Why is a Close Indo-Iran Tie Never Possible?

While India has always found it important to strengthen ties with Iran for strategic and economic interests, somehow India kept the relation conditional to its tie with the US. India should take a strong stand on Iran for its stable foreign policy priorities.


When the Barack Obama, the immediate Past-President of the US almost brought Iran in the negotiation table and removed all sanctions, India jumped to bolster tie with Iran. The Narendra Modi government immediately announced Rs.150 crore investment for development of the Chabahar port. In a matter of just a few months, as America elected a Donald Trump, India took a few steps back to think what Trump would view this India-Iran development and suddenly shifted the deadline of the project to 2050. 2050 means that the project is almost sidelined.

In the backdrop of Arab Spring and other geopolitical issues destabilising the Middle East, new dimensions of regional governance have started taking shape. This has largely affected the global geopolitical and economic environment as well, thereby posing some serious challenges. Further, the economic war game of the United States and Iran with its various strategic manoeuvres is compelling the developing world to revisit their foreign policy in the region. In fact, shaping foreign policy, under the current scenario, carries with itself numerous challenges pertaining to possible sanctions on Iran.

The confrontation on Iran’s nuclear ambitions has already affected India’s trade with Iran. This is evident from the recent bilateral trade between India and Iran signifying a downturn in India’s imports from Iran which decreased from US$ 12.37 billion in 2008-09 to US$ 10.93 billion in 2010-11. Iran’s share in India’s total imports decreased from 4 per cent to 2.9 per cent with a negative growth of 4 per cent during this period. Thus, amidst the global non-acceptance of Iran’s nuclear ambitions, India would require a strategic depth to carry forward India-Iran engagements. Therefore, with the objective to de-marginalise its economic engagement with Iran, it is crucial for India to decipher new modalities delineating its bilateral economic and strategic benefits.

India has voted against Iran for three times-adhering its deal on nuclear energy with core nuclear suppliers. The recent high level meeting held by officials of both the countries during December 2011 is viewed as an indication for reinforcement of bilateral engagement in future. Akbar Ali Velayati, International Affairs Advisor to Iranian President Mahmoud Ahmedinejad and former Foreign Minister of Islamic Republic of Iran asserted that that India’s stand on Iran, expressed recently at the United Nations, is “positive” and “friendly”. Also, Indian Prime Minister, Manmohan Singh has accepted the invitation from Iran’s President to visit Iran in the near future.

The question of strengthening Indo-Iran relations poses three major challenges in the contemporary scenario. First and foremost is the issue of India’s nuclear and oil security. The risk of nuclear security from core nuclear supplier group has already impeded the oil imports from Iran and led diversification of imports from other nations. In fact, Indian refineries started looking at alternate suppliers. Similarly, it is also important for India to continue its imports of oil from Iran to meet its rising domestic demand. The magnitude of oil imports from Iran worth US$ 12 billion, being 12 per cent of India’s total oil requirement, clearly reflects that bilateral relations with Iran is important for India’s energy security.

The second pertinent issue is the huge Iran’s market which is soliciting investment from emerging economies particularly from East Asia. China has already stepped into the market. Endangered by the prospects of tighter sanctions, Indian investors are also cutting their offshore investments in Iran favouring China to increase its economic activities therein. China’s State-owned oil companies, including China Petrochemical Corp. and China National Offshore Oil Corp. are already making investment in Iran. Further, total trade, between Iran and China, during three years has grown at a trajectory growth. Chinese export to Iran has grown at a rate of around 17 per cent from 2008 to 2010 amounting to US$ 11.1 billion. However, its imports from Iran have seen a decrease from US$ 19.6 billion to US$ 18.3 billion for the same period. During 2011, bilateral trade between China and Iran was estimated to be US$ 40 billion making Iran as an emerging power with strategic link with China.

This necessarily reflects that India would look to remove its marginalisation in Iranian market by facilitating flexible investment mechanisms through comprehensively designed bilateral models. A paradigm shift is needed to enhance its export capabilities and overseas investments. Moreover, India’s absence in Iran will strategically involve greater apprehensions for India’s external environment and security. This is notable that China’s engagement with Iran would be productive due to Iran’s strategic and geographical location. Any linkage of oil and gas pipelines to China will be its strategic asset providing energy security even during crisis or conflicts in the region. Therefore, India will have to look into this matter in the context of china growing role in Iran as well.

Finally, the question of payment mechanism comes to the fore which India has taken seriously in order to find a pragmatic solution. It is pertinent from the step that Indian Prime Minister has taken during his visit to Russia last year, requesting Russian counterpart for facilitating third party-banking. He further postulated the idea to allow the Reserve Bank of India to deal with the Central Bank of Iran through Russia’s Vnesheconombank.

Thus, discovering new modalities of payment is the key focus. It is important to mention that the bilateral trade has started under the structure of Rupee and Riyal and third party banking payment system and it was done through other banks like, Turkish Bank. The problem further increased with the depreciation of Indian Rupee. India has already made payment of around US$ 5 million to Iran in euros through Turkey’s Halkbank.

India’s economic relations with Iran have predominantly constituted the imports of crude oil. In the year 2009-10, India imported 22 million tonnes crude oil valued at about US$ 10 billion and became the third largest market for Iran’s crude oil. Further, India exported US$ 2.74 billion worth of articles of iron steel occupying a major chunk, constituting almost 23 per cent share in total India’s export to Iran, followed by chemicals and cereals. The share of Indian exports to Iran as with respect to India’s global exports also witnessed an increase from 0.7 per cent in 1993 to 1.2 per cent in 2010.

Thus, India’s economic interests with Iran are imperative to its external sector development and energy security. Trans-continental transit and cooperation in Afghanistan (with transit facilitation to Afghanistan via Iran’s port at Chahbahar) are key factors for bilateral trade facilitation. Also, in the wake of possible sanctions on Iranian oil and the consequent threat of blocking of Strait of Hormuz forced India to explore other global options to meet its energy requirements. It cannot be denied that the power balancing act would be the toughest in future in maintaining relations with Iran. Nevertheless, during recent visit to Israel in January 2012, the India’s foreign minister, S. M. Krishna pointed out that Iran has right to enrich its nuclear civilian energy requirement subject to the restraint of IAEA parameters.

Though India always found it important to strengthen ties with Iran, somehow India has always kept the relation conditional to its relation with the US. This has never allowed developing a genuine and natural relationship. If last 20-30 years are ignored since the US has vulnerable relations with Iran, India enjoyed historic relations with Iran. Israel remains another factor. It is, thus, important for India to take strong stand on Iran for its stable foreign policy priorities.