How Deteriorating US-Iran Relations Will Affect India’s Economy

The citizens of Iran are protesting over the degrading economy since November 2019. The protesters are demanding the removal of the supreme leader Ayatollah Khamenei, especially, after a Ukrainian plane was mistakenly brought down by Iranian missiles, killing everyone on board.

The Iranian government retaliated by bombing a US base in Iraq and the Iranian people got on the streets chanting “death to America.”

The Iranian government blames the stringent sanctions for its economic situation, imposed by the US after Trump backed out of the 2015 nuclear deal. Donald Trump alleged that the Iranian military-funded militias around the middle-east, with the money gained during the period when sanctions were removed.

Various leaders fighting over dominance in the middle-east have left the region and its people in ruins and the on-going tussle between the two countries has provided no relief. The common citizens remain the real sufferers, crushed between the politics of two nations.

India is not unscathed by this fiasco. The developments in the middle-east can prove to be detrimental to the Indian economy. Earlier, Iran was the third-largest exporter of crude oil to India. Due to the sanctions, India has stopped importing crude oil from Iran. To compensate, India has to import it from the US, at a higher price.

In January 2020, the prices of crude oil per barrel rose by 4% after a US airstrike in Baghdad killed the Iranian leader, Qassem Soleimani. Following this, the situation has only gotten worse.

The Iranian government retaliated by bombing a US base in Iraq and the Iranian people got on the streets chanting “death to America.” Further deterioration in their relationship can result in an increase in global crude oil prices.

A corollary to it is that prices in India can rise and the government might be forced to reduce taxes. It will affect the revenue of the government, which in turn can widen the fiscal deficit.

Furthermore, inflation can rise; retail inflation is already at a 6-year-high of 7.35%, for the month of December 2019. India is the third-largest consumer of oil and even a slight tweak in the prices can have a lasting effect on its economy.

China’s Growing Presence

India is developing Chabahar port in Iran to reduce its dependence on Pakistan’s Gwadar Port, which is managed by China. The growing influence of China in South Asia is concerning to India and the Chabahar port provides an opportunity to improve trade with Afghanistan, and Iran, without involving China.

Fortunately, the US has exempted the Chabahar port from the imposed sanctions and India can continue to develop it. However, any amount of trade through the Chahbahar port would be subject to those sanctions.

During the January visit of the Iranian Foreign Minister, Javad Zarif called for “removing the dollar” from the bilateral trade. He asked India to open bank branches in Tehran to promote transactions in national currency.

It might prove to be a great boon for the economy but India would not see it fit to grow its trade with Iran while sanctions are in place. Iran might be an important ally for oil but America is equally important to boost technological advancement. India has to take a balanced stand to not affect its relations with both countries.

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