Change in payment mechanism to impact Indo-Iran trade

Trade between India and Iran is set to undergo a paradigm shift, even as the Reserve Bank of India (RBI) is determined to stop making payments through dollars or euros under the Iran-based payment system or the Asian Clearing Union (ACU).

“It is not going to be easy. The new system of payment, whatever it may be, is bound to create problems for us, as we deal with it on a daily basis. Therefore, I think it is going to impact the bilateral trade between India and Iran,” said Bharat Shah of SK Age Exports, which exports pharmaceuticals to Iran. Shah is also senior vice president of the India-Iran Chamber of Commerce and Industry.

Recently, RBI had said it would no longer make payments through the Teheran-based ACU, an intra-regional mode of transaction for settling payments. The ACU was established in 1974 with the objective of a clearing union, to facilitate payments among member countries. It settles trade transactions between Bangladesh, Bhutan, India, Iran, Nepal, Pakistan, Maldives, Myanmar and Sri Lanka.

“The RBI is working out a payment mechanism, which I am sure would be up to the satisfaction of all the stakeholders involved. If a satisfactory resolution is worked out, then there should not be any impact. Trade will carry on smoothly, as it is now,” Arvind Mehta, joint secretary, commerce, told Business Standard.

Besides oil, India imports items such as nuclear reactors, furniture, nuts, cocoa products, salt, ores, ceramic items, and organic chemicals. India mainly exports tea, coffee, meat products, pharmaceuticals, tobacco items, silk, carpets, aircraft, spacecraft, iron and steel, footwear and fertiliser to Iran.

“The government had said it might opt for the (Japanese) yen to pay for all trade transactions. Exporters are worried, because the yen is not doing well. It depends what exchange rate we arrive at and it should not impact their margins,” said Ajay Sahai, director general and CEO, Federation of Indian Export Organisations.

Total export to Iran in 2009-10 was $178,751.4 million, while import was $288,372.9 mn and India’s trade balance was a negative $109,621.45 mn.

Until 2008, payment under the ACU was based on US dollars. Since then, the euro became the mode of payment, after the US imposed sanctions on Iran over its nuclear programme. The US had also been pressurising India to review its trading relations with Iran, from where 13 per cent of India’s oil imports come.

“The new mechanism may prove to be helpful in reducing the trade deficit and make the system more transparent. India has to take a clear view of its own national interest, irrespective of our alliance with the US,” said Rajiv Kumar, director general, Federation of Indian Chambers of Commerce and Industry.