Crude oil remains central to the Indian economy as it makes up for around 25 per cent of its imports in a year, that help to fulfil 80 per cent of the energy requirement. With Iran being the third largest supplier of oil to India in 2018-19, the risks and disadvantages posed by the sanction on import from Iran are manifold.
Of the total $128.7 billion imports of Petroleum, Oil and Lubricants (POL) during the first 11 months of 2018-19, Iran accounted for 9 per cent, according to the CMIE data compiled by CARE Ratings.
Crude oil has various uses in the industrial sector. It is refined into petroleum products that are used for many different purposes. The petroleum products are used to propel vehicles, heat buildings and produce electricity. The petrochemical industry uses petroleum as a raw material to produce products such as plastics, polyurethane, solvents, hundreds of other intermediate and end-user goods.
Benefits of imports from Iran
No supply of oil from Iran would mean sourcing the same from other countries which may not provide the same benefits as provided by Iran in the form of price and credit facility, said the report. The alternate suppliers such as Saudi Arabia, Kuwait, Iraq and the US do not offer benefits like 60-day credit, free insurance and shipping as Iran does.
Further, the voluntary cut by OPEC and allied producers and the US sanctions on Venezuela has already raised the oil prices by more than 35 percent, show Reuters data. Against this background, the sanctions on Iran will further push the oil price up.
Another threat which emerges from sanctions on Iran is the possible retaliation by the country in ways which may be detrimental to international oil market. For instance, Iran has threatened to close the Strait of Hormuz, which can increase energy costs and global energy prices. Since 60 percent of the world s petroleum and other liquids production moves on maritime route and Strait of Hormuz attracts the passage of one-third of global seaborne oil, such an action could be damaging, experts said.
Effect on economic indicators and policies
A continuing surge in oil prices could pose detrimental effect on the economy leading to widening of current account deficit, the report said. A permanent increase in crude oil prices by 10 per cent under ceteris paribus conditions could translate into the current account deficit increasing by 0.4-0.5 per cent of GDP, the report added.
The report further pointed out towards consequent rise in inflation by the move. However, it will depend on the extent to which crude oil price goes up and the extent to which the government allows the pass through of crude oil price to the consumer, the report added. In extreme cases, a 10 per cent increase in crude oil prices can lead to 1 per cent in the WPI and around 0.24 percent CPI inflation, the report noted.
The report also pointed towards a possibility of no rate cut by the MPC in its upcoming bi-monthly committee meeting in June.