Iran's nuclear deal can benefit India

Vienna/New Delhi: Iran and six world powers sealed a historic accord to curb the Islamic Republic’s nuclear programme in return for ending sanctions, capping two years of tough diplomacy with the biggest breakthrough in decades.

Diplomats reached the deal in Vienna on Tuesday, their 18th day of talks. US President Barack Obama said it blocks “every path to a nuclear weapon” for Iran, while Iranian foreign minister Mohammad Javad Zarif called it a “win-win”.

Banks including Goldman Sachs Group Inc. and Barclays Plc say it would take 6-12 months for the holder of the world’s fourth largest crude reserves to revive production by about 500,000 barrels a day. Sanctions cut the country’s crude exports by more than half from a peak of more than six million barrels a day in the 1970s.

With new oil flows expected to hit an oversupplied market, Brent, the global benchmark, fell as much as 2.1% to $56.63 a barrel in London and was trading $57.87 at 9.02pm India time. Iran’s benchmark TEDPIX Index, led by oil and gas companies, advanced 0.3% at the close, the highest since April.

In China, Europe and Russia, the agreement will be welcomed by companies eager to access an untapped market of 77 million people. With an economy bigger than Thailand’s and oil reserves rivalling Canada’s, Iran is the most important market still closed to major equity investors, according to investment bank Renaissance Capital.

Ending economic penalties could open Iran’s stock market to investors in early 2016, Renaissance’s Charles Robertson and Daniel Salter wrote in a report on Monday. Inflows could total $1 billion in the first year, they said.

Oil-importing countries such as India should use the period of subdued oil prices to strengthen their monetary policy framework along with fuel pricing and taxation reforms, the International Monetary Fund (IMF) recommended in a report released, coincidentally, on Tuesday.

Low oil prices could boost India’s gross domestic product (GDP) by 0.4-0.6 percentage point over this year and next.

Boon for oil importers

India follows the US, China and Russia in energy use, accounting for 4.4% of global energy consumption. Petroleum product consumption in India has been growing. According to the oil ministry, it grew 3.14% to around 163.17 million tonnes in 2014-15.

In its report tiled Global Implications of Lower Oil Prices, IMF said: “Oil importers, in deciding how much of the windfall to save, should balance rebuilding policy space with managing domestic cyclical risks. Those with significant vulnerabilities should save much of the windfall, while those facing large output gaps should spend it.”

It added that “countries should use this period as an opportunity to strengthen their monetary policy frameworks; evidence of second-round disinflationary effects could open space for reducing policy rates in some countries”.

The fund said countries such as India will reap modest benefits from lower global oil prices as it does not fully pass on the benefits to consumers. While lower oil prices are expected to boost global growth by one percentage point in 2015 and 2016, the IMF said India’s GDP is expected to get a boost of between 0.4 and 0.6 percentage point in the same period.

The multilateral agency is right to point out that governments like India may be absorbing the benefits of lower oil prices to meet their budget deficit targets and are not passing on the benefits to consumers, which could be less growth-inducing, said Madan Sabnavis, chief economist at CARE Ratings. “There is nothing wrong or correct about it. The Indian government has a huge subsidy burden and it is using the opportunity to correct it,” he said.

Low international crude prices have helped the National Democratic Alliance (NDA) government bring retail inflation below 5%, better its fiscal deficit target of 4.1% of GDP for 2014-15, and bring the current account deficit to 1.6% of GDP in the January-March quarter, against 2% in the preceding three months.

“Low oil prices provide a window of opportunity to undertake serious fuel pricing and taxation reform in both oil-importing and oil-exporting countries,” the report said.

In October, the government freed diesel prices. When crude oil prices fell, it cut fuel prices but simultaneously raised excise duties. This way, the government garnered additional revenue, while resisting the temptation to fully pass on the benefit of lower crude oil prices.

Crude oil prices in the Indian energy basket averaged at $61.75 per barrel in June, against $84.16, $105.52, $107.97 and $111.89 in 2014-15, 2013-14, 2012-13 and 2011-12, respectively.

The fall in prices has also presented countries such as India an opportunity to revise terms of imports. India has made a pitch for price and terms correction with the Organization of the Petroleum Exporting Countries (Opec) and has asked for a concession rather than having to pay the so-called Asian premium.

“India alone is not going to benefit. Japan, China, Korea are also going to benefit. We are talking together at many forums and will be raising it together as well. We are the largest buyers for the Opec, so we need a favourable treatment and things are on right track. There is a positive signal from the seller side also,” said oil minister Dharmendra Pradhan in a 16 June interview.

India is one of the major consumers of Opec’s production, with the group accounting for 85% and 94% of India’s crude oil and gas imports, respectively.

“This is a very good time to review this practice and to provide more fair conditions for all parties,” Fatih Birol, chief economist at Paris-based International Energy Agency (IEA), said in an interview published on 2 July.

Bouyed by the subdued crude oil prices, the 2015-16 budget has estimated India’s subsidy bill at Rs.2.43 trillion, around 9% less than the revised estimate of Rs.2.66 trillion for 2014-15.

The petroleum subsidy is estimated at Rs.30,000 crore for 2015-16, 50% less than the revised estimate of Rs.60,270 crore. The difference between market prices and retail fuel rates—to be borne by oil marketing firms this fiscal year—is estimated at Rs.42,500 crore.

The budget has earmarked Rs.22,000 crore for subsidy on domestic cooking gas and Rs.8,000 crore for kerosene. While petrol and diesel prices are deregulated, the prices of domestic cooking gas and kerosene continue to be set by the government.

The Iran deal

Full implementation depends on Iran meeting obligations to curb its nuclear programme and address concerns about possible military dimensions of its work. Iran has until 15 December to answer 12-year-old questions about its weapons capabilities. Once inspectors verify compliance, the oil-rich nation will be allowed to ramp up energy exports, re-enter the global financial system, and access as much as $150 billion in frozen assets.

“This is probably going to go down in history as one of the biggest diplomatic successes of the century,” Ellie Geranmayeh, a policy fellow at the European Council of Foreign Relations, said by phone from London.

Congress has 60 days to review the document in Washington, where it will meet resistance from lawmakers who oppose making any nuclear compromises with Iran.

Israel, which has threatened military action to prevent Iran from getting a nuclear bomb, said it will use “every means” possible to persuade Congress to reject it, though Obama vowed to veto such a move. The House and Senate would each need a two-thirds majority to override a veto.

Israeli Prime Minister Benjamin Netanyahu denounced the deal as a “historic mistake”, saying in a statement that “sweeping concessions were made in all areas meant to block Iran from the ability to arm itself with nuclear weapons”.

Should the agreement survive review, it would become one of the biggest foreign policy achievements for Obama, who kicked off the initiative with a call to Iranian President Hassan Rouhani nearly two years ago. The US cut diplomatic ties with Iran in 1980, after revolutionaries seized the American embassy in Tehran and held hostages for more than a year.

Iran agreed to cut 98% of its stockpile of enriched uranium and eliminate two-thirds of its centrifuges, according to a copy of the accord obtained by Bloomberg.

“This is a sign of hope for the entire world,” European Union (EU) foreign policy chief Federica Mogherini said in Vienna. “And we all know this is very much needed in these times.”

Relief, including sales of aircraft by companies including Boeing Co., would be phased in after 15 December if Iran complies. The United Nation’s (UN) International Atomic Energy Agency will negotiate access to all suspect sites, including military bases such as Parchin.

Once UN monitors verify Iran has taken all steps to curb its nuclear activities, the US and the EU will also lift restrictions on most of its financial institutions except those sanctioned for terrorism or human rights abuses. Iranian banks, including the central bank, will be able to process transactions once again through SWIFT, the leading global financial messaging system, US officials said.

The US and the EU will also allow any nation to buy Iranian oil and ease curbs on trading refined products, chemicals and natural gas. Iran holds the second largest gas reserves in the world, after Russia.

“If Iran violates the deal, all these sanctions will snap back into place,” Obama said at the White House.

The UN ban on conventional weapons imports and exports by Iran will remain in place for five years, while the UN embargo on ballistic missiles will hold for eight years, according to the draft. The unilateral US arms embargo will stay in place. Bloomberg

Utpal Bhaskar is with Mint.

Bloomberg’s Stepan Kravchenko in Vienna, Nafeesa Syeed in Dubai, Gregory Viscusi in Vienna, Kambiz Foroohar in New York and Angela Greiling Keane in Washington and Mint’s Asit Ranjan Mishra in New Delhi contributed to this story.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.