India imports a lot of crude oil from countries like Saudi Arabia, Kuwait and Iran – to the tune of 80 per cent of its requirements. Iran is the second biggest supplier to India after Saudi Arabia. It generates ten shipments a month to India. The sanction to cut all trade ties with Iran over its nuclear program has affected India, but a six-month waiver has been provided from Washington.
There recently was a problem with payments, but Iran is now accepting 45 per cent of the bill in rupees, which helps India immensely considering the falling rupee. However, Indian shipping companies have stopped taking orders for delivery from July 1 because that is when the imposed sanctions begin. The state-run General Insurance Corporation has agreed to provide third-party liability cover to the tune of USD 50 million, but there isn’t sufficient clarity yet. The shipping companies therefore don’t feel that the risk is low enough and will not take any further orders until proper insurance cover is provided. The current cover provided by Protection and Indemnity Clubs offers a much higher cover of USD 1 billion, including pollution damage.
The current method of shipping the oil is done by the ‘Free-on-board’ method, by which India has to organize transport and insurance. The option is ‘cost, insurance and freight’ imports, where the seller – Iran, in this case – will organize all three and India has to pay the all-inclusive bill. With more and more companies cutting trade relations with Iran, this cost is bound to go north, meaning a bigger oil import bill for India, and at current prices, an even bigger deficit. The oil ministry has requested the government to allow Iranian ships to ferry crude oil to India, but a final decision is yet to be taken.
Will this mean yet another petrol price hike? Or will the government take the plunge and risk inflation by increasing the price of diesel, kerosene or LPG? We can only hope that a solution works itself out in time.
