Iran-US tensions put India in a bind
February 12, 2020
Iran emerged as the top buyer of Indian tea last year. The Islamic Republic imported 53.5 million kilograms of tea from India last year, a rise of 74% from 2018.
The tea deals were made possible by an Indian rupee-based payment system set up by both countries to circumvent economic sanctions imposed by the US.
"This boost really has come because of the rupee-rial trade arrangement that we have had with Iran," Azam Monem, a director at McLeod Russel India Ltd., told Bloomberg earlier this week. The company is among India's largest tea exporters. "India's diplomacy should allow us to remain a partner to Iran where we supply humanitarian aid, tea and rice," Monem said.
Despite this rise in tea exports, an expansion of India-Iran commercial ties has been impeded by tensions in the Gulf region in recent months.
Indian strategic interests at stake
In early January, days after the US killed the head of the Iranian Revolutionary Guard Corps' Quds Force, Qassem Soleimani, Indian Foreign Minister Subrahmanyam Jaishankar made two urgent phone calls: one to US Secretary of State Mike Pompeo and the other to Iranian Foreign Minister Mohammad Javad Zarif. During his conversations, the Indian foreign minister urged both sides to keep tensions as low as possible.
The Iranian port of Chabahar offers an example as to what is at stake for India in the face of rising tensions between Iran and the US. To expand the port, Iran had joined forces with India and Afghanistan.
Chabahar's strategic location on the Gulf of Oman means that to reach it ships do not have to pass through the Strait of Hormuz, which is one of the most important waterways globally and is particularly crucial for oil shipments from the Gulf region. The Strait of Hormuz has become a flash point in the rising geopolitical tensions in the region over the past few months.
Over the past few years, India has also been striving to counter China's growing influence in the Gulf of Oman region. With the construction of the Gwadar port in Pakistan, less than 100 kilometers (62.1 miles) from Chabahar, China had strengthened its presence in the region.
The US, for its part, appears not to be bothered by the Chabahar port; on the contrary, American officials view it as an opportunity to promote Afghanistan's economy. That's why they did not include it in their sanctions list.
Still, Indian investors and firms became cautious in the face of US sanctions and held back from investing in Chabahar. This reluctance, in turn, prompted the Indian government to slash the budget allocated for the port by around two-thirds. After repeated assurances from the US that the port would not be included in the sanctions list, Indian businesses are now gradually beginning to consider investing again.
However, these investments are not aimed solely at Iran. In line with India's "neighborhood first" policy, the port is considered an important gateway to Afghanistan and Central Asia, and ultimately even to Europe.
Impact of crises in the Gulf
The conflict between Iran and the US could have other far-reaching consequences. The Strait of Hormuz, for instance, is particularly important for the global supply of crude oil.
A quarter of the world's oil and a third of its natural gas are transported via this waterway. India sources 65% of its oil imports through this shipping route. If this traffic were to be interrupted or even impaired due to military tensions, it would have a severe impact on the global oil price. This became apparent shortly after the killing of Soleimani, when the price of oil briefly rose to over $70 (€64.2) per barrel.
A sharp spike in the price of oil would have dramatic consequences for India. A jump of just $10 per barrel would push up inflation by 0.4%, say experts. The poorer sections of Indian society would be the first to feel the effects. Also, the Indian government's efforts to boost domestic consumption would be derailed by a rapid price rise.
A protracted conflict in the Gulf would also possibly have an impact on the approximately eight million Indians who reside and work in the region. If the situation forces them to quit their jobs and head home to India, the country would lose the around $40 billion they transfer home every year. The southern state of Kerala would be the worst hit, as remittances account for over 36% of the state's revenue.