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Fillip To India-Iran Relations – Analysis


After sanctions were removed on Iran in January 2016, the country has emerged as an important partner in India’s strategic calculus. Apart from the economic content in the India-Iran relationship, the strategic component is drawing both closer. This was demonstrated by back to back visits by India’s Petroleum Minister, Dharmendra Pradhan on 9-10 April 2016 and External Affairs Minister Sushma Swaraj on 16-17 April 2016, an indication that both the countries are willing to engage closely in a host of issues in the context of changing geo-political situation with the strategically important West Asian nation. India and Iran find themselves now in a different platform following the lifting of sanctions under a historic nuclear deal, which has opened up prospects for enhancing cooperation in several lucrative sectors, including oil imports and enhancing trade. In fact, Pradhan’s was the first visit by an Indian minister since the US and other Western powers lifted sanctions against Iran. Both the visits signal India’s efforts to step up its engagements in the region with both the competing Sunni and Shia powers.

India-Iran ties are not recent. Both had mutual understanding even when their ties with the US were strained because of different reasons. Both India and Iran have traditionally pursued independent stances in their foreign policies, though their priorities may have differed but the principles remained the same. When the US imposed sanctions on Iran in 2012, India stood its independent stance when then Prime Minister Manmohan Singh attended the NAM Summit in Teheran, which annoyed the US. But India was making a statement that it would not become an appendage of any other state. The sanctions also did not cloud their bilateral economic ties, which now will get a fillip following two visits by senior ministers to that country. What is going to unfold in the coming years is the improvement in energy cooperation and acceleration in the development of Chabahar port, which has huge strategic relevance for both. If the pending agreements on Preferential Trade Agreement, Double Taxation Avoidance Agreement and Bilateral Investment Treaty are concluded soon, the economic content in the relationships would have got a further boost.

Chabahar Port

The development of Chabahar port in the Gulf of Oman is a key project in India-Iran relations. India is the key partner. Its progress became slow as Iran came under sanctions because of its alleged nuclear program. In the post-sanction Iran, the project has now received serious attention by both. The MoU for the project was signed in 2003 but progress slowed down because of sanctions. Development of this port makes huge economic and strategic sense for India as India wants to bypass Pakistan, which does not allow transit of Indian goods through its territory. The use of Chabahar port in Iran shall facilitate the transport of Indian goods further forward by roads and rail to Afghanistan and onward to Central Asian nations.

As a long-term strategy to further its economic interests, India has already built the Delaram-in Zaranj Highway in Afghanistan border to facilitate movement of goods from Chabahar. India sanctioned around $35 million for the construction of two berths at Chabahar and the development of a container terminal. This was a response to Pakistan’s Gwadar port built with Chinese assistance. India also hopes to build the Chabahar-Zahedan-Mashhad railway line and wants to supply rail tracks, rolling stocks, signalling and other equipment. No wonder Rouhani sought cooperation in the development of Chabahar port, for which a lot more works need to be done. Rouhani appropriately remarked the project as a “defining partnership which has the potential of connecting the entire region”.

Swaraj and her counterpart Mohammad Javad Zarif agreed to fast-track the Chabahar port project. Here are some important facts:

In 2003, India and Iran agreed to develop the Chabahar port on the Gulf of Oman, near Iran’s border with Pakistan, but the venture moved slowly because of the sanctions on Iran’s atomic programme. Western nations lifted some of those sanctions in March 2016. According to state-run Oil and Natural Gas Corporation, India is ready to invest $20 billion in the development of Chabahar port and has requested Iran to allocate adequate land in the Chabahar Special Economic Zone.

The port will cut transport costs/time for Indian goods by a third. Iran plans to turn the Chabahar port into a transit hub for immediate access to markets in the northern part of the Indian Ocean and in Central Asia. The port of Chabahar in southeast Iran is central to India’s efforts to circumvent Pakistan and open up a route to landlocked Afghanistan where it has developed close security ties and economic interests. India has already built a 220-kilometre road to the port from Afghanistan. Chabahar is along the coast from Gwadar port in Pakistan that is being developed with China’s help. India’s involvement in the development of the Chabahar port has therefore a strategic element. In 2015, roads and highways minister Nitin Gadkari visited Iran and signed a preliminary pact on the development of the port. Sushma’s visit is a step further in that direction.

In the context of China’s deepening ties with Pakistan and the recent signing of energy and infrastructure agreements with that country worth $46 billion, India’s swift response with the Gulf countries and trade deals with Iran assumes significance as such moves could have been spurred to circumvent China’s attempt to spread its strategic outreach in the Gulf and beyond. The fact that India was one of a handful of countries that continued trade links with Iran despite it being isolated by Western countries against its disputed nuclear programme helps. Iran recognises that India is its second-biggest oil client after Beijing. No wonder, Iran has proposed a free-trade agreement with India.

Energy Cooperation

During the visit of Pradhan ahead of Swaraj’s visit, both countries signed agreements on crude oil imports. India also wants rights to develop Farzad-B gas field in the Persian Gulf discovered by OVL. A deal for the field could not be reached during Pradhan’s visit as Iranian Parliament, Majlis, is yet to approve the new Iran Petroleum Contract (IPC) under which the Farzad-B field is to be given to the OVL-led consortium. Apart from the $20 billion investment commitment in Chabahar port, India also committed $100 million Line of Credit for berths and jetties at Chabahar.

The sanctions imposed on Iran discouraged Indian firms from investing in that country. The same was also deterring New Delhi from claiming rights to invest $7 billion in the biggest gas discovery ever made by an Indian firm abroad. Following lifting of sanctions in January 2016, India is making a renewed pitch for rights to develop 12.8 trillion cubic feet of gas reserves OVL had found in 2008.

India has to manoeuvre its ties with Iran vis-a-vis Pakistan and Saudi Arabia, notwithstanding its strong relationship with Iran. It is speculated that following Prime Minister Narendra Modi’s visit to Saudi Arabia two weeks before, which Iran considers its rival, and the subsequent visits by two senior ministers of his Cabinet could herald a likely visit by Modi himself to Iran soon. An invitation of President Hassan Rouhani is already pending. If that happens, it is to be seen how India will balance both relationships, away from the much talked about Shia-Sunni prism. Since Pakistan is traditionally a close ally of Saudi Arabia and keen to deepen ties with Iran, India needs to craft its policies towards Saudi Arabia and Iran carefully so that its strategic needs are not compromised. India would find it reassuring that during President Rouhani’s recent visit to Pakistan, he categorically told a journalist that Iran’s relationship with Pakistan was as important as its relationships with India and both stand independently on their own.

The two visits by senior ministers are seen as India’s balancing act. For India, engaging Iran is considered important from the point of view of connectivity with Central Asia and Afghanistan. India is equally concerned to accord importance to its relations with Saudi Arabia which is a major energy supplier and also hosts 2.96 million expatriate Indians who sent back $10 billion in remittances in 2015.

For India, Iran is a trusted partner and so is Saudi Arabia and Israel and therefore India needs to balance its relations with both. This is because a strong India-Iran strategic and economic partnership shall contribute to stability in the Gulf region and would be mutually beneficial. It is in the interests of both that all pending agreements that are agreed in principle are signed soon so that the economic and strategic contents get a stronger spine.

Notwithstanding the hype and the expected bonhomie in India-Iran relations, India shall not find its economic ties with Teheran easy as there is a rush of investment in the resource-rich nation by global economic powers including Japan, China, the US and several European countries after Iran invited foreign companies for joint ventures in many of its crucial sectors including gas and oil.

True, India has already lined up a $20 billion investment in oil and gas as well as in petroleum and fertiliser sectors in Iran. But it has to cope with competition with other powers in that country that have also stakes both economically and strategically. For India, Iran is important for its energy security as well as to get access to oil and gas-rich Central Asian nations. India imports close to 12 million tonnes of crude from Iran and it is looking at increasing the oil import from that country. There is also scope for cooperation in the banking sector too.

As per the earlier agreement between the two countries, Iran had agreed to ship crude oil to India free and agreed to receive half of the payment in rupees. Iran terminated this three-year-old agreement. This issue figured during Swaraj’s talk with her counterpart Zarif. Iran is now insisting on being paid in Euros for the oil it sells to Indian refiners. It also wants refiners like Essar Oil and Mangalore Refinery and Petrochemicals Ltd (MPRL) to clear nearly $6.5 billion of past dues in Euros. This issue had also figured during discussion that Pradhan had with his counterpart.

For obvious reasons, the issue of Kulbhushan Yadav, who was charged by Pakistan to have slipped into Balochistan from the Iranian border as an agent of Indian spy agency, the RAW, was not discussed by Swaraj with her counterpart. Teheran has rejected Pakistan’s protest that Iran’s territory must not be used by another country’s spy as it finds the allegations baseless. New Delhi has dismissed Pakistan’s allegations and Yadav’s confessions as tutored allegations. India wants to discuss this issue with Pakistan bilaterally without third country intervention.

As Iran begins to leapfrog following lifting of sanctions and emerges from its isolation, it has started rebuilding its oil economy and ageing infrastructure. In fact even when Iran was under sanctions, India did not feel shy to engage with that country and continued to do business. India continued to export good quality basmati rice, other agricultural products, medicines and medical equipment all through the sanction period. India also continued to buy some amount of oil from Iran, though was forced to lower the quantity because of the difficulties in payment. Before sanctions were imposed on Iran, Iran was the second largest supplier of oil to India. From April 2016 onwards, India is expected to buy around 400,000 barrels per day of Iranian oil.

Iran possesses 132 billion barrels of oil reserves and also the second largest proven reserves of gas with 971 trillion cubic feet. Iran is therefore positioned to feed the giant growing Indian economy which is thirsty for energy and supplies 90 per cent of its oil needs. The geographical proximity between the two countries also helps. The bilateral trade volume that stood at over $13 billion in 2007 is likely to see a jump soon.

Indeed, Iran is now attracting attention of many foreign nations because of its huge resource and as a source of oil imports. One of the first leaders to visit Iran post-sanction was Chinese President Xi Jinping, during which both countries inked 17 agreements and promised to increase bilateral trade by $60 billion in the next 10 years. President Rouhani also travelled to Europe and signed deals worth $18 billion. Compared to these, India is slow to see the potentials to do business. Given the past record, India should have been able to leverage better than other countries. As of now, India shall find stiff competition with China in economically engaging Iran.

Both the countries also share common viewpoints on other issues such as combating terrorism, situation in Afghanistan and Syria besides other regional issues. Both look for bilateral cooperation in addressing to them. The Shia-Sunni conflict that led to a war in Yemen, the instability in Iraq, the civil war in Syria and the rise of Islamic State are worrisome for not only Iran and India but to the rest of the world as well. The Sunni terror group is threatening the Persian Gulf, Europe and the world as a whole. The spread of Taliban’s influence in Afghanistan is also a major concern for both. Both India and Iran are on the same page to address these kinds of worrying issues.


India’s real test would be how it navigates the Shia-Sunni prism as Modi reaches out to Saudi Arabia, the leader of the Sunni-Muslim world, on his first choice of visits to a Gulf country, and two senior ministers of his Cabinet woo Iran, the leader of Shia-Islam, by visiting Iran the same month in quick succession. Keeping the economic interests apart, the political engagement has greater salience as India perceives Iran as a key factor for stability in West Asia. India needs to keep the interests and safety of 8 million Indians who live and work in the Gulf. The remittances they send back home each year also contributes to the country’s foreign exchange reserve.

Analysing from all perspectives, India’s engagement with Iran during the post-sanction period is going to be hugely important for both the countries. It is going to be a win-win situation for both. It is hoped that Pradhan’s and Swaraj’s visits to Iran have prepared the ground for Modi’s historic trip to Teheran. Can one expect Prime Minister Modi to execute the invitation received from Iran in January 2015, which he has accepted to honour, anytime soon?

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Dr. Rajaram Panda

Dr. Rajaram Panda, Senior Fellow at Nehru Memorial Museum and Library, a think tank under the Ministry of Culture, Government of India, Former ICCR India Chair Professor, Reitaku University, Japan, and former Senior Fellow, IDSA, New Delhi E-mail: [email protected]

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