External Affairs

India and Iran: Connectivity Matters. Trade and Investment Matters More

The true measure of the success of the Chabahar port project will be if it is implemented quickly and leads to a quantum leap in Indian trade and investment relations with Iran, Afghanistan and Central Asia.

Prime Minister Narendra Modi and President Hassan Rouhani in Tehran, May 23, 2016. Credit: PMO

Prime Minister Narendra Modi and President Hassan Rouhani in Tehran, May 23, 2016. Credit: PMO

Most Indians don’t realise that until 1947, their country shared borders with Iran and Afghanistan. With partition, India lost this geographical contiguity with both countries. Iranian ports are a short sail away but India has always had problems trading with land-locked Afghanistan because Pakistan blocks access across its territory. Against the backdrop of Tehran’s emergence from sanctions, Prime Minister Narendra Modi’s recent visit to Iran saw the long-awaited Chabahar port project finally get off the ground. The visit saw the signing of agreements for investment in the project, and the offer of Indian financing for the Chabahar-Zahedan railway line. This breaks new ground, as India has not executed major projects in that country so far. Once implemented, India will have a path into Afghanistan and also one to Central Asia that bypasses Pakistan completely.

But there is a bigger story unfolding in Iran than just connectivity.

Even before last year’s landmark nuclear agreement between Iran and the P5+1, more than a dozen European foreign ministers had travelled to Tehran to take advantage of emerging opportunities. Britain established the UK-Iran Business Council much before the recent resumption of diplomatic relations. The level of interaction has gone up since. Immediately after the nuclear deal was reached in July 2015, the German deputy chancellor and economy minister visited Tehran with a 60-member business delegation. President Rouhani of Iran has been received in Paris and Rome.

India continued to buy crude oil from Iran throughout the sanctions period. In the absence of normal banking, re-insurance and shipping services, alternative channels had to be worked out. This involved considerable adjustment, and sacrifice, by both sides. India’s policy was not merely transactional. It understood that sanctions were a passing phase in the life of a nation with millennia old history.

Modi’s visit brought the focus on connectivity and trade. The contract for Indian participation in Chabahar builds upon the MOU signed on May 6, 2015 during Nitin Gadkari’s visit to Iran. A trilateral transport and transit agreement was also signed between India, Iran and Afghanistan. Though Indian trade with Afghanistan already passes through the Iranian port of Bandar Abbas, the two agreements will substantially expand Afghanistan’s options and allow India greater and quicker access.

Indian participation in the expansion of Chabahar port is in keeping with the Iranian government’s priorities. The port is outside the Strait of Hormuz, and hence will be insulated from any conflagration in the Gulf. Expansion of the port will also bring more trade and development to Sistan-Balochistan, a strategic province bordering Pakistan and Afghanistan with few natural resources. In recent years, the region has also witnessed an upsurge in terrorist attacks by groups based in Pakistan.

The Indian quest for connectivity

The Chahabar free trade zone offers a good opportunity for India to invest in a urea plant, which is a priority in a country where more than 60% of the population works in the agricultural sector. Other energy intensive industries can also be set up in the Chabahar FTZ. During Modi’s visit, NALCO signed an MOU for setting up an aluminum plant.

Iran has the world’s second largest gas reserves. Recently, it announced a new gas pricing policy. This brought the price of gas down from 13 cents per cubic meter to 8 cents. There is also a discount for gas feed-stock prices for the Urea plant in the free trade zone. The gas pricing formula is valid for 10 years, which provides stability to long-term investments. Though the exact price needs to be negotiated, it will be cheaper than the pool gas price for the fertilizer sector in India. Indian investors will of course decide whether the difference in raw material cost is sufficiently attractive.

The Chabahar FTZ is being developed in close proximity to the port. It has the added advantage of tax exemption for 20 years, and duty free import. Iran has already built a 900 km pipeline, bringing gas from Assaluyeh in the west, to Iran Shahr, north of Chabahar. The remaining segment of around 100 kms can be completed before industry comes up in the vicinity. China is already building a refinery in the FTZ for supplying heavy oil to Afghanistan.

Chabahar will not only allow access to Afghanistan, but also to Central Asia and Russia. However, to realise its full potential, the port needs rail connectivity. At present, there is an excellent 1000 kms road link connecting Chabahar with Mashad and Sarakhs on Iran’s tri-junction with Turkmenistan and Afghanistan. This needs to be supplemented by a railway line. During the prime minister’s visit, IRCON signed an MOU with the Iranian railways for development of the Chabahar-Zahedan rail link. China has already completed a 6,000 km railway line from the eastern part of the country to northern Iran.

The International North-South Transit Corridor (INSTC) also offers transit to Russia and the CIS countries. There already exists a rail link between Bandar Abbas in the south and Aminabad port on the Caspian, and Inchebarun on the Iran-Turkmenistan land border. The rail link between Kazakhstan-Turkmenistan-Iran was inaugurated by the presidents of the three countries in December 2014. There are two other ports on the Caspian – Bandar Anzali and Astara – which are connected by road with Bandar Abbas. There is a north-eastern trunk of this corridor, which passes through Sarakhs on Iran’s border with Turkmenistan. While substantial infrastructure exists for transit, Indian trade needs to make more use of it. Even during the sanctions period, the INSTC was being used by the UAE, the CIS countries and China.

India also has observer status with the Ashkabad agreement – a transit-trade arrangement between Uzbekistan, Turkmenistan, Iran and Oman. This will provide a route to the CIS countries.

Energy still central

India represents a large and growing market for Iran’s oil and gas exports. Recovering its market share for crude exports is a major priority for the Iranian government. This is particularly crucial during the period of excess supply, and low crude prices. India’s growing economy, and energy needs, would require access to Iran’s surplus hydrocarbon reserves. Iran also offers opportunities for investment in upstream oil and gas exploration. These were discussed during the Tehran visit of Dharmendra Pradhan, India’s minister for oil and gas, in April, 2016. At present, an OVL-led consortium is negotiating a contract for the Farzad B offshore gas block with 12.5 tcf in place gas reserves. Apart from Indian interest in Farzad B, there would be other oil and gas blocks, which will be part of the next bidding round.

During the sanctions period, a rupee arrangement was devised for part payment of Iran’s oil dues. Since June 2012, this has saved the country Rs.90,000 crores of foreign exchange, and sustained Indian exports of around Rs.80,000 crores so far. There is need to move on, and restore the pre-sanctions arrangements. After the rupee payment arrangement became operational in June 2012, for two consecutive years, Indian exports went up by 38.97% (FY 2012-13) and 48.35% (FY 2013-14) respectively in dollar terms. Since then, they have started coming down. In the post-sanctions phase, India will face a more competitive environment. In order to sustain, and increase exports, India has to move into project export mode. This needs extending credit. Iran has an excellent credit record with a debt-to-GDP ratio of 2%.

India needs to clear all oil payments which were held up due to sanctions. A beginning has been made. $750 million out of a total of $6.4 billion was paid before Modi’s visit. It is hoped that with more banking channels opening up, the balance will be cleared soon. Oil payments are contractual obligation of Indian companies.

The Iranian economy proved its resilience during the sanctions period. Since President Rouhani came to power, the economy had shown positive growth, the rial stabilized and inflation was brought down to 14% from a high of 35% over past two years. The recent visit of the IMF mission to Iran predicted GDP growth of 4-4.5%. Oil accounted for 30% of GDP before the sanctions. The combination of reduction in volume of crude exports due to sanctions, and low oil prices has driven this figure further down to 18% in the last financial year.   Thus Iran’s oil dependency is much below that of many other oil rich countries. Iran also has a conscious policy of diversification, though this will require more time and effort.

The recent Majlis elections have validated the nuclear deal, and strengthened President Rouhani’s hands. There are conflicting claims about the exact strength of the Reformist and Principalist groups in the 10th Majlis. Independents will hold the balance. As in most systems, independents tend to side with the government.

Iran’s integration is good for the region

The situation in the Af-Pak region will be in flux following the expected American withdrawal after 2017. Iran is concerned with rise of ISIS in Afghanistan. Iran hosts nearly 2 million Afghan refugees. US$2 billion of transit trade passes through Iran to Afghanistan. There are also religious affinities between the Shia and Hazara groups and Iran. Iran is not included in the Quad group on Afghanistan; this group has not made much progress in any case. With the recent killing of Taliban leader Mullah Mansour, factional violence in Afghanistan may intensify. India has made major contribution to Afghanistan’s development, and has a stake in peace in that country.

The rise of ISIS in Syria and Iraq also points to the need for co-operation amongst the countries of the region. There could be a convergence of interests between Saudi Arabia and Iran in combating ISIS, though unfortunately this strand has been clouded by the rise of sectarianism. ISIS has attacked and killed Saudi guards on its border with Iraq. It could pose a limited territorial challenge to Iran; it has greater ideological pull for Sunni Arab population of the Kingdom. India has an interest in the stability of the region, which accounts for 60% of our crude oil imports, and supports an Indian diaspora of more than 6-7 million. India could be a security provider.

Iran’s integration with the international mainstream is in the interests of all countries. This particularly applies to neighbouring states. Before the sanctions, the UAE’s trade with Iran was worth more than $21 billion. It also provided banking channels for trade with Tehran. Most of this was, of course,  re-exports. Iran continues to have good relations with Oman.

Will the nuclear deal survive s Republican victory in the US presidential race? The extent, and level of the EU’s engagement with Iran after the lifting of sanctions, makes it difficult to envisage it will agree to re-impose sanctions. Russia and China are even more unlikely to do so. Unilateral US sanctions will hurt US corporate interests, and will not have the effect of a comprehensive sanctions regime.

India’s bilateral relationship with Iran is not aimed at other countries. Modi’s visit has imparted a momentum, which needs to be sustained by timely and focused implementation.

D.P. Srivastava was India’s ambassador to Iran, 2015-2016. 

Note: This piece was edited to correct the first name of India’s oil minister. He is Dharmendra Pradhan.

  • Harikumar Vaidyam

    hope india starts sprinting through c. asia !!