Delhi's dilemma

India’s economic mess is so desperate it’s considering busting sanctions on Iran

September 2, 2013
September 2, 2013

The worsening current-account deficit and the falling rupee are driving Indian policy-makers to propose moves that some might consider extreme, if not downright foolhardy.

In June, Washington exempted India and eight other countries from financial sanctions on trading with Iran for reducing their dependence on Iranian oil. India, which had already cut its imports from Iran by 27% to 13.1 million tonnes (14.4 million tons) in the last fiscal year, imported just two million tonnes in the first five months of the current fiscal year. But now India’s oil minister, Veerappa Moily, has floated a proposal to restore them to last year’s levels. According to Moily’s calculations, doing so will help India save $8.5 billion in foreign-currency reserves, since Tehran accepts payments in rupees as part of a barter system between the two countries.

The stakes are high. If India goes through with the proposal it could be cut off from the US financial system for six months. But the economic crisis could force India to tread the diplomatic tightrope. The government’s promise to bring the current-account deficit down to 3.7% of GDP from the previous year’s 4.8% has not yet bolstered confidence in the rupee. GDP data out on Aug. 30 showed that the economy was growing at its slowest pace since 2009, and manufacturing activity contracted for the first time in four years. And rising oil prices have made matters worse; India imports 80% of its oil. In the first seven months of 2013, the petroleum import bill has averaged $14.2 billion a month, compared to $13.9 billion a year earlier.

Moily’s proposal comes after prime minister Manmohan Singh last week asked the oil ministry to work out a plan to reduce the $170 billion annual oil import bill by $25 billion. It seems radical, but there aren’t too many other options. Yesterday (Sept. 1), state-owned Indian Oil Corporation, the country’s biggest oil refiner, raised petrol prices by around 4% to curb imports, but fuel price hikes are an added burden for Indian consumers, whose household budgets have been strained by inflation hovering around 6%.  The government has also raised import taxes on gold, the second biggest contributor to the deficit after oil, three times this year.

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