US $2.7 billion.

However, sources said actual trade was in the range of US $20-25 billion which is conducted indirectly, especially due to U.S. sanctions. The Iranians believe this can go up to US $30 billion if there is a barter mechanism for direct trade. Many items can be exchanged without going through the banking channels is one the reasons Tehran is said to be pushing for the barter mechanism.

For instance, it is looking to supply urea and barter it for soybean meal (used to feel animals) which it already imports from India. Nearly one-third of India’s demand for urea is met by Iran and sanctions have forced the former to import this commodity through third parties, increasing its cost by 38 per cent for the Indian farmer.

Apart from Iranian crude and urea, other Indian imports from Iran include inorganic and organic chemicals, fruits, nuts, glass and glassware, natural or cultured pearls and precious and semi-precious stones.

Among the major items of imports by Iran are iron and steel, rice, tea, pharmaceuticals, electrical machinery, etc. Iran imports ingredients for drugs manufactured by its pharma industry from India and is keen on increasing these imports.

As for the PTA, sources said it is almost finalised. Yet another round of talks to discuss which commodities can be included in the PTA by both countries was held in Tehran recently. A previous round of talks was held in New Delhi in January.

“We will choose commodities on which the lowest import tax can be levied,” said sources. “For example, Iranian apples are among the best in the world. If tariffs go down, India can import apples from Iran. And Iran, in turn, can import other fruits from India instead if importing them all the way from Latin American countries,” sources added.

Bilateral trade and investment is also expected to get a further boost with the Iranian Majlis recently giving its approval to the double taxation avoidance pact. Signed during Iranian President Hassan Rouhani’s visit to New Delhi in February last year, the agreement is expected to aid the flow of investments, technology and personnel between India and Iran.

Apart from having systems in place that will facilitate bilateral trade, the two countries are also involved in active outreach to their business communities.

Iranian foreign minister Javad Zarif’s during his visit to New Delhi in January 2019 proposed the setting up of an India-Iran Chamber of Commerce that will facilitate business between the two countries.

The Indian embassy in Iran brought businessmen from both countries together at an ‘Expanding India-Iran Trade’ event last month in the Iranian capital. According to the embassy, there were nearly 100 participants at this event in which New Delhi also made a push for Iranian business to explore having ties with not just the Centre but with states as well.