Iran and India: Opportunities and challenges in a new world order

Geopolitical constraints and opportunities

Iran and India have always had amicable and cooperative relations. These two nations are positioned to play a key role in forging new Eurasian connectivity and trade patterns in the age of a growing multipolar world order. As the competition between the US and China grows, Tehran and New Delhi are seeking new roles in the unfolding rivalry. Both understand that they need to stay out of this competition and like the string of so-called middle powers,[1] which may gain greater space to maneuver if they act prudently, India and Iran are carefully balancing.

Turkey, Iran, Indonesia, and many others, tend to behave independently from the West, China, or Russia. They seem to use great powers against the other to increase their status and, in some cases, even build their own ‘mini order’ in the immediate neighborhood. For these middle powers, fixation on a certain geopolitical pole is dangerous because it limits foreign policy options, whereas cooperation with several geopolitical poles increases chances of playing one side against the other, thereby increasing a country’s relative clout. Perhaps their location in the center of Eurasia, their belief in their special historical place, and more so the inefficacy in choosing between either the US or China push these middle actors to seek a more independent foreign policy.

But as these middle powers garner a bigger say in international affairs, the risk of major military destabilization increases. In fact, they appear to be more eager to change their status through direct military measures which, in turn, raises the risk of involving great powers. This behavior of middle powers – driven by self-interest and nationalism rooted in grand historic narratives from their past – reflects the shifting nature of the global balance of power.

The emergence of a host of middle powers also shows the inefficacy of portraying the world of geopolitics as a battle between the West and East, the US and China, or democracy versus autocracy/illiberalism. The picture is much more complex and consists of numerous actors. In fact, the key to winning the great power competition could lie in either China’s or the US’ ability to manage or even win over the middle powers.

Despite the growing understanding on the need to mold the present world order into a version that would be more reflective of their power and needs, India-Iran ties have been susceptible to a number of geopolitical downturns brought on by external causes. For example, following America's withdrawal from the nuclear agreement with Iran, known as the Joint Comprehensive Plan of Action (JCPOA), India ceased to purchase Iranian oil. A long-term investment arrangement in Chabahar port and the Chabahar-Zahedan railway project also saw substantial delay.

India has been concerned about the strengthening of strategic links between Iran and China, and these fears have grown since the signing of a 25-year investment agreement between the two countries.[2] India is worried because China's goals in Eurasia often collide with India's, whether it is in Pakistan, the Middle East or in the India Ocean, where a crucial battle over the control of shipping routes is unfolding. Moreover, the two countries are also competing over strategic heights in the Himalayas, which have occasionally led to military escalations and the deaths of Indian military personnel[3]. Control over vital passes and heights would give either India or China a relative edge in a potential escalatory competition over who would be a leading power in the region.

After Washington withdrew from the nuclear deal in 2018, Iran's ambitions of becoming a major energy provider for India were hampered by the re-imposition of US sanctions. Over the past years, for example, Iranian products such as oil and petrochemicals have been largely replaced in India by imports from Arab countries (Iraq and UAE). India, as a highly pragmatic player, is careful not to be subjected to American sanctions. It might disagree with and openly criticize the penalties Washington has imposed, but the country is highly likely to maintain its strategy of avoiding violations of US sanctions because of the potential spillover effect on its economy. A case in point is when the US imposed sanctions on a Mumbai-based petrochemical company for purchasing oil from Iran in September 2022.[4] This fear will continue to be a key impediment to the oft-mentioned growth of Iran-India investment and commercial relations.

Another issue straining bilateral relations is India's affiliation with Iran's geopolitical rivals, Israel and the United States. Though both New Delhi and Tehran have worked hard to base their bilateral relations on matters other than those related to ties with the US and Israel, this approach has proved to be difficult in the longer-term. Israel is particularly important to India since Tel-Aviv is one of the country's largest military suppliers. India, as a self-interested player, is in no way ready to sacrifice ties with one partner in exchange for better relations with other players. New Delhi wants to have balanced relations with all actors and, as a rising player, approaches relations with Eurasian players from a transactional perspective. Therefore, ideological (democracy versus autocracy) as well economic divisions, such as imposition of sanctions, are seen as impractical foreign policy approaches. In other words, India has grown increasingly agnostic.

Despite periodic disagreements, India's relations with the United States remain important to New Delhi, which sees America as a counterbalance to China's vision of the Indo-Pacific region. Yet here, too, India is not ready to sacrifice relations with Iran and other actors, such as Russia, in exchange for closer cooperation with the US. Balancing has become India’s foreign policy constant. Despite managing these conflicting sets of relationships, India’s ties with Iran have nevertheless been impacted and the two countries spare no effort to minimize the effects of outside powers on their bilateral relations.

India-Iran economic ties

India exported $1.28 billion in goods to Iran in 2021, which mostly comprised of rice ($662 million), tea ($96.8 million), and bananas ($46.1 million). Iran sent $379 million worth of goods to India in the same year, primarily nuts ($100 million), ammonia ($58.2 million), and apples and pears ($48.3 million)[5]. The Islamic Republic also exported dates, methanol, crude oil, liquified butane and propane, bitumen and mineral base oil, stone and mineral salts such as marble, and clinker cement in considerably smaller quantities.

Yet, Iranian exports to India fell by 1.08% on an annual basis from $502 million to $379 million between 1995 and 2021[6]. This has impacted bilateral trade which totaled $1.91 billion in 2021-22, a 9% reduction from the previous fiscal year's value of $2.10 billion. When seen over a longer period of time, the downward trend becomes much more apparent. While bilateral trade between Iran and India reached $18 billion before the US’ decision to exit JCPOA, the situation has drastically changed with the re-imposition of US sanctions.

Several strategies have been used to offset trade restrictions, one of which is the Central Bank of India's statement made in July 2022[7] that it could use the rupee payment mechanism to enable commercial transactions with nations subject to economic sanctions, such as Iran and Russia. The Reserve Bank of India even devised a system to encourage foreign trading in rupees by providing an instant payment option. In a more recent move, in early May 2023, Iranian Secretary of the Supreme National Security Council Ali Shamkhani held talks with Indian National Security Advisor Ajit Doval on the need to activate the ‘rial-rupee’ mechanism.[8] So far, the proposition has only remained on paper, as has been the case with other countries such as Russia.[9] Reasons wary from the unreliability of such a trade arrangement to the fear of sanctions (and India’s close ties with the US) as well as wider geopolitical calculations.

One way for the two countries to strengthen bilateral trade ties is for India to lower its high tariffs on Iranian exports, particularly from the agricultural sector, which can be accomplished through the use of specific economic instruments such as the negotiation of bilateral preferential trade treaties. It is also feasible that the two nations will reach a deal comparable to the 25-year investment pact struck by China and Iran. Some suggestions of this have already been expressed by the Indian side but have yet to materialize. Moreover, progress could also be achieved through encouragement of mutual investment or by applying preferential tariffs, expanding cooperation in the field of medicine and pharmaceutical materials, and increasing production cooperation between Iran and India. Among these are herbal medicines and India's investment in the downstream industry of Iranian oil and petrochemicals directed at the Indian market.

Ports and new trade routes

Despite existing geopolitical impediments, India and Iran have never been real geopolitical rivals, and their economies complement one another in the areas of transportation, energy, and trade. As a member of the Shanghai Cooperation Organization (SCO) and BRICS, India is important for Iran not just in the economic area sphere, but also in attempts to reshape the present global order and make it more convenient for both countries.

Both are interested in promoting new Eurasian connectivity routes such as the International North-South Transport Corridor (INSTC), a 7,200-kilometer multi-modal maritime, rail, and road network with three branches (western Caspian, trans-Caspian, and eastern Caspian) that can transport cargo from Mumbai in India to northern Europe via Iran, Azerbaijan, and Russia.[10] In this enormous project, Iran's southern port of Chabahar is essential in harmonizing India's and Iran's interests. Indeed, the port serves as a land route for India to access markets in Russia, Central Asia, and maybe Europe.[11]

The cooperation agreement between Iran and India for the administration and development of Chabahar port was signed in 2003, but the real work began in 2016, with the signing of a memorandum of understanding in which India promised to invest $85 million in the port's infrastructure[12]. Chabahar is critical for India as it would allow India to grow its outreach to Central Asia and Russia. It would also allow India to compete with the Chinese initiatives of building ports in the South Asia.

The constraints are once again related to the sanctions regime that looms over Iran. While India was spared from US sanctions throughout the construction of the Iranian port, New Delhi has been cautious about completing the Chabahar project rapidly, despite expediting its investment in the project at the beginning of 2021, when it increased the amount of money allotted to Chabahar port from $6.9 million in 2020 to $13.5 million in the fiscal year 2021-2022.

However, broader Eurasian geopolitical factors may potentially support the rapid construction of Chabahar port. The conflict in Ukraine has compelled Russia to seek alternate routes, and INSTC appears to be promising option. Inadvertently, the Ukraine situation may serve to revitalise not just India-Iran trade, but also bring Russia and India economically closer to each other. India and Russia are constrained by geography and the INSTC corridor through Azerbaijan and Iran has the potential to pull the two countries closer and establish a direct land route from North Eurasia to the Indian Ocean. However, the amount and quality of Iran-India trade must be enhanced as it presently lacks product diversity, with fruits and raw materials accounting for a large portion of the trade.

Evidently, there is a strong basis for close ties between Iran and India. India as an emerging global powerhouse needs energy resources. It also needs as many trade corridors as possible to reach critical markets in Eurasia. Bilateral ties are still hampered by outside geopolitical factors, but New Delhi and Tehran seem to be increasingly adaptive to the new realities. Their growing partnership fits into the changing global dynamics amid the US-China competition and the emergence of a more even distribution of power with the rise of the so-called Global South – a collection of actors that are striving to avoid being caught up in the rivalries of other actors.