US-Iran tensions and why India needs to step up its game

Delhi Jun 24, 2019, 06.05 PM(IST) Written By: Priyanka Deo

US President Donald Trump. Photograph:( Reuters )

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Even though US-Iran war is unlikely, peaking tensions only hinder India’s foreign policy, relations and economic activities.

Last week was tense as the US and Iran almost went at loggerheads with each other. The relationship between the two countries has deteriorated since the 1970s when Irani revolutionaries kicked out US-backed shah and took the US embassy hostage. 

In 2015, the US signed a deal to stop Iran’s nuclear agenda but President Donald Trump pulled out of the deal completely saying that it wasn’t enough and instead, implemented heavy sanctions that are squeezing Iran’s economy. Tensions have reached a peak as of last week after weeks of threats from Iran against US troops. On Thursday (June 20), Iran gunned down an unmanned military drone that it said was in its airspace. The US denies that it was intruding on Iranian territory. Soon after, it was found that the USA had called for a retaliatory strike against Iran- literally ships and places in place and ready to go. This was called off. But certainly kept the world on a jittery edge. And in particular, India; who should be gravely concerned for two major reasons. 

First, this will exponentially increase oil cost for India. With a width of only 35 nautical miles, the Strait of Hormuz is the only passage between the Persian Gulf and the Gulf of Oman. It is through this narrow strip of sea that 20 per cent of the world global crude and 25 per cent of the world LNG (liquefied natural gas) goes through.

Additionally, Iran has been one of India’s top energy suppliers (crude oil) for over a decade. India also purchases natural gas from Iran.

Therefore, India is dependent on the Strait of Hormuz for its energy imports. Continued tensions at this level between the US and Iran could prove difficult for India’s economy; especially at a time when Modi’s NDA is set to increase federal spending on energising India’s economy. In fact, the account of Iran allegedly shooting down the US drone in its airspace earlier this week has already led to increased oil prices; globally, a five per cent spike. 

Exactly how does India get affected with higher oil prices? India’s oil and petrol prices have inherently remained in the low range without volatility. This has allowed the central government to spend on other areas like affordable housing, healthcare, electricity and multiple Swachh Bharat initiatives at a time when the GDP requires this diverse spending. With volatile oil prices, consumers will be pinched and a significant chunk of government spending and reserves will be forced to go to oil. Every $10 per barrel increase in crude oil takes away 0.4 per cent of GDP by increasing India’s current account deficit by about $12 billion. Higher oil prices also have other consequences to a rapidly growing economy. Inevitably, the price of India’s imports will increase, foreign exchange reserves will deplete and the value of the rupee gets goes down. 

The second major reason why India needs to be concerned about US-Iran tensions is that our agenda for a robust foreign policy would be hindered should pressure continue to rise. India carries excellent bilateral relations with Iran. The two nations share historical and cultural links with each other. They also cooperate on trade, oil imports and the development and operationalisation of the strategic Chabahar Port; an $85 million project. In the year 2018-19, total bilateral trade between India and Iran was over $15,600 million. Furthermore, in order to enhance India’s maritime strategy, PM Modi signed an agreement with Iran and Afghanistan to develop the Chabahar Port as a passage for increased trade, collaboration and transit. Should tensions escalate between the USA and Iran, no single country will be able to handle the magnitude and impact of conflict around the Gulf area. This could weather down the strong bilateral relations PM Modi has worked so hard to build. 

Recently, India had also stopped importing Iranian oil in order to comply with US sanctions being imposed on Tehran. Indian firms involved in Iranian iron, steel, mining and automobile manufacturing sectors are therefore getting directly hit with increased US sanctions. And with continued hits on these sectors, infrastructure and development projects for the Chabahar port will also be adversely affected.  

India is currently in a gravely precarious situation. If we completely stop taking oil from Iran, it impacts bilateral relations and trade. If we give in to American pressure, we plunder our own autonomy and risk as strong of a military relationship with the United States who called us a priority ally not too long ago. It is unlikely that India is going to defy the USA for Iran. But at the same time, we diminish our own autonomy; something that PM Modi’s NDA government has worked hard to build. 

For these reasons, it is essential that India must play a more active leadership role in the US-Iran conflict de-escalation initiatives. In particular, India must work to get a formal or informal exemption from America to continue to get oil from Iran. If that is not possible, India can increase investment in the Chabahar Port. This maintains a positive relationship with Iran and does not defy the United States.

The bottom line is that even though a US-Iran war is unlikely, peaking tensions only hinder India’s foreign policy, relations and economic activities. Consequently, the time and occasion to step up for India is now. 

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL.) 

Priyanka Deo

Priyanka Deo holds masters' degrees from Harvard University, the London School of Economics and Political Science and the University of Southern California

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