Economy, Business And Markets

Iran: India’s Gateway to Central Asia, Middle East

Iran: India’s Gateway to Central Asia, Middle EastIran: India’s Gateway to Central Asia, Middle East

India wants to expand its influence beyond South Asia, and to that end it has turned to Iran. Their shared history of cooperation actually dates back to the 16th century, when Persian was the official language of India’s Mughal Empire.

More recently, India and Iran jointly supported the Northern Alliance against the Taliban in Afghanistan during the first phase of Operation Enduring Freedom in 2001. Both are also home to large Muslim populations, wrote American publisher and global intelligence company Stratfor in a recent analysis.

Beyond history and culture, their cooperation also extends to the energy sector. Iran is India’s sixth largest supplier of oil, providing 250,000 barrels per day, roughly 6% of India’s crude oil imports.

The two nations have also been negotiating on various energy projects. There is the Iran-Oman-India Pipeline, a $4.5 billion undersea natural gas corridor expected to transport 31.5 million cubic meters of natural gas per day to India, and a plan for India to increase its crude oil imports from a post-sanctions Iran by an additional 200,000 bpd, pending pricing negotiations.

Yet the project that may best exemplify India’s ambitions of carving a greater sphere of influence in Asia, particularly Central Asia, the Middle East and Afghanistan, is the planned improvement of Chabahar Port.

  The Benefits

Situated along the Sea of Oman near the Iranian border with Pakistan, Chabahar is just 299 kilometers east of one of the world’s most critical passageways for oil tankers, the Strait of Hormuz.

In May 2015, India and Iran signed a memorandum of understanding whereby India pledged to invest $85 million in a first phase of construction to transform two berths in the port, one to a functional container terminal and the other to a multipurpose cargo terminal.

In the second phase, India pledged to invest $110 million to develop a 901-kilometer railroad linking Chabahar to the iron ore mines in Hajigak, Afghanistan.

So far, Iran has invested $340 million into the port and has declared the surrounding area a free trade industrial zone.

The port could benefit both nations. While 85% of Iran’s seaborne traffic is processed through the country’s other port in Bandar Abbas in the Strait of Hormuz, that port can handle only 100,000-ton ships.

Larger ships have to first offload at the Jebel Ali Port in the UAE en route to Iran. Chabahar—a deep-water port—could alleviate the problem by being able to process larger ships, not to mention diversifying Iran’s ports of entry.

For India, the port is part of New Delhi’s broader strategy of engaging the Middle East, expanding its trade routes with Central Asia and furthering its influence in Afghanistan.  

Since assuming office in May 2014, Indian Prime Minister Narendra Modi has courted various countries in the Middle East as part of India’s historical foreign policy of non-alignment. India’s strong energy dependence on the region explains this engagement: Last year, India sourced 57% of its crude oil from the Middle East and its energy dependence on the region will only grow in the next decade as India’s energy needs increase.

Besides energy, India wants to use Chabahar Port to expand trade with Afghanistan and with the rest of Central Asia, where India has also been steadily increasing its presence.

Since 2001, India has provided Afghanistan with $2 billion in development assistance. In December, Modi visited Kabul to inaugurate the newly constructed Afghan Parliament building, which India financed at a cost of $90 million.

In 2009, India finished building Route 606, a 217-kilometer highway costing $100 million that links the southwestern Afghan city of Zaranj with Delaram, located on the Afghanistan-Iran border. From there, local roads connect to Chabahar.

And India has made good use of the improved infrastructure: In 2012, New Delhi used the port to transport a 100,000-ton shipment of wheat to Afghanistan.

  Reality Meets Expectations

Chabahar Port could well give India a trade inlet to Afghanistan and Central Asia, deepening India’s presence in the Middle East while bypassing Pakistan. Still, the project is fraught with complications.

First, Chabahar’s proximity to existing ports in the Persian Gulf and Arabian seas will force it to compete for shipping traffic and scarce development funds.

Iran estimates the port and surrounding chemical complexes will cost $31 billion, but so far India and Iran have invested just $340 million in the port and have promised only another $195 million—less than 2% of the full amount needed.

India and Iran will need private investment to cover the rest and have the difficult task of convincing investors that Chabahar is a safe investment over other regional ports, including Khalifa Port in Abu Dhabi, Duqm Port in Oman and Gwadar Port in Pakistan.

Second, the security situation in Afghanistan is deteriorating. Taliban gains suggest that Afghanistan will face a difficult year ahead. Consequently, the prospects of building rail lines linking Chabahar with Afghanistan will remain dim, similar to the recently inaugurated Turkmenistan-Afghanistan-Pakistan-India pipeline, which languished for more than a decade thanks to Afghan insecurity.

Finally, India’s bureaucratic infighting will not make financing the port any easier. The six-month memorandum of understanding signed between India and Iran in May 2015 expired in November, with no conclusive deal reached. It is not the first time that an agreement between the two nations on Chabahar has expired; dealings to develop the port started in 2003.

And while India and Iran signed an agreement Feb. 13 for New Delhi to provide Tehran with a $150 million line of credit to develop a railroad, it came after six months of delays, during which the Indian Finance Ministry sought greater clarity on the project before granting the funds.

Moreover, both nations have yet to settle India’s $6.5 billion oil debt owed to Iran. Iran has requested repayment in dollars or euros—more stable currencies than the Indian rupee—but India has declined.

Iran and India will have difficulty meeting the expectations of Chabahar Port. They will be able to complete the first two construction phases, but finishing the entire project this year, if ever, is highly unlikely.

Much has been made of Modi’s “Look East” policy of engaging more with Southeast Asia, a critical component of his plans to enhance Indian influence throughout Eurasia. But as the prime minister gazes west toward Chabahar, the outlook may look more challenging.