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Examining The Effects Of The Unfolding US-Iran Crisis On The Indian Economy

(L-R) President of Iran Hassan Rouhani; Indian PM Narendra Modi; US President Donald Trump

The ongoing tussle between the US and Iran is not new. Both countries have had a turbulent past. The present confrontation started when the US retracted from the nuclear deal which was signed by Obama during his last days in 2015. But now the narrative that the US puts forward is that the Iran nuclear program shouldn’t be there at all and also it should abandon its ballistic missile development and stop supporting militant groups in Syria, Yemen and elsewhere. According to the sanctions, anyone who buys from Iran/does business with Iran will face penalties or it will have an effect on the trade between that company/country and US.

Effective from November 2018, the US has put sanctions on Iran’s energy sector, including petroleum. However, waivers were granted to eight nations to import oil from Iran which included China, India, Japan, South Korea, Italy, Greece, Turkey, and Taiwan for a period of six months, to allow them time to gradually shift to alternative sources for importing oil. The waivers stand expired as of May 2019. Four countries including Italy, Greece, Turkey, and India have stopped importing from Iran.

Standard Chartered had to pay a hefty fine of $1.1 billion to settle allegations that it repeatedly violated sanctions on Iran and other countries. Chinese telecom group, Huawei has been charged with violating sanctions on Iran, and they pleaded not guilty last month. I am of the opinion that the reason behind these happenings is both political and economic. It has got nothing to do with the nuclear program.

After the sanctions on Venezuela, the US is trying to shift dependency of oil importers to itself and its allies. Iran is at an important location (geopolitical), it restricts the US from having a strategic benefit on Russia and China. Iran and China have had friendly relations, and China has opposed these unilateral sanctions in the past. Everyone knows about the US-China trade war. I am of the opinion that by pushing Iran to the corner, the US is indirectly targeting China and trying to invoke a response from them. Based on that response the US might then have an edge against China in international forums. The other reason might be Saudi Arabia-led invasion in Yemen, where Iran is seen as pro-Yemen.

The question is, who is supporting Iran? The European Union along with France, Germany, UK has regretted the sanctions. But they are not likely to support Iran and it seems like they are waiting and watching. The natural allies of the US, the Saudis, Israel, UAE, I feel do not look like they will change their stance. They are the one who will be benefitting with this deficit of crude oil supply. Both Russia and China have shown their support to Iran.

What About India?

Trump has tweeted about India’s high tariff to US and in a rather direct and ‘Trumpesque’ way. The two countries exchange goods and services worth about $142 billion a year, but the relationship has soured in the past after the Trump administration ended India’s participation in a preferential trade program earlier this month. The program exempted Indian goods worth more than $6 billion from US import duties in 2018. US had imposed a tariff on Aluminium and steel. India, as part of the trade row brewing between the countries, imposed a tariff in June on 28 US products including almonds, apples, and some chemicals went into effect earlier in June 2019 after several postponements.

US state secretary Pompeo with Minister of External Affairs S. Jaishankar

During US state secretary Pompeo’s visit to India in June, he met with foreign minister S. Jaishankar and said that “There are trillions of dollars worth of American investments, sitting on the sidelines waiting to be put to work in the Indo-Pacific region.” He also asked “Can we work together as partners, with partners such as Japan, to keep India’s networks, the 5G networks of the future, safe and reliable? Can we come to an agreement that allows data to flow freely so that we don’t balkanize the internet, and make our own companies less competitive and impede economic growth?” The context for these statements was Huawei’s ban by the US over security issues.

During the G-20 summit held in Japan’s Osaka in June, there was a trilateral meeting between US, India and Japan. It is well known that OM Modi and Shinzo Abe share a cordial relationship, which has translated/culminated into the Ahmedabad-Mumbai bullet train project. I would say that all these dots connect to one thing and that is India’s market, which the US doesn’t want to lose to China. Pompeo touched upon two points, one, that the Indian market which is going to auction 5G license and Huawei is the front contender, in this, the US want a share. Also, the pressure from Facebook, Google over data localization and e-commerce restrictions law proposed by India part of new e-commerce rules for foreign investors introduced in February he felt needs to come to a resolution.

Current rules allow up to 100 percent FDI under the automatic route in the marketplace model of e-commerce but bar any investments in the inventory based model of e-commerce. The government had, last year, also restricted flash sales and deep discounting for e-commerce companies with foreign investment. The government brought in the new policy in February after complaints from small Indian traders who said the e-commerce giants used their control over inventory from affiliated vendors to create an unfair marketplace in which they offered major discounts.  In December 2018, the government had tightened the FDI conditions in the online space, stating that an e-commerce platform with foreign investment cannot exercise ownership or control over the inventory sold on its platform. That angered the United States which saw a protectionist New Delhi effort to help small traders at the expense of U.S. firms such as Walmart and Amazon. Companies such as Mastercard and Visa have also been battling Indian central bank rules that mandate them to store their data only in India.

India is buckling under US pressure and has already cut crude oil import from Iran. India is importing more from the USA. India bought about 184,000 barrels per day (bpd) oil from the United States between November 2018 to May 2019, compared with about 40,000 bpd in the same period a year earlier. Over this same period, India, which through May was Iran’s second-biggest oil client, took 48% less oil from Tehran at about 275,000 bpd, according to the data. India’s intake of Saudi oil during the seven months to May rose by 11% to 804,000 bpd, while that from the United Arab Emirates jumped by 37% to about 360,000 bpd.

The Way Out

I would say that the problem is the Chabahar project, which India might lose to China (which is already developing Gwadar port) if Iran feels India is aligning with the US. So what Iran thinks of India becomes very important. If India goes with the US, I think it will lose Iran to china. It will hamper India’s presence in the region. Earlier when there were restrictions on Iran, India adopted a rupee payment scheme in 2012 and defied US sanctions.

Although the protection of vessels from the strait of Hormuz will be a serious concern and the insurance companies, like they did in 2012, will be reluctant to cover refineries that use oil from the Persian Gulf nation. But I’d say this option is still there for India. Also, the present refineries are made for oil imported from Iran. In case India imports from the US as it is doing now these refineries will have to incur operational cost so as to modify their existing structure.

So India is hanging in the balance what should it do, should it favor Iran or USA? I guess India is thinking this is a short term tension due to the US presidential election in 2020. But I think the lack of intent and ambiguity in decision making is visible as India is bowing down to US pressure. The thing is, I feel that India should form a coalition with S Korea, China, Japan, and other parties to ensure trade is maintained from Iran.

The cost is too high for India, both sides if it goes with the US it loses Iran, if it goes with Iran then I think it will have to rely on China for the 5G project. India is looking at the situation and hoping it is a transient one. I think if tension escalates then Iran will look for a short war. They might block the Strait of Hormuz which might result in a tanker war. The Saudi’s say they have alternate routes for the trade, which to me indicates that they too are worried as a shift a from a traditional route will take time, and that’s what Iran wants- short term disruption as it cannot sustain long-term sanctions. I also think that India shouldn’t worry about the data localization and e-commerce and 5G projects, as it is the US who should worry that what will happen if the Indian market slips from its hands.

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