Spearhead Analysis – 18.10.2017
By Syed Murtaza Zaidi
Research Analyst, Spearhead Research
The past few years have been extremely kind to the Indian Economy. In 2015, they eclipsed China as the fastest growing economy in the world, with a growth rate of 7.6%. IMF’s World Economic Outlook Database from April 2017 identified them as the sixth largest economy in the world, and predicted that they would move up to fourth in the next few years. In terms of Purchasing Power Parity, their GDP ranks third in the world, at $9.49 trillion and they now have the fifth highest military expenditure in the world, estimated to be at $56 billion in 2016. All signs point to a bright and prosperous future.
Recently however, cracks are starting to appear and even senior members of the Bharatiya Janata Party (BJP) have voiced their concerns to Prime Minister Modi. The demonetization move from last year was a mess and the government’s attempts at implementing a new GST is not faring any better. Having promised to deliver over ten million jobs each year, Mr. Modi finds himself in a precarious position, with many of his supporters losing their patience. With growing pressure on him to deliver, it is to Iran that Modi has turned to, due to their geopolitical advantage in South East Asia, as well as the wealth of economic opportunities they offer.
It is important to remember that most of the progress made by India in the last few years, is a direct result of some of the policy amendments made by the Indian government back in the nineties. The insistence of the IMF, as well as other pressing extenuating circumstances, forced the people in charge to start investing in their local businesses. It also compelled them to introduce certain free market reforms, that not only decreased the government’s role in various industries, it also led to reduced tariffs for imported and exported goods. They also made it easier for foreign investors to capitalize on the burgeoning Indian economy and revel in its impending success.
These moves did great in helping the Indian economy thrive over the next few years, and made it clear to their government that in order to keep growing, they had to look outside the confines of their own country and engage powerful allies, especially in the South East Asian region. This would not only alienate their rivals Pakistan, but also help secure an economically viable future for the country.
Diplomatic ties between Iran and India were established on 15th March, 1950, with the signing of the Treaty of Friendship. The treaty recognized the “ancient ties which have existed between the two countries for centuries and their mutual need for cooperation in strengthening and developing these ties”. However, this was easier said than done.
Over the next few years, the relationship between the two nations deteriorated and this was due to a number of mitigating factors. These included Iran’s close ties to Pakistan who helped drive a wedge between Tehran and New Delhi, both physically and in the political sense of the word. As they were a newly formed nation with a considerably more powerful adversary to their east, Pakistan found it in their interest to develop a strategic partnership with their neighbors to the west.
The Iranians were also opposed to the USSR and this led to a direct conflict with India who were, at the time, counting on Russian economic and military support, and were also considering integrating a relatively milder form of communism around their country. Moreover, the Iranians also disapproved of India’s support for the state of Israel, as well as their backing of Egypt’s Abdel Nasser.
Just like the turnaround experienced by their economy, India’s relationship with Iran also took an upturn during the nineties. India realized the economic benefits of trading with other regional states and Iran was one of the first nations they approached. Both countries apposed the Taliban government vying for power in Afghanistan and supported the opposing Afghan Northern Alliance. This prompted the government of Iran to invite the Indians to help them develop their deep sea port of Chabahar, so that the Indians could have direct access to Afghanistan, bereft of Pakistani influence.
Since then the Indian government has pledged an investment of over $500 million for the first stage of the development of the port. The two countries also signed the Trilateral Transit Agreement (TTA) with Afghanistan to create a land, transit and trade corridor. The first phase of this project would constitute a $1.6 billion, over 300-miles long, railway track, that would start in Chabahar Port, and end in the city of Zahedan in Iran.
India also proposed a North–South Transport Corridor (NSTC) which would not only involve Iran and Afghanistan, but Armenia and Russia as well, through which it could expand to other countries in central Asia and Europe. This estimated 7000-mile route would start at the western ports in India, continue to the Bandar Abbas port in Iran from where it would run all the way to the port of Bandar Anzali in the north, after which it would cross the Caspian Sea to the port of Astrakhan in Russia and onwards. This is seen as a direct response to the China led One Belt One Road Initiative (OBOR) that India refused to be a part of, due to various disagreements with both the Chinese and the Pakistanis.
Farzad-B Gas Field
One potential project that India is quite keen to invest in is the Farzad-B gas field. In 2008, the gas field was discovered by a company named ONGC (Oil and Natural Gas Corporation) Videsh Ltd, which is primarily based in India. The field holds an estimated 12 to 20 trillion cubic feet of natural gas. India was confident that their improved relations with Iran, as well as the fact that it was their firm that found the field in the first place, would help them secure a deal to develop it further. However, their offer to invest $6 billion for the development of the gas field, as well as a further $5 billion to create a liquefied natural gas terminal and export facilities, was firmly rejected by Iran.
For their part, the Iranians have been adamant from the beginning that there was no prior agreement with India that they would be awarded the contract to develop the gas field. The spokesperson for Iran’s Majlis Energy Commission, Asadollah Gharekhani said “In the past, it was decided that Iran and India jointly carry out (feasibility) studies on the Farzad-B oil field. The studies have been conducted and have finished. However, no decision was made that would suggest the project to develop the field should necessarily be contracted out to India”. He further added that “Under equal circumstances, this company (ONGC Videsh Ltd) could take priority. However, if there is a difference between the Indian company and other firms in terms of technology, technical knowhow and investment, Iran will, based on the independence and freedom that is has, choose the company which would best serve the country’s national interests”.
Since then the government in Tehran seems to have come to an agreement with Russia’s Gazprom and have signed a Memorandum of Understanding (MoU) with the gas industry giants. These moves have incensed the Indian government and prompted the state owned oil refineries to initiate policies that would cut their oil imports from Iran by twenty percent in 2017/2018. In retaliation the Iran government reduced the 90-day credit period they offered to Indian companies, down to 60 days. They also reduced various discounts offered to Indian Oil refineries by twenty percent, along with raising freight charges for Indian ships, making their purchases significantly more expensive than before.
Both governments deny these moves have anything to do with their dispute on Farzad-B, but the timing of these incidents cannot be coincidental. While the Chabahar Port development, as well as the NSTC seem to be moving ahead on schedule, the disagreements over the gas field might derail the spirit of cooperation developing between the two states. Additionally, Iran’s strong stance against the US, as well as President Trump’s threats to decertify the Iran Nuclear Deal, has put India in a tough spot. Even though they would like their relationship with Iran to remain cordial, they also do not want to disrupt their ever strengthening bond with the US.
There also remains the ever looming threat of China and Pakistan. The One Belt One Road Initiative (OBOR), and the development of the Gwadar Port is a huge threat to India and its economic interests in the South East Asian region. Moreover, the road’s route through the ‘disputed’ territory in Kashmir is seen by the Indian government as a sign of China’s support for Islamabad’s claim on the region. By aligning themselves with Iran, and to some extent Afghanistan and Russia, India hopes to not only limit Pakistan’s influence, but to also counter China’s growing military and economic hegemony in the area.
As two distinct factions emerge to oppose one another in this complex region, it is imperative that India retains the support of the government in Tehran. Iran has shown an interest in joining CPEC in the past, and if they find that China and Pakistan have more to offer, they might just jump ship, handing a huge blow to India’s aspirations of becoming a global and regional geopolitical power.