2-Sep-2013
India's oil minister is considering a plan to reduce the country's ballooning current-account deficit that includes holding its oil imports from Iran steady, according to a letter he sent to the prime minister.
Veerappa Moily said in the letter to Manmohan Singh, reviewed by The Wall Street Journal, that India could save as much as $8.5 billion by importing a further 11 metric tons of crude from Iran on top of the 2 million tons it has imported so far in the fiscal year that began April 1. This would be on par with the country's 13.11 million tons, or 263,000 barrels a day, of Iranian oil imports, in 2012-13. Failing to reduce the amount would put India in jeopardy of losing an exemption from U.S. sanctions against countries that do business with Iran.
The savings in foreign-exchange outflow would be achieved thanks to a barter arrangement that India has with Iran. It purchases oil from the Islamic Republic by depositing rupees into a bank account, and then Iran imports Indian goods, potentially including food, drugs, consumer products and auto parts, debiting rupee amounts from the same account.
India could save more money by limiting crude-oil imports by state-owned companies to the level reached in 2012-13 and by launching a fuel-conservation campaign, among other measures, Mr. Moily said in the letter. Last week, Mr. Moily said that Prime Minister Singh had asked him to work out a plan to cut the oil import bill by $25 billion.
Oil costs have been increasing globally of late on concerns about potential supply disruptions from the Middle East, largely as a result of U.S. plans to launch a military action against Syria. India has been particularly hard-hit, as the value of the rupee has fallen by nearly 20% against the U.S. dollar since May. The resultant higher cost of imports in general has led to accelerating inflation.
The rupee was at 66.00 to the dollar in late Asian trade, compared with around 53.68 at the end of April. Wholesale inflation was at 5.79% in July compared with 4.86% in June.
India paid about $144.29 billion for crude oil in 2013-14, Mr. Moily said. The country imports around 75% of its oil, and state-owned oil companies are forced to lose money on much of their output of refined products. Losses on subsidized diesel and cooking fuels will likely increase by 12% in 2013-14 to reach 1.8 trillion rupees ($27 billion) from 1.61 trillion rupees last year.
In the last calendar year, front-month Brent crude on the ICE futures exchange for delivery in October averaged $105.20 a barrel. On Monday, it was around $113.50. That amounts to around 7,475 rupees a barrel at the current exchange rate, up nearly a third compared with the average rupee-equivalent price last year.
"Whether it is Iran or any other country, any way by which we can have petrol or crude oil in a different currency [other than dollars], that is useful," said B.K. Chaturvedi, a member of the Planning Commission, a government think tank.
He said the idea of oil imports in rupees ought to be explored with other producers as well, such as Saudi Arabia, Nigeria, Venezuela and Colombia.
India has begun talks with Iraq for a barter trade agreement.
Any plan to increase oil imports from Iran would depend on foreign ministry approval, said Sujon Hajra, chief economist at Anand Rathi Securities.
India will have to consider the U.S. sanctions. Last fiscal year's Iranian oil imports fell by 27%, in line with a U.S. requirement that India and some other countries—including China and South Korea—steadily diminish their reliance on Iranian crude. The exemption is renewed every 180 days, and it is due to be renewed in December.
A continuing dispute between Iran and India over an Indian oil tanker that the Islamic Republic has detained—Iran says the tanker was polluting its waters; India denies the allegation—could also slow trade between the two countries. The tanker's owner said Friday that it was "hopeful" that the dispute would be resolved soon.
The broader goal of restricting oil imports could stumble, as railways and the defense sector, among the biggest guzzlers of diesel in the country, will likely continue to ratchet up demand, Mr. Hajra said.
Increasing prices "in a phased manner" may help to limit demand, he added.
The oil ministry has said that it may increase diesel's price by between three and four rupees a liter once the current session of parliament ends on Sept. 6. Diesel is selling at 51.97 rupees per liter in New Delhi.
Mr. Moily also said in the letter that the government is expected to fully implement a program to blend 5% ethanol with gasoline by next March.
The ethanol blending program could save around $340 million in 2013-14, he said
Source:- online.wsj.com
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