Indian exporters have urged the finance ministry to allow them to obtain advance payments from Iran, even as a payment mechanism has already been established between India’s UCO Bank and the Parsian Bank of Iran. The mechanism is aimed at raising India’s exports to Iran from $2 billion to $5 billion in 2013-14.
It has been decided shipments to sanctions-hit Iran would now be paid in rupees.
According to the Federation of Indian Export Organisations (FIEO), letters of credit (LCs) have been operational under the new system of payment mechanism with Iran. However, the exporters’ body has urged the government to look into another issue. The buyer, in this case Iran, should pay an advance of 15-50 per cent of the entire value based on the contract, to ensure the buyer’s commitment during price fluctuations.
Unlike dollar trade, trading in rupees requires permission from the importer’s bank to clear payment guarantees for exporters. In dollar trade, whenever an exporter produces the LC before his bank, the guarantee is given by the home bank.
Sahai said under rupee trade, the importer had the right to reject payments in case there was a discrepancy in the documents provided by the exporter.
Ajay Sahai, director general and chief executive, FIEO, said, “Advance payments are required in sectors in which where prices are changing rapidly. Paying advance means there is a commitment from the buyer’s side to buy the product from us. At the moment, the mechanism that has been worked out does not talk of advance payments. We are demanding this with Iran, because we are carrying out rupee trade with them.”
India earlier engaged in a similar manner of trade with the erstwhile USSR (rupee-rouble trade). Then, too, an option of advance payment was sought. However, this trade collapsed with the fall of the USSR.
|* Payment for shipments to Iran to be made in rupees
|* Payment problem with Iran started in 2010 with the withdrawal of Asian Clearing Union mechanism by RBI in December 2010
|* India plans to increase exports to Iran from $2.74 billion to $5 billion in 2013-14
|* India plans to export wheat, tea, machinery, pharmaceuticals, auto components to sanctions-hit Iran
|* Indian exporters are demanding advance payment mechanism option to carry out trade with Iran
|* Separate Iran cell opened under the aegis of FIEO for the benefit of exporters
FIEO officials today met the banking secretary and RBI officials to raise the issue of advance payments with Iran.
According to Ram Upendra Das of the Research and Information System for Developing Countries (RIS), exporters are always wary of payments. The fact that FIEO is urging for such a provision indicates the risk factor associated with such transactions, especially if a country is under sanctions.
FIEO had led an 80-member delegation to Iran to increase its exports to that country in the wake of sanctions imposed on the region by the US and EU. The delegation, led by Arvind Mehta, joint secretary in the department of commerce, ministry of commerce & industry, also had exporters and representatives from the Reserve Bank of India (RBI).
India now plans to export pharmaceuticals, auto components, iron and steel, rice, soya bean, soya bean oil, medical instruments, surgical instruments, flat-rolled iron, flat-rolled stainless steel, tractor parts, polymers and frozen meat products to India. India has set a target of increasing bilateral trade with Iran from $15 billion to $25 billion in four years.
Rafeeque Ahmed, president, FIEO, said, “There is now a huge demand for Indian commodities there. We are going to sell those products where there is an opportunity. We are not there only because of the sanctions, we want to be their permanent trading partner.”
Ahmed also said the payments stuck would be cleared expeditiously. Payments worth over $1 billion to be paid to Indian exporters are stuck under the Asian Clearing Union mechanism since December 2010, when RBI withdrew the mechanism.
FIEO has set up a separate Iran cell to solve the problems of exporters under the new payment mechanism. The cell would also receive feedback from exporters. India is the second-largest buyer of Iranian crude oil after China. It imports about $11 billion worth of crude from Iran, the second-largest supplier to it after Saudi Arabia. Items Iran imports from India include spices, coffee, tea, mineral fuel, iron and steel, machinery and organic chemicals.
Ahmed is scheduled to meet officials from the shipping ministry to determine the shipping lines, as some have expressed reservations on carrying consignments to Iran.