[Answered]With India and the USA coming closer to each other in the international arena, new challenges have emerged in India-Iran relations. Discuss.

Demand of the question

Introduction. Contextual introduction.

Body. Us-Iran issues. Consequences of the tussle.

Conclusion. Way forward.

Recently, India has come close to the USA in terms of bilateral relations. At the same time relations with Iran is taking a new strategic shape especially due to the importance of Iran’s Chabahar port and oil sources. But the relations with Iran has been engulfed in new challenges especially the US-Iran tussle. The US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and sanctions has worsened its relations with Iran. It poses a new challenge for India on how to maintain relations with USA and Iran at the same time.

Us-Iran tensions: Broadly, there are three contentious issues that led to the current impasse:

  1. Nuclear issue: First and foremost is the Iranian nuclear issue. While Iran has always maintained that its nuclear programme is for civilian and peaceful purposes, the US and its allies in the region refuse to believe that Iran’s programme is only meant for producing electricity or for medical purposes.
  2. Iranian missile program: Secondly, the US has raised serious concerns on Iran’s missile programme. Iran has a robust military establishment that has developed medium- and long- range ballistic missile capabilities. Even after signing the JCPOA, Iran continued to develop and test ballistic missiles.
  3. Military expansionism: The third contentious issue is Iran’s regional military expansionism and support for non-state actors including Hezbollah, Hamas, Ansar Allah, Iraq’s Popular Mobilisation Unit (PMU) and Shia militias in Syria. The US and its regional allies see this as threatening their national security and regional interests.

Challenge for India:

  1. Growing tension in Persian Gulf: There is growing tension in the Persian Gulf and the increasing pressure being placed on the Iranian economy under unilateral US sanctions. After the US withdrawal from the JCPOA and re-imposition of sanctions, Tehran stepped up diplomatic efforts to convince the European Union (EU), Russia, India and other countries to continue doing business with Iran.
  2. Strategic balance: 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 vis-à-vis Iran.
  3. Oil imports: Most importantly, the US insistence on not renewing the waiver on Iranian oil imports poses a challenge for New Delhi as Iran is India’s third largest oil supplier. It might not be difficult for India to meet the shortfall in crude oil imports due to US sanctions on Iran.
  4. Political challenge: 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.

Consequences of US-Iran tussle and Impact on India:

  1. Threat to companies: The US has refused to renew the exemptions issued for 8 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. Effect on steel sector: 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. Chabahar port: 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.
  4. Energy resources: Bilateral ties took a beating during the sanctions years. Until sanctions were imposed on Iran, it was India’s second largest source of crude oil after Saudi Arabia. New Delhi had also backed off from a pipeline project that aimed to bring natural gas from Iran to India through Pakistan.
  5. Current account deficit: Higher crude oil prices due to sanctions will widen the trade deficit and current account deficit of India.
  6. Costly rupee: The currency could be impacted if the trade and current account deficits were to widen. An increase in the import bill will tend to put pressure on the rupee.
  7. Inflation: There could be significant impact on inflation, given how crude oil prices move and the extent to which the government allows the pass-through to the consumer.

Way forward:

  1. India must consider not only its own interests in terms of its ties with Iran and with the U.S. and its allies.
  2. One immediate priority is to work more closely with European countries in ensuring that Iran does not feel compelled to walk out of the nuclear deal, and to jointly build a sanctions-immune financial infrastructure to facilitate Iranian trade.
  3. India must continue negotiating with the US 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.
  4. It is necessary that the countries affected in the region cooperate, over a possible U.S.-Iran clash.

Both the US and Iran are strategically and economically important for India. Ideally, India wants to have good relations with Iran as well as the US. India has so far been forced to conduct a careful balancing act to ensure that its mutually beneficial relationship with Iran does not impinge upon the one with the US. India is free to conduct its foreign policy driven by its core national interests. However, the geo-politics around US-Iran relations have had a bearing on India too. India needs to balance these considerations going forward.

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