Basmati Blues: India's Rice Exports At Risk In Iranian Market

India, known for its high-quality Basmati rice, is facing a potential setback in one of its largest export markets. Iran, which has been a significant importer of aromatic long-grain rice from India for several years, may reduce its imports due to delays in payment settlements caused by the depletion of India’s rupee reserves. This article explores the reasons behind the slowdown in exports to Iran, the impact on India’s rice industry, and the potential consequences for the country’s economy.

Delays In Payment Settlement

The settlement of payments to Iran has been hampered in recent months, primarily due to the depletion of rupee reserves resulting from a decrease in oil exports. As a consequence, a substantial portion of payments is being rerouted through a third currency payment system that employs Dirham via Dubai. This complex process has led to prolonged delays in payment settlements, making it difficult for rice exporters to replace Iran as a trading partner. Iran accounted for 22% of India’s 4.55 million tonnes of basmati rice exports, making it a vital market for Indian exporters.

Impact On Basmati Rice Exports

India’s basmati rice exports to Iran showed no growth in the first two months of the current fiscal year, staying at 0.15 million tonnes, the same as the previous fiscal year. Moreover, Iran’s portion of India’s overall basmati rice exports has decreased from 29% in the fiscal year 2019-20 to 18% in April-May of the ongoing fiscal year.The payment settlement issues have not only affected rice exports but also impacted the export of other commodities such as tea and pharmaceuticals to Iran.

Rice Settlement Mechanism And Current Challenges

Previously, India had implemented a rupee settlement mechanism with Iran in April 2012 to avoid sanctions from the US and EU. This initiative facilitated the settlement of dues through partnerships between state-owned UCO Bank and Iranian lenders. However, the system of rupee settlement was discontinued in 2019 when India stopped purchasing crude oil from Iran. Currently, importers in Iran are using traders’ accounts based in Dubai to settle payments, further complicating the process.

Concerns For The Rice Industry

The challenges in payment settlements have led major exporters of basmati rice to halt shipments to Iran. The absence of a reliable payment system creates uncertainty and hinders the growth of the rice industry. While a barter system exists for some commodities like bananas and apples, basmati rice exports primarily rely on a third currency payment system. The disruption caused by the payment settlement issues has raised concerns among industry insiders about the future of rice exports to Iran.

Market Outlook

India’s rice exports have witnessed significant growth, with the value of rice exports in FY23 reaching a record $11.1 billion, reflecting a 15% increase from the previous fiscal year. This growth signifies India’s dominant position in the global rice market, accounting for 45% of the global grain trade and approximately 80% of the global basmati rice trade.

OFB’s Insight

In order to overcome the potential loss of the Iranian market, it would be beneficial to explore alternative markets and establish reliable payment mechanisms. Despite these hurdles it is anticipated that India will maintain its position as the most competitively priced global rice exporter in 2024, with an estimated total of over 24 million tonnes of rice exports, marking a historic milestone. To ensure the continued growth and sustainability of rice industry, India must address the issues surrounding payment settlements.