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India to stop buying Oil from Iran

India to stop buying Oil from Iran

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  • GS2 || International relations || India and rest of the world || USA

Why in news ?

  • The U.S. has decided that it will not renew exemptions from its sanctions for importing oil from Iran.
  • The US will not issue any additional Significant Reduction Exceptions to existing importers of Iranian oil.
  • US has continued to apply maximum pressure on the Iranian regime until its leaders change their destructive behaviour, respect the rights of the Iranian people, and return to the negotiating table.

Impact on countries:

  • India, China and U.S. allies Japan, South Korea and Turkey will be the most impacted by the non-renewal of waivers.
  • The other three currently exempted countries — Italy, Greece and Taiwan — have already reduced their imports to zero.

Implications:

  • High Costs on oil imports.
  • The threat to oil shipments –Iran has threatened to shut down the Strait of Hormuz, a key channel for global oil shipments, which would further lead to inflationary trends, not just for oil but other commodities too.
  • Any direct backlash from Iran for its decision will also jeopardise India’s other interests in the country, including its considerable investment in the Chabahar port, which India is building as an alternative route for trade to Central Asia.
  • Current account deficit: Higher crude oil prices will widen the trade deficit and current account deficit, given that the value of imports goes up with crude oil, and that the quantity imported tends to be sticky in general.
  • Rupee: The currency could be impacted if the trade and current account deficits were to widen.
  • Inflation: There could be significant impact on inflation, given how crude oil prices move and the extent to which the government allows the pass-through to the consumer.
  • Fiscal impact: There could be a two pronged impact on government finances — both on the revenue side and on the expenditure side.

What happens if India continues to import oil from Iran?

  • The U.S. has made it clear that Indian companies that continue to import oil from Iran would face severe secondary sanctions, including being taken out of the SWIFT international banking system and a freeze on dollar transactions and U.S. assets.

Background:

  • India had received six-month reprieve, from November 2018 to May 2019, from the U.S. in the form of sanctions waivers to import Iranian oil. India had also received the exemption to continue developing the Chabahar port.

Way ahead for India:

  • Alternative Energy Sources – The government’s focus is now on finding alternative sources of energy, and minimising the impact on the Indian market.

Important facts for prelims – About India’s Oil Import:

  • India is the world’s third-largest consumer of oil.
  • With 85 per cent of its crude oil and 34 per cent of its natural gas requirements is being fulfilled by imports.
  • In 2016, India imported 215 million tonnes of crude oil and at 13 per cent, Iran stood third among India’s biggest oil suppliers, after Saudi Arabia and Iraq at 18 per cent each.

Additional references : https://youtu.be/TXxuWZWb9NY