Manan Goel
By Manan Goel
Economic and political developments in India and Iran have climbed higher on the global agenda this year and their economies are likely to become increasingly intertwined.
Iran, home to the world’s fourth largest oil reserves, would benefit from a secure and significant home for its exports, while India may need up to 10 million barrels of oil per day (b/d) by 2040, according to the International Energy Agency (IEA). This marks a new supply-demand chapter for the two countries, following Iran’s previous position as India’s second largest oil supplier before Western-imposed sanctions.
The accelerated nature of the two countries’ trade relationship is not as unlikely as it seems.
India pushed back against US-led encouragement for New Delhi to cut all ties with Iran during the sanctions era.
Within legal parameters, scaled down trade between Iran and India not only continued, but swelled and Indian exports to Iran nearly doubled between 2009 and 2013.
The ink covering the lifting of the Western-imposed sanctions on Iran on January 17 has drenched global newspapers. Tehran’s ambition to boost its economic prowess after years under sanctions can partly be translated through its pledge to boost its oil production by 21% from today’s 3.3m b/d to 4m b/d, with 600,000 b/d additional supply this year.
Whether Iran has the capacity to hit these targets is yet to be seen. It had to funnel large portions of its financial and human capital resources during sanctions towards maintaining the country’s energy infrastructure.
Indian Prime Minister Modi’s ongoing global tour illustrates the country’s need to befriend multiple energy partners, with a flight to Tehran in late-May following a thorough tour of the Gulf. India’s search for allies will be supported by the country’s strong growth projections – 7.5% this year and next, according to the International Monetary Fund (IMF).
India’s reliance on energy imports could climb to 90%, which is an unnerving statistic for the country’s energy security. Its energy demand has almost doubled since 2000 and one in five of its 240 million people still lack access to electricity, which means its appetite for fuel will only accelerate. Couple this with the ‘Make in India’ programme – plans to transform the country into a manufacturing behemoth – and Iran’s oil export market seems to be onto a sure thing. The impact of the revitalized Iran-India relationship is already being felt. Iranian crude heading to India surged from 190,000 b/d in January this year to 540,000 b/d in March, potentially displacing imports from Iraq and Nigeria, according to market intelligence firm Genscape.
And although Iran is suffering in the current low oil price environment, the blow might be somewhat alleviated by the fact that every dollar drop in the price helps reduce the Indian government’s costs by up to $1 billion.
This financial boost will only strengthen India’s plans to become a refining superpower by 2025, which could be helped by many of the refineries’ ability to process Iranian-grade crude.
But it is not all clear sailing - Iran’s export plans are facing a freight hurdle. Many of the ships that Iran needs in order to ramp up its exports are either being used for storage as traders sit and wait for oil prices to rise, or are not seaworthy. The treasury’s funds earmarked for maintenance only stretched so far during sanctions.
Oil and tanker trade is priced in dollars and remaining US sanctions on Tehran disallow any business traded in dollars or with US companies, causing some foreign ship owners to avoid Iranian cargoes. This could slow Iran’s re-launch into the European market and New Delhi and other Asian customers are no doubt keeping a close eye on developments.
Plus, low oil prices are also squeezing Iran’s economy, with the IMF expecting GDP to decelerate from 3% in 2014-2015 to no more than 0.5% in 2015-2016, before accelerating to as high as 5.5% in 2016-2017.
The Iran-India strategic alliance has wider economic benefits, with India, Iran, and Afghanistan wrapping up a trilateral agreement that allows India to bypass Pakistan and access Afghanistan through Iran’s Chabahar port. India is offering a $150m credit line for the development of the port on the Gulf of Oman.
The successful agreement, beset by potential economic and political pitfalls, puts the spotlight on Iran and India’s other much-delayed and major energy projects, such as the 2,700km Iran-Pakistan-India pipeline. Tehran reaffirmed its appetite for the project this year, though New Delhi’s questions still linger over whether the pipeline will reach as far as its borders considering its oft-aggravated relationship with Pakistan.
The positive sentiment surrounding Iran-India’s alliance suggests there will be more abstract handshakes between Tehran and New Delhi, as the countries lock in crude and gas supply contracts and rejuvenate lagging infrastructure deals. This year no doubt marks the beginning of a new Iran-India era – the best allies are always the old ones.
