Iran nuclear deal could help India boost business
Days before western powers struck a deal with Iran to stall nuclear weapon development, Iranian president Hassan Rouhani was meeting India's Prime minister Narendra Modi on the sidelines of the Shanghai Cooperation Organization (SCO) summit at Ufa in Russia. Optimistic about clinching the negotiations taking place miles away in Austrian capital Vienna, Rouhani asked Modi to invest $8 billion in rebuilding infrastructure in Iran.
Rouhani's call was symptomatic of Iran's constraints that brought it to the negotiating table to agree to the deal. Ever since 2006, Iran has faced a series of sanctions from the UN, EU and the US which have starved the country of capital, technology and related infrastructure development. The sanctions imposed were the toughest ever against any country. The US began blacklisting companies doing business with Iran. Iran's economy is in tatters with GDP growth rate at 1.1 per cent last year and inflation raging at 15.8 per cent.
But with Rouhani's foreign minister Mohammad Javad Zarif and representatives of G5+Germany announcing the deal on July 14, the question is whether India is in any position to leverage nearly six decades of goodwill with the country to partake the economic bonanza that awaits doing business with Iran. After all, despite the sanctions, India is among the few countries that found ways to trade with the country, including importing crude. Barely a week after Iran's deal with the West, a delegation of Indian industry lobby CII went to capital Tehran to seek business opportunities. In fact, another group, ASSOCHAM announced its plan to set up an office in Tehran.
Iran is starved of real infrastructure, rail, road network, ports and airports. India sees this as a 'golden opportunity'. Not just for investments within Iran, but also to strengthen the connectivity towards Afghanistan and subsequently to Central Asia, circumventing Pakistan. But Indian companies eyeing business in Iran won't have it easy. They will have to contend with companies from Iran's close allies China and Russia. Particularly, from China which is likely to offer mega infrastructure projects - just what Iran needs right now. Last year, India exported goods worth $4.17 billion and imported goods (largely crude oil) worth $8.9 billion. "Connectivity is the mantra of PM Modi that coincides with Iran's policy," Iranian ambassador Gholamreza Ansari told scribes in India recently. India is working on Iran's proposal of having a free trade agreement. In April, a joint working group - with officials from both sides - began deliberations.
While oil imports from Iran will accelerate, now that India can pay for Iranian crude in dollars instead of rupees, but the area where Iran will look for mega investments is its bread and butter business of oil & gas. Iran currently exports a million barrels per day, which is less than half of the 2.2-2.3 mbd that the country exported before sanctions. Oil minister Bijan Namdar Zangeneh said once the sanctions are lifted, Iran can ramp up production by another million barrels a day. This has to be seen if the global market has appetite - the market already has excess supplies. In order to ramp up the production, Iran needs over $100 billion. "They will need a lot of investment and technology expertise from western firms," remarks Aditya Gandhi, Director, Sapient Global Markets (India). India's consortium ONGC Videsh Limited, Indian Oil and Oil India discovered Farzad B block in Farsi field, but developed cold feet because of sanctions. In 2014, it put the field on list of blocks to be auctioned. "once the sanctions are lifted the consortium could face competition for development of the field from other global players," says K. Ravichandran of ICRA in a note circulated to clients. Zangeneh, in March this year, met the officials from BP, Shell, Total SA et al., and assured the auction process will start by end of this year. Other than these western companies, Indian players will have to compete with the Chinese and Russian companies.
Indian companies are keen to set up refineries in Iran. "If you see the markets in the Middle East, every oil and gas producing country is investing in refineries. Iran has ample reserves of both oil as well as gas, this makes them a great location for refineries," says the CEO of a refiner.
The other area Indian companies are looking at is power. Public sector power equipment major BHEL has already begun evaluating the new opportunities there. "We have supplied boilers earlier. It is an untapped market, we must explore every possibility there," says a senior official from BHEL. The company recently executed an order for supply of centrifugal compressor for Tabriz refinery (commissioned last year). BHEL is also pursuing opportunities to supply equipment for conventional steam based power plants, hydro power plants, transportation equipment and other products like transformers, motors, valves, and oil field equipment.
Currently, more than half of Iran's electricity comes from gas based units, this is closely followed by oil based power plants. "There is potential for wind-based units," says an official from Suzlon, India's largest wind energy company. Suzlon is keen to not only set up plants but also supply equipment to Iranian projects. Both Suzlon and BHEL were part of the 14 member CII delegation.
In the oil and gas sector, many hope that India may seek revival of the Iran-Pakistan-India pipeline, but with India's frigid relations with Pakistan realistically this option is non-existent. An Iran-Pakistan pipeline is already under construction. "The government has not decided as yet on this," Oil Minister Dharmendra Pradhan told Indian Parliament.
Moreover, Indian consortia - Rashtriya Chemicals & Fertilizers, Gujarat State Fertilizers & Chemicals and Gujarat Narmada Valley Fertilizer & Chemicals - are in the process to identify an Iranian JV partner for a fertiliser plant to produce 1.3 million tonne of urea. While Iran has assured gas supplies to this plant, India will commit urea offtake.
An entirely untapped area that will now be explored is the services sector, particularly in IT and banking. Since a vast majority of their revenue originates in the US and Western markets, Indian IT firms feared reprisal from the US. But with the lifting of sanctions, domestic IT firms can freely trade with Iran. Then, Iran is also seeking investments from foreign banks in JVs in the country. The Iranian central bank is already talking to probable investors.
There are other sectors with potential - auto for instance. The Automotive Component Manufacturers' Association (ACMA) decided to participate in the annual Iran International Auto Parts Fair in November, after a gap of three years. Automobile companies in India plan to export two wheelers and small cars to Iran. In fact, before sanctions were imposed, Bajaj Auto was in process of setting up an office in Tehran.
But in the sanction years, China has made major inroads into Iran. "Post sanctions, Iran will have more options to choose from, it will have to see where India fits in," says Ajay Sahai, director general of Federation of India Export Organizations. India will have to compete with companies from central Europe for engineering goods and tools. "During the days of sanctions, Indian companies made market for rubber goods, gems, iron & steel, pharmaceuticals, medical equipments et al. It would be a test for them to retain their marketshare once this country opens up," he adds.
But even in the midst of positivity around doing business with Iran, some industries are worried. One of the businesses that carried on between India and Iran even during sanction years was the supply of agri-commodities. Iranian importers paid as much as 15 to 20 per cent premium for products such as rice, sugar, cereals since the clampdown. Though such imports may continue, the premium is under threat since Iran's options have opened up. India exported 2.57 million tonnes of Basmati rice to Iran last season, and is one of India's biggest markets. Rice, soybean, sugar and cereals exporters will have to watch out for how sanctions get lifted.
