In a recent development, Indian merchants have shown reluctance towards signing new export contracts with Iranian buyers, primarily due to concerns regarding Iran’s dwindling rupee reserves with Indian banks. This change of stance comes in the wake of the Ministry of External Affairs’ announcement earlier in 2020 that India won’t be participating in Iran’s Farzad-B gas field project any longer. Major reasons cited for this decision include policy alterations by the Iranian government, uncertain financial situations in Iran, and the ongoing sanctions by the USA.
The Falling Rupee Reserves
Iran’s rupee reserves in India’s UCO and IDBI Bank, which are the only two lenders authorized to facilitate rupee trade, have been witnessing significant depletion. This can be traced back to the sanctions imposed by the US on Iran, which has prevented Iran from using US dollars for transacting oil sales. Prior to the sanctions, Iran had an arrangement in place to sell oil to India in exchange for rupees. This enabled them to import critical goods such as agricultural commodities. However, following the expiration of a US sanctions waiver, India ceased purchasing oil from Tehran in May 2019. These developments have caused a significant dip in Iran’s rupee reserves.
Consequences of the Situation
The uncertainty around the current situation and the resultant hesitance of exporters is adversely affecting Indian exports to Iran. They remain unsure about timely payment for new shipments and are therefore avoiding doing business with Iran due to delayed payments. In 2020, India’s overall exports to Iran fell by 42% from the previous year, amounting to USD 2.2 billion – the lowest in over a decade. This downward trend continues in 2021, with January exports being just over half of what they were at the same time last year.
The Growing Influence of China
Amidst these developments, China has been increasing its presence in Iran. Recent deals between the two countries look to bolster Chinese involvement in banking, telecommunications, ports, railways, and various other projects. This burgeoning strategic partnership might complicate India’s access to Afghanistan through Chabahar and further connectivity to International North South Transportation Corridor (INSTC).
Maintaining India’s Interests
In spite of the strengthening relationship between Iran and China, Iran hasn’t indicated any disruption to any projects involving India. It remains crucial for India to sustain its ties with Iran, while concurrently forging new relationships with countries such as Saudi Arabia and Israel. This would help India balance its policy interests in West Asia.
Avoiding Sectarian Tensions
India houses considerable Shia and Sunni Muslim populations. In order to segregate itself from any regional sectarian tensions, it’s important for India to neither sever ties with Iran completely nor oppose the United States outright.
Security of India’s Energy Supply
Since India has ceased buying Iranian oil – accounting for approximately 90% of its imports from the Islamic nation – safeguarding its energy supply has become a pressing concern. India was Iran’s second biggest oil customer after China until mid-2018.
The Role of Pakistan
Pakistan is playing an active role in the Middle East, attempting to leverage the Organisation of Islamic Cooperation (OIC) and its connections with certain Arab nations to garner support on the Kashmir issue.
Next Steps
In 2019, India opted to prioritize its ties with the USA, halting oil imports from Iran. However, India will need to carve out a solution to maintain its relationship with Iran, ensuring its energy supply and regional foreign policy objectives remain unhampered. This could be achieved either by persuading Washington to grant an exemption or evading the USA sanctions like it did in 2012-13. Given India’s dependence on Middle Eastern oil and gas, it is vital to maintain cordial relationships with all major suppliers, including Iran, UAE, Qatar, Iraq, and Saudi Arabia.
