The U.S. recently declared that India and other countries should wait for the conclusion of the final nuclear deal with Iran before actively engaging with Tehran. Even in 2014, after the interim nuclear deal with Iran was inked in November 2013, the U.S. asked India to hold off on increasing its crude oil imports from Iran until it was clear that Iran was cooperating in the negotiations process. These requests followed repeated U.S. suggestions that India reduce its dependence on Iranian oil in order to boost American sanctions against Iran over its nuclear program.
Sanctions and U.S. pressure were thus significant contributing factors in the 62 percent drop in India’s oil imports from Iran from 2014 to 2015. Iran, India’s second biggest supplier in 2010-11 has now been relegated to the sixth position. New Delhi’s evolving relations with Washington have moderated its ties with Tehran over the last decade, and India’s deepening relations with Israel and the GCC are also likely to impact Indo-Iranian ties.
India-Iran relations were at their peak during then Indian Prime Minister Atal Bihari Vajpayee’s visit to Tehran in 2001 and then Iranian President Mohammad Khatami’s visit to India in 2003. Those visit saw the signing of the Tehran Declaration and the Delhi Declaration, respectively. In addition to a number of cooperative measures, both sides reaffirmed their commitment to nuclear disarmament under effective international control as well as the right to research, production and use of technology, material and equipment for peaceful purposes.
India, which supports Iran’s right to peaceful use of nuclear technology, voted against Iran for the first time at the IAEA in September 2005. India subsequently voted against Iran in 2006, and elected to refer Tehran to the UNSC and 2009 and 2011, stating that Iran had failed to comply with the NPT provisions. India simultaneously began negotiating a civil nuclear agreement with the U.S. in 2004. Initialized with a series of U.S.-India strategic partnership agreements, including frameworks for defense cooperation, the negotiations achieved a breakthrough in March 2006 with the conclusion of the civil nuclear agreement, or the 123 agreement.
The 2006 Hyde Act, which anchored the 123 agreement, contained clauses mandating India’s support for U.S. policies on the Iranian nuclear issue. The India-U.S. nuclear deal was essential to India’s efforts towards securing international nuclear cooperation and acquiring civil nuclear technology from countries like France, Mongolia, Namibia, Argentina, Canada and Australia.
India welcomed the nuclear framework agreement between Iran and the P5 + 1 as a diplomatic resolution to the nuclear standoff. As an increasingly energy dependent country, India awaits the easing of sanctions. However, a number of challenges remain to be addressed before New Delhi and Tehran can give impetus to their economic ties. Under the sanctions regime, India paid for its oil imports from Iran in rupees, which were used by Iran to purchase agricultural products and medicines from India.
While this system boosted Indian exports to Iran, it is insufficient for the payments necessary to maintain the current levels of oil imports. India currently owes Iran around $8.8 billion. While the rupee system helped India reduce its current account deficit by containing the outflow of dollars, the depreciating value of the rupee and progress in nuclear negotiations has led Iran to reject full rupee payment for oil imports. In October 2014, Iran stated that while forty-five percent of the payment can be made in rupees, the remaining fifty-five percent must be paid in euro.
As the deal goes through, Iran may withdraw other incentives like tanker services and insurance for shipments that it offered to remain competitive under the sanctions regime. Moreover, as payment channels to Tehran are expected to normalize with the nuclear deal, India’s exports of agricultural products to Iran are also likely to suffer with rival suppliers entering the market.
India’s other projects with Iran, including the $22 billion agreement for the export of LNG and the $7 billion Iran-Pakistan-India pipeline project, have been in limbo for almost a decade. While sanctions have prevented India from building the LNG plant in Iran, pricing issues with Iran and pressure from Washington have elevated the importance of the U.S. as a natural gas supplier to India. Similarly, the IPI has suffered significantly as international pressure, pricing issues, and security concerns about the pipeline passing through Pakistan prevent the conclusion of a final agreement.
Iran was also a major importer of Indian refined products, but some leading Indian suppliers halted sales to Iran in 2009, fearing suspension of loan guarantees from the U.S. Export-Import Bank. Thus, while the easing of international sanctions will benefit trade ties between India and Iran, both countries need to clear some hurdles if they are to revive energy relations in any meaningful way.
One of the main turning points in India-Iran relations could be the development of the port of Chabahar. In October 2014, The Indian government made a decision to support the Iranian Chabahar port project with a commitment of $85 million to develop the port. This is in addition to the $100 million worth of investment India sanctioned in May 2013. For both Iran and India, Chabahar offsets Pakistan’s port of Gwadar as a gateway to Afghanistan and Central Asia. Their concerns about Gwadar intensified after Pakistan handed over operation control of the port to China in February 2013.
Progress on the port, however, has been slow because, in addition to delays from the Iranian side, Tehran believes India’s investment and role in the development of the port has not been sufficient. Moreover, China can surpass India’s investment in Chabahar. Beijing has already offered 60 million euro ($67.9 million) to Tehran for upgrading the port in July 2013. Easing the sanctions regime could bring in bigger players for investing in the development of the port.
India’s deepening engagement with the states of the Gulf Cooperation Council as well as Israel could also moderate New Delhi’s diplomatic ties with Tehran. The Modi government’s high-level political engagements with UAE, Oman, Bahrain and Israel have been complemented by stronger partnerships in energy, trade and investment as well as counter-terrorism. Over the last decade, India has institutionalized security partnerships with Saudi Arabia, Qatar and Bahrain and has emerged as the biggest purchaser of Israeli defense equipment. Simultaneously, Iran has not featured on New Delhi’s diplomatic calendar, with the last high-level engagement being Iranian Foreign Minister Javad Zarif’s visit to New Delhi in February 2014. Thus, as the West Asia region experiences political turmoil and deep polarization, India’s relations with Iran could be put on the backburner.
Kanchi Gupta is a Junior Fellow at the Observer Research Foundation, Delhi, India. She is a researcher for the West Asia programme at ORF.