[Answered]“U.S.-Iran relations have reached a new low whichcan lead toserious economic consequences in the region”. Comment. Discuss the impact of US-Iran tussle on India.

Demand of the question
Introduction.Contextual introduction.
Body. Discuss US-Iran issue and its impact especially on India.
Conclusion.Way forward.

Iran recently announced that it would begin enriching uranium above a concentration of 3.67% permitted under the nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA), reached by Iran and the P5+1 (China, France, Germany, Russia, the United Kingdom, and the United States).

The downward spiral in U.S.-Iran relations started with US decision to withdraw from the JCPOA against the advice of the U.S.’s European allies France, Germany, and the U.K. that are parties to the deal. The US administration followed it up with the re-imposition of stringent economic sanctions against Iran that were being gradually dismantled following the 2015 nuclear deal. These included sanctions against foreign companies doing business with Iran and against countries buying Iranian oil.

Economic Consequences of US-Iran tussle:

  1. Sliding towards a deep recession: Iran’s economy was badly affected for several years by sanctions imposed by the international community over the country’s nuclear programme.The reinstatement of US sanctions last year – particularly those imposed on the energy, shipping and financial sectors in November – caused foreign investment to dry up and hit oil exports.The sanctions bar US companies from trading with Iran, but also with foreign firms or countries that are dealing with Iran.As a result Iran’s GDP contracted by 3.9% in 2018, according to estimates from the International Monetary Fund (IMF).
  2. Oil exports have more than halved: At the start of 2018, Iran’s crude oil production reached 3.8 million barrels per day (bpd), according to data gathered by the Organization of the Petroleum Exporting Countries (Opec). The country was exporting about 2.3 million bpd.Most of the oil was bought by eight countries or territories that were granted six-month waivers by the US when sanctions on the Iranian energy sector took effect – China, India, Japan, South Korea, Taiwan, Turkey, Greece and Italy.By March 2019, Iran’s oil exports had fallen to 1.1 million bpd on average, according to the consulting firm SVB Energy International. Taiwan, Greece and Italy had halted imports altogether, while the two biggest buyers – China and India – had reduced them by 39% and 47% respectively.
  3. The value of the rial has plummeted: Iranian currency has lost almost 60% of its value against the US dollar on the unofficial market since the US sanctions were reinstated, according to foreign exchange websites.The rial’s slide has been attributed to Iran’s economic problems and a high demand for foreign currency among ordinary Iranians who have seen the value of their savings eroded and worried that the situation will get worse.Iran’s currency problems have also led to shortages of imported goods and products that are made with raw materials from abroad, most notably babies’ nappies.
  4. Living costs have risen dramatically: IMF estimates that inflation soared to 31% in 2018 and predicts that it could reach 37% or more this year if oil exports continue to fall.The plunging value of the rial has affected not only the prices of imported goods but also of locally produced staples. In the past 12 months, the cost of red meat and poultry has increased by 57%, milk, cheese and eggs by 37%, and vegetables by 47%, according to the Statistical Centre of Iran. The poor have also been hit hard by almost 20% increases in the costs of housing and medical services in the past year.
  5. Companies exiting: Many foreign companies have announced their intention to exit the Iranian market or forego new investments, unwilling to risk losing access to the U.S. market and exclusion from the dollar-based financial system. The International Monetary Fund (IMF) forecasts the Iranian economy will contract by 1.5 percent this year and another 3.6 percent in 2019, a sharp reversal from April when it forecasted 4 percent growth for both years.Unemployment is also rising, especially among younger workers.

Impact of Sanctions on India:

  1. US has refused to renew the exemptions issued for eight countries including India. This means that Indian companies will either have to stop buying oil from Iran or resort to a Rupee payment mechanism as was done in the past.
  2. Other than the oil sector, India is not directly affected by US sanctions on Iran though Indian companies involved in the Iranian automobile, iron & steel and mining sectors will be affected due to additional US sanctions on these sectors.
  3. The Chabahar Port also does not come under US sanctions and hence Indian investments and involvement in it will not be affected. Nonetheless, due to sanctions on the iron & steel sector, certain infrastructure development projects such as the Chabahar-Zahedan railway and gas pipeline, part of Iran’s plan to develop Chabahar as a transit hub between Central Asia and the world, could be affected.

India’s Challenges and Options:

It might not be difficult for India to meet the shortfall in crude oil imports due to US sanctions on Iran.

  1. While US shale production is expected to grow rapidly, the higher flows from countries such as Nigeria, Libya and Iraq have already offset losses from the decline in Iranian exports. Moreover, countries such as Saudi Arabia, the United Arab Emirates (UAE) and the US have publicly announced their willingness to help meet the shortfall in crude oil that India might face due to sanctions on Iran.
  2. Then there are countries such as Iraq, Kazakhstan, Nigeria, Angola, Mexico, etc. which are among the top ten sources of oil for India and have the capacity to increase production and exports in case of a rise in demand.Therefore managing the economic aspect of continued flow of oil to India might not be difficult.
  3. The bigger challenge is the political aspect of managing relations with the US and Iran. On the one hand, if India were to stop sourcing oil from Iran, it will affect bilateral relations. On the other hand, if India were to continue to buy Iranian oil, say by sidestepping US sanctions, it is likely to impact the strategic relationship with the US.

Given this scenario, India has two options:

  • One is to resort to buying Iranian oil through one or more informal arrangements including: devising a Rupee payment mechanism to overcome the sanctions; joining hands with the EU, Russia and China; teaming up with a Shanghai Cooperation Organisation (SCO) initiative to defy US sanctions. If India were to undertake such a move, its multifaceted relations with the US will be hampered.
  • The second and more plausible option is to continue negotiating with the US to either secure a formal waiver or to have an informal understanding to buy Iranian oil. In the meanwhile, India can offer to Iran to enhance its investments in the Chabahar Port development project as well as consider initiating other developmental and connectivity projects to strengthen linkages to Afghanistan, the Caucasus and Central Asia. This will help India not openly defy the US or subvert its policy towards Iran but also  at the same time ensure that its relationship with Iran is not completely derailed and it is also able to pursue an independent foreign policy.

The bottom line is that while India can wait for the easing of US-Iran tensions to resume buying oil from Iran, it is unlikely to undermine its relationship with the US to please Tehran.

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