The US Sanction on Iran and Its Impact on Indian Economy

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The World Economic Order is unstable. Many countries are either on the verge
of bankruptcy or have been freshly bailed out by the IMF. The relationship
between the two largest economies, the USA and China is fraught with tension and
fire amid the ongoing trade war.

This wasn’t enough that a new problem has erupted to shake the world economy, bound to cause fresh wounds. The US under the Trump Administration has decided to re-impose sanctions on Iran, thus restricting its trade (mainly oil) with other countries.

WHAT ARE THESE SANCTIONS ON IRAN?

During the time before 2016, due to undisclosed nuclear activities by Iran, it
was hit by sanctions by the US. The sanction would mean that the US and all the countries having ties with it, would be restricted from trading with Iran including both import and exports. Example: supply of heavy weapons and nuclear technology to Iran was restricted, ban on crude oil imports from Iran and banking transactions with Iran were also restricted, a freeze of overseas assets, travel ban, ban on the trade of precious metals etc. This greatly affected Iran’s economy thus giving way to the ‘Iran Nuclear Deal’.

Iran Nuclear Deal

Formally known as the ‘Joint Comprehensive Plan of Action’ was signed and implemented in January 2016. It was signed between Iran and the five permanent members of the UN Security Council- China, France, Russia UK, US- plus Germany and the EU.

Under the agreement, Tehran (capital of Iran) agreed to eliminate and reduce the production of various gradients of Uranium. The agreement was aimed at ensuring that ‘Iran’s nuclear program will be exclusively peaceful’. In return, the UN Security Council will lift sanctions covering areas of trade, technology, finance and energy. The International Atomic Energy Agency (IAEA) was to have regular access to all Iranian nuclear facilities to monitor and verify Iran’s compliance with the agreement.

WHAT DID IRAN DO THAT THE SANCTION IS BEING IMPOSED AGAIN?

On 30th April,2018, the US and Israel stated that Iran did not stay true to the agreement as it didn’t disclose a past covert nuclear weapon’s program to the IAEA, which was required as per the 2016 deal. This lead to Trump’s withdrawal from the deal, who was always apprehensive about it, as previously seen from his powerful rhetoric during election campaigning. He called the deal inadequate which would not prevent Iran from
making nuclear weapons.

However, this move is not welcomed by the other signing members as they feel that this will further give Iran an incentive to strengthen it’s nuclear program.

In 2004, Iran produced 5.1% of the world’s total crude oil which was approximately 3.9 million barrels per day (mbd). It was the 2nd largest exporter among the Organization of Petroleum Exporting Countries (OPEC) in 2012.

Several major emerging market economies depend on Iranian oil: 10% of South Korea’s, 9% of India’s and 6% of China’s oil imports come from Iran. These statistics show that the Iranian oil has deep penetration into these markets and their balance sheet is bound to get affected post the sanctions are imposed.

WHAT WILL BE THE EFFECT ON IRAN OIL SANCTION ON INDIAN ECONOMY?

Analysts polled by Bloomberg say that Iranian sanctions could add between $2-$10 to oil prices this year. This is because with an imposition of the sanction, the supply of crude oil reduces in the oil market due to which there is a rise in crude oil prices. This increase in crude oil prices will increase India’s oil import bill, widening the current account deficit. It will have to be financed either by foreign borrowing or by utilizing the foreign exchange reserves.

If the government does not provide subsidies to the Indian oil and petroleum companies, the retail prices of petrol/ diesel and other products (having the crude as a raw material) will shoot-up affecting the domestic consumer’s pocket.

The current depreciation in rupee, when combined with high oil prices will lead to a higher inflation, thus eroding real purchasing power. These macro-economic instabilities will cripple the domestic economy.

According to data published by the Department of Commerce and Industry, Iran is the third largest exporter of crude oil to India, behind Iraq and Saudi Arabia. India’s increasing reliance on Iranian oil can be attributed to its discounted sales. However, if we were to agree to these sanctions then our oil import portfolio will have to be changed.

Other countries facing a similar situation will follow suit. US’s regional ally Saudi Arabia would be handed a big market share on a silver platter!

In the past, India dealt with such sanctions on Iran by partially bartering goods and carrying out the transactions in rupees.

WHEN WILL THE SANCTION BE IMPOSED 

The sanctions become applicable from November 4 2018, until and unless US and Iran truce with each other.

CONCLUSION

This geopolitical conundrum will put India’s negotiation skills to test. America is trying very hard to leave no elbow-room for any country to side-step its sanctions. The grave part to ponder on is that these unilateral sanctions by one country are being forced upon other countries as well. The environment created is such that if the sanctions are not adhered to by any country, it would cost their economic relationship with the super-power to dwindle.

Author | Deepti Kansal