primer on a nation that could change geoeconomics & geopolitics in near future, & affect India
India and Iran: Story of Ancient Cultures
Back in the Bronze Age, the Indus Valley civilisation traded with ancient Mesopotamia (Iran).
The Mughals had close ties with the Iran empires. When Mughal emperor Humayun was defeated by Sher Shah Suri, he chose to seek refuge in Iran (Persia).
The Bibi ka Maqbara - a replica of the Taj Mahal - in Aurangabad was built by Aurangzeb's son Prince Shah Alam in the memory of his mother. It was designed by a Persian architect Ustad Attah Ullah of Persia.
Lucknow is a major centre for Shiite culture and Persian studies in India. Iran has the largest Shiite population in the world.
Nearly 1,500 years, a board game called chaturanga was introduced in Persia. The Persians renamed it as shatranj. We know it as chess today.
When the Sassanid Empire fell in 651 AD, Zoroastrians moved from Persia to India, home to the largest Zoroastrian population in the world. Some of India's largest business houses like Godrej, Tata & Wadia have been founded by Parsis.
Iran's Economy: Propane, Pistachios & Petrochemicals
Iran is the 26th largest economy in the world in terms of nominal GDP and 17th in terms of purchasing power parity globally.
Even though oil accounts for a lion's share of Iran's exports and revenues, non-oil exports have also grown in the past 10 years.
Iran's non-oil exports are expected to touch $43 bn in March 2012 from just a shade over $4 bn in 2001.
Major non-oil exports include liquid gasses (like propane), pistachios, had woven cars. Incidentally, Iran is also the world's largest exporter of caviar.
In 2008, there were 345 telephone lines and 106 personal computers for every 1,000 Iranians. (In India, 32.1 telephone lines and 31.8 computers).
70% of all Iranians own their homes and 82% of the population is literate.
Also, Iran foreign reserves, at $80 billion (2009), are reasonably healthy.
Why Does the World Need Iran?
Iran has the fourth-largest proven oil reserves in the world and the second-largest natural gas reserves globally.
Iran is the third-largest crude oil exporter in the world, after Saudi Arabia and Russia.
Iran has about 137 billion barrels of proven oil reserves, 9.3% of the world's total reserves.
In all, Iran accounted for 5.2% of global oil production in 2010.
[Source: The BP Statistical Review 2011, US Energy Information Administration (EIA)]
Why Iran Needs World?
One, the economy is powered by oil...
Oil is a key part of Iran's economy - contributing to about 72% of all export revenues in the last decade.
However, the share of the oil in the Iran's economy has fallen from nearly 40% of real gross domestic product (GDP) in the '60s to 10.5% in the last decade.
Despite that, oil and gas receipts still account for 65% fiscal revenue, which means that most government programmes for development have to be financed by oil money.
However, Iran still imports food items like maize and raw materials like steel. Iran imports over 3.5 million tonnes of maize a year (mostly from Ukraine). Even though the country plans to become self-sufficient in steel by 2015, it needs more steel now to complete the steel plants under construction.
Inflation is Booming and the Currency is Weakening...
Inflation is rife in Iran. The official inflation rate has jumped to 20% from single digits within the last year and a half. The reason: Iran introduced a wave of reforms in late 2010, which lopped off major energy and food
subsidies.
Also, the US and EU sanctions are making imports, especially food imports, costlier. Recent reports have suggested that Iran is bartering containers of oil for food.
Iran's currency, the rial, has plummeted against the dollar. The unofficial rate for the rial in Tehran is said to be about 23,000 rial to the dollar, down from 11,000-12,000 in December, reports The New York Times.
Are the Sanctions Affecting Iran?
The US sanctions against Iran are broad and sweeping. For example, in late 2011, the US froze all assets of Iranian financial institutions, including those of the Central Bank of Iran. It also passed a law that proposed sanctions on foreign institutions that conducted financial transactions with the Central Bank of Iran. That law has got Indian companies like ONGC sweating.
Iran watchers believe the rising inflation is partly stoked by the sanctions. Prices of some food commodities (like maize which Iran imports) and raw materials like steel are on the rise. It's a scenario that even 'allies' can use to advantage. Take China, for example. China, Japan, India and South Korea together import about 60% of Iran's oil exports. China, which bought over 11% of its oil from Iran last year, has cut its January purchase by half even as it has said that it would continue to trade with Tehran.
Global analysts believe that the Chinese are angling for a substantial discount (10-15%) from Tehran on their oil purchases. However, economists believe that Iran - thanks to its relatively better fiscal health and abundant oil - will be able to withstand American sanctions which even poorer countries like North Korea and Cuba were able to defy.
Why India Needs Iran?
Each year, India buys Iranian oil worth $12 billion - about 12% of its annual requirements. Plus Iran is amongst the cheapest suppliers of crude to India.
For starters, India's trade with Iran was $13.67 billion - which included imports worth $10.92 billion and exports of $2.47 billion. The import bit was mostly oil. More importantly, Assocham expects trade to touch $30 billion by 2015.
In return, 70% of Iranian rice imports come from India. In the last fiscal, India exported 2.2 million tonnes of rice, half of which went to Iran.
Iran's geographical proximity makes it an important source for hydrocarbons for India, which is hydrocarbon deficient and imports two thirds of its needs. State-owned companies like ONGC hope to invest in oil and gas projects in Iran including the $5-billion Farsi offshore block which was discovered in 2006.
India is also eyeing the vast iron reserves in Afghanistan. India wants to tap into these reserves through Iran's Chabahar Port and build a 900-km railway line to link it with Afghanistan.
Also, the Chinese and Indians are the two big remaining partners of Iran which is fast being isolated by the international community. India would prefer to standby Iran, during these difficult times, and thereby not let the Chinese steal a strategic victory with Tehran.
What Happens If Tensions Escalate?
Let's take the worst case scenario. What if Iran cuts off the Strait of Hormuz? Traders and international experts believe that the West, which badly needs the oil, will declare war on Iran. US warships are already present at the Strait. In that scenario, it is believed that oil prices would jump up by as much as $30 per barrel within a day or two. "...Iran attempting to block the Strait of Hormuz, then prices could potentially move north of $150/bbl in very quick fashion.
India and Iran: Story of Ancient Cultures
Back in the Bronze Age, the Indus Valley civilisation traded with ancient Mesopotamia (Iran).
The Mughals had close ties with the Iran empires. When Mughal emperor Humayun was defeated by Sher Shah Suri, he chose to seek refuge in Iran (Persia).
The Bibi ka Maqbara - a replica of the Taj Mahal - in Aurangabad was built by Aurangzeb's son Prince Shah Alam in the memory of his mother. It was designed by a Persian architect Ustad Attah Ullah of Persia.
Lucknow is a major centre for Shiite culture and Persian studies in India. Iran has the largest Shiite population in the world.
Nearly 1,500 years, a board game called chaturanga was introduced in Persia. The Persians renamed it as shatranj. We know it as chess today.
When the Sassanid Empire fell in 651 AD, Zoroastrians moved from Persia to India, home to the largest Zoroastrian population in the world. Some of India's largest business houses like Godrej, Tata & Wadia have been founded by Parsis.
Iran's Economy: Propane, Pistachios & Petrochemicals
Iran is the 26th largest economy in the world in terms of nominal GDP and 17th in terms of purchasing power parity globally.
Even though oil accounts for a lion's share of Iran's exports and revenues, non-oil exports have also grown in the past 10 years.
Iran's non-oil exports are expected to touch $43 bn in March 2012 from just a shade over $4 bn in 2001.
Major non-oil exports include liquid gasses (like propane), pistachios, had woven cars. Incidentally, Iran is also the world's largest exporter of caviar.
In 2008, there were 345 telephone lines and 106 personal computers for every 1,000 Iranians. (In India, 32.1 telephone lines and 31.8 computers).
70% of all Iranians own their homes and 82% of the population is literate.
Also, Iran foreign reserves, at $80 billion (2009), are reasonably healthy.
Why Does the World Need Iran?
Iran has the fourth-largest proven oil reserves in the world and the second-largest natural gas reserves globally.
Iran is the third-largest crude oil exporter in the world, after Saudi Arabia and Russia.
Iran has about 137 billion barrels of proven oil reserves, 9.3% of the world's total reserves.
In all, Iran accounted for 5.2% of global oil production in 2010.
[Source: The BP Statistical Review 2011, US Energy Information Administration (EIA)]
Why Iran Needs World?
One, the economy is powered by oil...
Oil is a key part of Iran's economy - contributing to about 72% of all export revenues in the last decade.
However, the share of the oil in the Iran's economy has fallen from nearly 40% of real gross domestic product (GDP) in the '60s to 10.5% in the last decade.
Despite that, oil and gas receipts still account for 65% fiscal revenue, which means that most government programmes for development have to be financed by oil money.
However, Iran still imports food items like maize and raw materials like steel. Iran imports over 3.5 million tonnes of maize a year (mostly from Ukraine). Even though the country plans to become self-sufficient in steel by 2015, it needs more steel now to complete the steel plants under construction.
Inflation is Booming and the Currency is Weakening...
Inflation is rife in Iran. The official inflation rate has jumped to 20% from single digits within the last year and a half. The reason: Iran introduced a wave of reforms in late 2010, which lopped off major energy and food
subsidies.
Also, the US and EU sanctions are making imports, especially food imports, costlier. Recent reports have suggested that Iran is bartering containers of oil for food.
Iran's currency, the rial, has plummeted against the dollar. The unofficial rate for the rial in Tehran is said to be about 23,000 rial to the dollar, down from 11,000-12,000 in December, reports The New York Times.
Are the Sanctions Affecting Iran?
The US sanctions against Iran are broad and sweeping. For example, in late 2011, the US froze all assets of Iranian financial institutions, including those of the Central Bank of Iran. It also passed a law that proposed sanctions on foreign institutions that conducted financial transactions with the Central Bank of Iran. That law has got Indian companies like ONGC sweating.
Iran watchers believe the rising inflation is partly stoked by the sanctions. Prices of some food commodities (like maize which Iran imports) and raw materials like steel are on the rise. It's a scenario that even 'allies' can use to advantage. Take China, for example. China, Japan, India and South Korea together import about 60% of Iran's oil exports. China, which bought over 11% of its oil from Iran last year, has cut its January purchase by half even as it has said that it would continue to trade with Tehran.
Global analysts believe that the Chinese are angling for a substantial discount (10-15%) from Tehran on their oil purchases. However, economists believe that Iran - thanks to its relatively better fiscal health and abundant oil - will be able to withstand American sanctions which even poorer countries like North Korea and Cuba were able to defy.
Why India Needs Iran?
Each year, India buys Iranian oil worth $12 billion - about 12% of its annual requirements. Plus Iran is amongst the cheapest suppliers of crude to India.
For starters, India's trade with Iran was $13.67 billion - which included imports worth $10.92 billion and exports of $2.47 billion. The import bit was mostly oil. More importantly, Assocham expects trade to touch $30 billion by 2015.
In return, 70% of Iranian rice imports come from India. In the last fiscal, India exported 2.2 million tonnes of rice, half of which went to Iran.
Iran's geographical proximity makes it an important source for hydrocarbons for India, which is hydrocarbon deficient and imports two thirds of its needs. State-owned companies like ONGC hope to invest in oil and gas projects in Iran including the $5-billion Farsi offshore block which was discovered in 2006.
India is also eyeing the vast iron reserves in Afghanistan. India wants to tap into these reserves through Iran's Chabahar Port and build a 900-km railway line to link it with Afghanistan.
Also, the Chinese and Indians are the two big remaining partners of Iran which is fast being isolated by the international community. India would prefer to standby Iran, during these difficult times, and thereby not let the Chinese steal a strategic victory with Tehran.
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What Happens If Tensions Escalate?
Let's take the worst case scenario. What if Iran cuts off the Strait of Hormuz? Traders and international experts believe that the West, which badly needs the oil, will declare war on Iran. US warships are already present at the Strait. In that scenario, it is believed that oil prices would jump up by as much as $30 per barrel within a day or two. "...Iran attempting to block the Strait of Hormuz, then prices could potentially move north of $150/bbl in very quick fashion.
Citi analysts do not, however, expect them to stay there for very long, as they believe that level is simply too much of a burden for the global economy and could lead to a global recession which would in turn take oil demand and prices much lower," reads a recent Citibank report. But this scenario is unlikely - given that US presidential elections are around the corner and Iran seems to be willing to return to the negotiating table. However, if it does happen, the world can kiss an economic recovery goodbye. Here's why:
Global Pain
In its report, Citi notes that recessions have followed sharp oil price spikes resulting from supply disruptions "The 1973 Opec embargo on the US resulted in a 300% price spike, which saw global GDP growth drop from 6.4% in 1973 to 1.5% in 1974 and 0.9% in 1975. Similarly, the Iranian revolution and Iran-Iraq war from 1978 to 1981 saw oil prices double and global GDP growth drop to an average of 1.3% from 1980 to 1982, versus a 4.2% average for the previous three years".
(Source: Citibank Market Outlook Report 2012)
So What Does This Mean for India?
India is in an odd spot. On the positive side, the lustre seems to be back in the stock markets. Inflation is low. Interest rates are set to fall. Yet, a showdown at the Strait of Hormuz can derail the party. As oil prices have zoomed ominously with Iran's latest display of nuclear knowhow, India is most likely to hike fuel prices as soon as the current round of polls across the country comes to an end. That's not likely to help inflation, which finally seems to be cooling off. A rise in inflation could make the Reserve Bank of India pause from slashing rates - something that Indian industry has been clamouring for given the shortfall of liquidity in the market.
That leads us to the $12-billion question: can India tank up on cheaper Iranian oil imports? It's a tricky situation for India. India has several factors to consider:
a) Its longstanding friendship and strategic relationship with Iran
b) allies US and Israeli pressure to cut oil supplies with Iran
c) India's relationship with Saudi Arabia, which has offered to supply India with crude incase of a shortfall Will India buy cheaper Iranian oil at the expense of costlier Saudi Arabian crude? "In our view, China and India remain extremely mindful of longer-term relationships with the kingdom, especially given the spare capacity and flexibility of output it has at the margin of the market," reads a recent Barclays' report which also points out that India is finding it tougher to pay Iran, and that Iranian oil imports may fall.
Global Pain
In its report, Citi notes that recessions have followed sharp oil price spikes resulting from supply disruptions "The 1973 Opec embargo on the US resulted in a 300% price spike, which saw global GDP growth drop from 6.4% in 1973 to 1.5% in 1974 and 0.9% in 1975. Similarly, the Iranian revolution and Iran-Iraq war from 1978 to 1981 saw oil prices double and global GDP growth drop to an average of 1.3% from 1980 to 1982, versus a 4.2% average for the previous three years".
(Source: Citibank Market Outlook Report 2012)
So What Does This Mean for India?
India is in an odd spot. On the positive side, the lustre seems to be back in the stock markets. Inflation is low. Interest rates are set to fall. Yet, a showdown at the Strait of Hormuz can derail the party. As oil prices have zoomed ominously with Iran's latest display of nuclear knowhow, India is most likely to hike fuel prices as soon as the current round of polls across the country comes to an end. That's not likely to help inflation, which finally seems to be cooling off. A rise in inflation could make the Reserve Bank of India pause from slashing rates - something that Indian industry has been clamouring for given the shortfall of liquidity in the market.
That leads us to the $12-billion question: can India tank up on cheaper Iranian oil imports? It's a tricky situation for India. India has several factors to consider:
a) Its longstanding friendship and strategic relationship with Iran
b) allies US and Israeli pressure to cut oil supplies with Iran
c) India's relationship with Saudi Arabia, which has offered to supply India with crude incase of a shortfall Will India buy cheaper Iranian oil at the expense of costlier Saudi Arabian crude? "In our view, China and India remain extremely mindful of longer-term relationships with the kingdom, especially given the spare capacity and flexibility of output it has at the margin of the market," reads a recent Barclays' report which also points out that India is finding it tougher to pay Iran, and that Iranian oil imports may fall.
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