Iran agreed to source vehicles and medicines from India to bypass sanctions on its oil industry and help New Delhi settle payment for oil imports in rupees, Times of India reported today.

The two countries had agreed to settle bilateral trade in rupees after it became difficult for India to route payments to Iran because of the sanctions.

India is Iran’s second-biggest oil client after China.

While Iran is pursuing diplomacy through negotiations with so-called P5+1 group consisting United States, Britain, France, Russia, China and Germany, to settle longtime dispute with west over its nuclear program, US is using unilateral sanctions to pressure Iran to abandon its nuclear program, which the West believes is aimed at making a bomb but Iran insist is for civilian use.

India exported goods from Iran worth $3.36 billion in 2012-13 while its imports were $ 11.6 billion, prompting New Delhi to look for more items to sell to the country.

“We visited Iran and suggested sectors they could look at including engineering, power, steel, auto and pharma. They are keen on automobile and pharma for now,” said a commerce ministry official, adding that the country did not appear keen on a larger trade agreement.

Under the rupee arrangement, India makes part payment into a rupee account maintained with UCO BankBSE 0.06 %. Iran uses this account to import goods from India, reducing the need for routing dollar payments through third country.

A delegation led by Indian commerce secretary SR Rao had visited Iran last month when India presented many import options to Iran to reduce the $11 billion trade deficit it ran with the country last year.

Automobiles and pharmaceuticals are India’s biggest exports adding up to $18.4 billion and $14.6 billion in 2012-13. Currently, India’s exports comprise mainly of agriculture and processed goods and more recently, pharma. Iran had rejected Indian wheat citing quality issues.

The arrangement suits Iran, which was importing most of the automobiles and auto components from EU, but after the sanctions were imposed is facing some difficulty. Indian automakers already meet the stringent quality norms and are in position to meet Iranian demands.

The Iranian industry is working at one-third lower capacity due to problems in importing auto parts. Iran has most European and Japanese, South Korean brands of cars, trucks and buses. India enjoys competitive advantage as it is being driven by R&D, said FIEO.

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