US-Iran tensions spell trouble for India

Another blow for the Indian economy?


January 9, 2020

/ By / Mumbai

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Protesters demonstrate over the US airstrike in Iraq that killed Iranian Gen. Qasem Soleimani in Tehran, Iran

The US killing Iranian commander Qasem Soleimani at Baghdad’s airport last Friday and Iran retaliating by firing more than a dozen ballistic missiles at two military bases in Iraq where American troops are stationed is not just bad news for both these countries and the Middle East, but for India as well. India’s economic and strategic interests will take a hit if the current tensions lead to a war.

Just two days after US President Donald Trump ordered the killing of General Qasem Soleimani, the second most powerful man in Iran, Iran struck back early Wednesday, firing a series of ballistic missiles at two Iraqi military bases housing American troops, in a major escalation that could bring the two long-time foes closer to war.

Soon after the news of the Iranian missile attacks emerged, crude oil prices shot up, while stock markets across the world tumbled fearing a tit for tat escalation in this tumultuous relationship that has seen Trump tear up the Iran Nuclear Accord and take other provocative steps against Iran.

However, there was respite by the end of the day as the US denied any casualties in the attack and Iran also clearly said that it would not attack any more if there was no response by the US. Trump tried to portray it as a win and cool the frayed tempers.

Between a rock and a hard place

The ongoing crisis between Iran and the US is not just a cause of concern for the two nations and the Middle East, but for India as well. India has already started facing the ripple effect in the form of rising petroleum prices. The petrol prices have gone up for the fifth consecutive day now and are likely to go further up.

In Delhi the retail pump price of petrol rose to INR 75.69 per litre. It is the highest price for petrol since November 2018. Diesel price climbed to INR 68.68 a litre. The reason for this rise was a sudden spike in global oil prices that hit USD 70 mark in the wake of escalating US-Iran tensions.

India, the world’s third-biggest oil consumer, meets more than 80 pc of its crude oil requirements and around 40 pc of its natural gas needs through imports. Although successive governments have talked about firm measures to boost India’s oil security, the country’s domestic oil and natural gas production have been slowing down in the past few years, making the country even more import-dependent. India imported 207.3 million tonne of crude oil in 2018-19, and 4.5 million barrels a day in the April-November period of calendar year 2019. Moreover, India’s import dependency based on consumption has increased to 84.5 pc compared to 83.3 pc a year ago in the same period. The country spent USD 111.9 billion on oil imports in 2018-19, up from USD 87.8 billion in the previous fiscal year, according to the oil ministry’s Petroleum Planning and Analysis Cell (PPAC).

Even sensex felt the jolt of Trump’s attack order as it fell by 788 points on Monday. Investors collectively lost around INR 3 trillion (USD 40 billion). Rupee fell to below 72 against the dollar. Gold prices hit a lifetime high of INR 41,730 for every 10 grams.

“The attack by the US on IRGC commander can destabilise the entire Middle East and it will hurt India’s relations with Iran. It is not good for us because we will need to evacuate our citizens. Oil prices will go up and remittances will go down. We stand to lose a lot,” a senior Indian diplomat who didn’t want to be quoted told an Indian news agency.

A worry for the Indian diaspora

Another major cause of worry for the Indian government is that the ongoing conflict might put the lives of the over eight million Indians living and working in West Asia, the vast majority of who live in the Arabian Gulf, in danger. Also, Iran holds huge religious and cultural influence over the Shia population (about 25 million) in India. If the situation becomes any worse, the government may have to carry out another large scale evacuation of the diaspora, just as in the 1990s during the US invasion of Iraq when India had to arrange an airlift of more than 110,000 Indian citizens.

The south Indian state of Kerala has already begun coming to terms with the idea that many more will return. A sudden jolt would put pressure on the places Indians return to, and also endanger the USD 40 billion in remittances India receives from West Asia – more than 70 pc of all remittances to the country, a key source of foreign exchange.

India has already issued a statement and has asked all Indian carriers to avoid airspace of Iran, Iraq and the Gulf. Indian nationals are advised to avoid all non-essential travel to Iraq until further notification. As per the Ministry of External Affairs, Indian nationals residing in Iraq are advised to be alert and may avoid travel within Iraq.

Strategic partnership

Over the past decade or so, the US and Israel have emerged as strategic partners for India, while Saudi Arabia and Iraq have been crucial for the country’s energy security. However, at the moment, Iran is central to India’s plans as the core of the relationship lies in strong bilateral trade, crude oil imports from Iran and cooperation in the development and operationalisation of the Chabahar Port. India deems the port as a gateway for its trade with Afghanistan and Central Asia. India signed an agreement with Iran committing investments worth USD 85 million for the development of the port. In February 2018, when President Rouhani visited New Delhi, India Ports Global Limited (IPGL) and Iran’s Port and Maritime Organisation signed a lease contract for the operationalisation of Phase-1 of the Chabahar Port underlining the strengthening cooperation between the two countries.

After the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and re-imposition of sanctions, Tehran stepped up diplomatic efforts to convince EU, Russia, India and other countries to continue doing business with Iran. However, the US threat to impose secondary sanctions under the Countering America’s Adversaries through Sanctions Act (CAATSA, 2017) might prevent European companies from defying US sanctions.

These developments have placed India in a difficult situation given its growing strategic partnership with the US, on the one hand, and strong bilateral ties with Iran, on the other. It faces a pre-JCPOA-like situation – having to deal with the US pressure while simultaneously working to secure its interests with Iran. Most importantly, the US insistence on not renewing the waiver or SRE on Iranian oil imports poses a challenge for New Delhi as Iran is India’s third largest oil supplier. This signifies that Indian companies might have to stop buying oil from Iran. According to media reports, as of May 2019, Indian oil companies have decided to not place further orders for oil imports from Iran due to US sanctions.

Iran can also be a very useful ally in India’s Afghanistan-Pakistan strategy. With the US withdrawing from Afghanistan and parleying with the Taliban, India would find itself at a severe disadvantage as all its work to re-establish its influence in Afghanistan and work with the Afghan government could come unstuck. The Taliban were and remain firm allies of Pakistan and if they regained power, Islamabad would once again end up controlling Kabul.

Moreover, the Taliban would not hesitate to export their kind of Islam to Jammu & Kashmir, where India is already facing a heavily disenchanted populace which has been under a lockdown, at least metaphorically, since the abrogation of Article 370 in August last year.

To protect its interests in the neighbourhood, India needs a friendly Iran, which could be a challenge, should India be seen as being too close to the United States. India also needs to develop its ties with the US, which may ask India to choose its allies, especially if Trump manages to secure a second term later this year. The next few months will be a good indication if the Indian diplomats and political masters can walk this fine line.



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