India and Iran Step Up Economic Engagement

February 28, 2014 Posted by India Briefing Reading Time: 5 minutes

DELHI – Iranian Foreign Minister Mohammad Javad Zarif arrived in New Delhi yesterday for talks with senior Indian officials on a range of issues aimed at bolstering economic and diplomatic ties between the two countries.

“The Islamic Republic of Iran and India are two key players and decision-makers in the international arena,” Zarif said after arriving in New Delhi on Thursday, adding that Iran considered India a “very important” country with which it shares centuries-old civilizational relations.

Before FM Zarif’s visit, Iran’s IRNA news agency announced the talks would focus primarily on oil and banking, including India’s current backlog of payments for oil shipments and a proposed oil pipeline between the two countries.

Shortly before Zarif’s visit, Indian oil secretary Vivek Rae confirmed to Reuters that India was preparing to pay Iran the US$1.5 billion it owed as part of the P5+1 Geneva Interim Agreement granting Iran access to US$4.2 billion in oil revenues that had previously been frozen abroad by sanctions.

India is reported to owe Tehran nearly US$5.3 billion in total for oil shipments.

Also on the agenda is a proposed US$5 billion deep-sea gas pipeline that would connect Iran’s South Pars gas field with India’s west coast. Today, talks between India’s External Affairs Minister, FM Zarif and Oman’s Foreign Minister will represent the first FM-level discussion of the proposal.

Last December, India’s South Asia Gas Enterprise Pvt. Ltd. (SAGE) conducted feasibility studies for the multi-billion-dollar proposal, which would import nearly 31 million cubic meters of natural gas per day to help feed India’s ever-growing energy requirements.

“We are in regular touch with the Iranians and at this moment they are the only country, among energy rich nations of the Persian Gulf, which has the surplus to export to India. There could be several options but one of them could be bringing Iranian gas to the port of Chabahar from where it could either be transferred directly along the seabed or via Oman, which could also become a beneficiary,” said Subodh Kumar Jain, Director of SAGE, after the feasibility study last year.

Sources close to the talks believe the high-level discussions today may result in the pipeline being routed through Oman rather than via Chabahar. “Earlier, there were plans of lifting the gas via sea bed to India from Chabahar port. But getting it via Oman can be more viable and strategic,” said a source quoted in the Hindustan Times.

India’s oil imports from Iran more than doubled last month after the lifting of sanctions, increasing from 189,100 barrels per day (bpd) in December to more than 400,000 bpd in January.

Business as Usual?

After western sanctions against Iran were eased late last year, President Hassan Rouhani has stepped up efforts to attract foreign investment to revive Iran’s economy. Reviving economic ties with traditional partners in Asia and Europe appears to be the cornerstone of this endeavor.

Despite insistence from the United States that “Tehran is not open for business,” foreign investors have demonstrated an eagerness to take advantage of the economic ‘feeding frenzy’ the relaxing of sanctions has created.

Earlier this month, a high-level trade delegation of French business executives to Iran elicited remarks from U.S. Secretary of State John Kerry that the visit was “not helpful” and gave the wrong impression that the international community was able to do business with Tehran as usual.

A Balancing Act

Despite American discouragement, India is one of several nations lining up to take advantage of foreign investment opportunities in the Islamic Republic while balancing its dealings with other Middle Eastern nations.

Anupam Shah, Chairman of India’s Engineering Export Promotion Council (EEPC India) announced the EEPC’s intention to field a delegation to Iran later this year.

“We will do a delegation to Teheran this year. We would like to tap the full potential of doing engineering exports to Iran,” the EEPC chief said.

As the fear of reprisal from the U.S. for engaging with Iran subsides, Indian exporters and foreign companies with Indian holdings will likely begin seeking out new business opportunities in the country. After an Iranian delegation attended the Indian Engineering Sourcing Show in Mumbai last month, the Indian External Affairs Ministry clarified that Indian exporters should not foster apprehension towards engaging business opportunities in Iran. “That fear is going away,” said the EECP chief.

The Iranian Foreign Minister’s visit overlaps with that of crown prince of Saudi Arabia Prince Salman bin Abdulaziz Al Saud, who is also in India this week to discuss defense issues. Considering Saudi Arabia and Iran often find themselves at loggerheads over regional national security, the overlapping visits by delegates from both nations exemplifies India’s new “Look Middle East” policy, which consists of increased economic and strategic engagement with one of India’s strongest trading partners and the source of nearly 60 percent of the nation’s energy supply.

Prince Salman, who also serves as Saudi Arabia’s defense minister, is expected to sign a recently negotiated defense cooperation agreement with India that will result in deeper cooperation in military training and defense exchange.

While only time will tell whether India can successfully balance the political, economic and military components of its “Look Middle East” policy, all signs point to Iran becoming a stronger economic partner for India in the future. The “zero sum game” played by the West is over, FM Zarif said after arriving yesterday, and proposed that India and Iran work together to usher in a new chapter of cooperation and peace at the global level.

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