Targeted PTA with Iran can give India a major edge
• Iranian markets have great potential for Indian exports in categories like machinery, vehicles, cereals, pharmaceutical products, iron and steel & organic chemicals.
• The proposed PTA targeted for lower tariffs will help make Indian goods competitive, especially agro-products and textiles.
• India could gain approximately up to US$ 4.5-5 billion with the PTA if the above products are included.
• Focus should also be on enhancement of investment opportunities in Iran, which would help us increase bilateral trade.
Iran is located in Western Asia, bordering the Caspian Sea, the Gulf of Oman and Persian Gulf. The country is in a transition phase towards a market-driven economy. Iran had an estimated Gross Domestic Product (GDP) in 2017 of US$ 447.7 billion, and a population of 80.6 million people (World Bank).
Iran ranks second in the world in natural gas reserves and fourth in proven crude oil reserves. It is also characterised by strong agriculture and services sectors, and a noticeable state presence in manufacturing and financial services. Recently, the country’s economy registered a decline, as oil exports fell significantly following international sanctions imposed in the context of nuclear development.
Source: ITC Trade Map
Iran’s major imports are machinery, cereals, iron & steel, and chemicals. Apart from India, its main import partners are China, South Korea, Turkey and Germany (Refer to Fig.1). Iran is a founding member of the Economic Cooperation Organisation (ECO) and Organisation of the Petroleum Exporting Countries (OPEC).
Iran has extensive tariffs on imports and exports across a range of goods in the country. The Iranian embassy has imposed a variety of tax/tariff rates on different goods, ranging from 10-25%, with cotton at 46% and automotive vehicles & textiles at 100%. This could be one reason why Indian goods haven’t been able to penetrate the Iranian market.
However, a trade agreement between the two countries could go a long way to provide greater market access for Indian exports to Iran. Therefore, India and Iran are working together to boost bilateral trade by finalising a Preferential Trade Agreement (PTA). The Centre for Advanced Trade Research (CATR) has analysed the possible product categories that could be included in the PTA for enhancement of India’s exports (selected products in table below at the 2-digit level).
Iran’s import from India and World of selected products (2018)
Source: ITC Trade Map
The products in the table are selected mainly on the basis of India’s comparative advantage and share in Iran’s imports. In cereals, India is the topmost exporter to Iran in rice, but we can expand our millets exports as well. Similarly, in terms of coffee, tea and spices; India is the largest supplier, but it can expand in ginger. Similarly, India can grow exports in sectors like vehicles, electrical machinery and equipment, pharmaceutical products, organic chemicals, miscellaneous chemical products, cotton especially textiles, fruits (coconut) and leather.
Our analysis further reveals interesting results on high tariffs faced by the textile and leather sectors (nearly 100%), cotton and edible fruit (~48%) and vehicles (~65%). Since all countries are facing similar kind of tariffs, a PTA with Iran could make us competitive in these sectors and some others like tobacco and vegetable fats and oils, where tariffs are comparatively lower. In this respect, if it we assume that the PTA between two countries reduces the tariff by 40% initially, India may benefit by around US$ 4.5-5 billion in an optimistic situation despite the presence of well-entrenched competition from China and EU, especially Germany.
Besides the PTA, India could look for investment opportunities into Iran to further boost our exports. Iran has already invited Indian investments of about US$ 8 billion in infrastructure projects. At the government level, India is planning to allow investments into Iran through the Rupee. Hence, India should capture the opportunities after lifting of sanctions as a number of countries have an eye on this market. Korean, German, Japanese and Swiss banks who are the main competitors of India in Iranian market, among others, have established connections and their companies are also doing business in the country.
By Dr Ishmeeta Singh, Senior Research Associate, Trade Promotion Council of India