A short note on Iran and India

Introduction

Ever since the withdrawal of the US from the JCPOA (Joint Comprehensive Plan of Action), or the Iran nuclear deal, in 2018, Iran-India economic linkages have taken a hit. The impact on the bilateral economic relationship between New Delhi and Tehran became even more pronounced after India stopped purchasing oil from Tehran in 2019. The US had ended the waiver from sanctions, which had provided to India and a number of other countries, the continued ability to import oil from Iran.

In 2018-2019, bilateral trade between India and Iran was estimated at over $17 billion (mineral oil and fuel imports accounted for a significant percentage of the $17 billion). In 2019-2020, for the period from April-November, bilateral trade was estimated at $3.5 billion. There was a significant drop in Iran’s imports to India, owing to the reduction of Iranian petroleum imports by India to zero.

Downward trajectory in the bilateral relationship

2019 witnessed a downward trajectory as far as New Delhi-Tehran ties were concerned, with Iran expressing its disappointment with New Delhi for not taking a firm stance against Washington. Iranian Foreign Minister, Javad Zarif, in 2019, while making the above point in an interaction with Indian journalists, also stated that ‘if you can’t lift oil from us, we won’t be able to buy Indian rice.’

Chabahar Port and the India-Iran relationship

The US on its part has exempted the strategically important Chabahar Port Project, India’s gateway to Afghanistan, from sanctions. The Port was earlier touted by many as India’s counter to the Gwadar Port (Balochistan Province, Pakistan), which is at a distance of 70 kilometres and an important component of the China-Pakistan Economic Corridor (CPEC). The Government of India had taken over Phase 1 of the Shahid Beheshti Port in December 2018 (according to an agreement India was to operate two berths within Phase 1 of the project). During the Covid-19 pandemic, India had used the Chabahar Port to deliver relief materials to Afghanistan.

After India’s decision to stop the purchase of oil from Iran, and the souring of ties between both countries, Iran has given indicators that it is keen to get Pakistan (Iran had proposed to connect the Chabahar Port with Gwadar Port) and China on board. Iran has also complained that progress on the Chabahar Port was slow due to India’s cautious attitude towards the project, (as a result of both American pressure and delays in funding).

In the aftermath of the Iran-China 25-year agreement, India has been paying greater attention to ties with Iran in general, and the Chabahar Project in particular, a point strongly reiterated by the back-to-back visits of India’s Defence Minister, Rajnath Singh, and External Affairs Minister S. Jaishankar, to Tehran respectively. Connectivity, economic linkages, and issues of regional security (specifically Afghanistan) were discussed during both visits.

There were reports that India had been elbowed out of the Chabahar-Zahedan railway project, an important component of the Chabahar Project, but Iran has categorically dismissed this claim.

Indian exports of Basmati to Iran hit by sanctions

While the India-Iran bilateral relationship is often viewed from the prism of the Chabahar Port and Oil, Iran also accounts for a large percentage of India’s Basmati (an aromatic long grain rice) exports – 34%. There is likely to be a dip this year, due to sanctions, and Iran is already substituting Indian Basmati with Pakistani basmati.

The North Indian states of Punjab and Haryana account for 75 percent of Basmati exports. Indian Basmati exporters and growers have expressed their concern over the likely fall in exports to Iran (which is an important market).

Conclusion

The impact of US sanctions on Iran’s economic ties with India, with Basmati exports being an important example, reiterate the point that the Iran-India relationship is far deeper and multifaceted than is often perceived. While the thrust is on connectivity and geopolitics, the economic links are often overlooked. It is important for New Delhi to seek the views of all domestic stakeholders as far as economic ties with Iran are concerned.

New Delhi should also take a cue from the UK, France, and Germany – also referred to as the E3 – which set up a special purpose vehicle (SPV), known as Instrument in Support of Trade Exchanges (INSTEX), in 2019, to circumvent US sanctions. (During the Covid-19 pandemic, INSTEX was used to provide relief materials to Iran). New Delhi clearly needs to think out of the box, and accord its ties with Iran greater priority given the economic, historical, and political context. The visits of India’s Defence Minister, Rajnath Singh, and External Affairs Minister S. Jaishankar to Tehran in the month of September clearly emphasize the point that India is doing a re-think with regard to its Iran policy, factoring its strategic and economic importance. There is also a realization that Washington’s approach towards Tehran may witness a significant shift if there is a change of guard in November 2020 (which can not be ruled out).

Coronavirus and the BRI

The Corona Virus epidemic has shaken the world in numerous ways. The virus, which first emerged in the Chinese city of Wuhan (Hubei province), has led to the loss of over 12,000 lives globally. The three countries most impacted so far have been Italy (4,825 lives lost), China (3,287 lives lost), and Iran (1,500 lives lost) as of Saturday, March 21, 2020.

While there are reports that China is limping back to normalcy, the overall outlook for the economy is grim, to say the least, with some forecasts clearly predicting that even with aggressive stimulus measures China may not be able to attain 3% growth this year.

The Chinese slow down could have an impact on the country’s ambitious Belt and Road Initiative (BRI). While China has been trying to send out a message that BRI will not be impacted excessively, the ground realities could be different given a number of factors.

One of the important, and more controversial, components of the BRI has been the $62 billion China Pakistan Economic Corridor (CPEC), which has often been cited as a clear indicator of ‘Debt Trap Diplomacy’ (this, some analysts argue, is China’s way of increasing other country’s dependency on it, by providing loans for big ticket infrastructural projects, which ultimately lead to a rise in debts).

The US and multilateral organizations like the International Monetary Fund (IMF) have predictably questioned the project, but even in Pakistan many have questioned CPEC, including politicians, with most concerns revolving around its transparency and long-term economic implications. Yet the Imran Khan-led Pakistan Tehreek-E-Insaaf (PTI) government, and the previous Pakistan Muslim League (Nawaz) (PML-N) government, have given the project immense importance, arguing that it would be a game changer for the South Asian nation.

On more than one occasion, Beijing has assured Pakistan that CPEC will go ahead as planned with China’s Ambassador to Pakistan, Yao Jing, stating on numerous occasions that the project will not be hit in spite of the Corona Virus. Senior officials in the Imran Khan government, including the Railway Minister Sheikh Rashid Ahmed and Foreign Minister Shah Mehmood Qureshi, in an interview with the Global Times, stated that while in the short run Corona may have an impact on CPEC, in the long run there would be no significant impact.

Analysts in Pakistan however, doubt that there will be no impact, given the fact that a large number of Chinese workers who had left Pakistan are unlikely to return. Since February 2020, a number of reports have been predicting that the CPEC project is likely to be impacted significantly.

Similarly, in the cases of other countries too, there are likely to be significant problems with regard to the resource crunch in China as well as the fact that Chinese workers cannot travel. Not only is Beijing not in a position to send workers, but countries hit by COVID-19 themselves will not be in a position to get the project back on track immediately, as they will first have to deal with the consequences of the outbreak.

Some BRI projects which had begun to slow down even before the outbreak spread globally were in Indonesia and Bangladesh. In Indonesia, a high speed rail project connecting Jakarta with Bandung (estimated at $6 billion) has slowed down since the beginning of the year, and ever since the onset of the Corona Virus, skilled Chinese personnel have been prevented from going back to Indonesia. Bangladesh too has announced delays on the Payra Coal power plant in February 2020. As casualties arising out of the virus increase in Indonesia and other parts of Asia and Africa, the first priority for countries is to prevent the spread of the virus.

While it is true that Beijing would want to send a clear message of keeping its commitments, matching up to its earlier targets is not likely to be a mean task. Even before the outbreak, there were issues due to the terms and conditions of the project and a number of projects had to be renegotiated due to pressure from local populations.

What China has managed to do successfully is provide assistance for dealing with COVID-19. In response to a request for assistance from the Italian government, China has sent a group of 300 doctors and corona virus testing kits and ventilators. The founder of Ali Baba and one of Asia’s richest men, Jack Ma, has also taken the lead in providing assistance to countries in need. After announcing that he will send 500,000 coronavirus testing kits and 1 million masks to the United States, Ma pledged to donate more than 1 million kits to Africa on Monday March 17, 2020, and on March 21, 2020, in a tweet, the Chinese billionaire said that he would be donating emergency supplies to a number of South Asian and South East Asian countries — Afghanistan, Bangladesh, Cambodia, Laos, Maldives, Mongolia, Myanmar, Nepal, Pakistan, and Sri Lanka. The emergency supplies include 1.8 million masks, 210,000 test kits, 36,000 protective suits and ventilators, and thermometers.

China is bothered not just about it’s own economic gains from the BRI, but is also concerned about the long term interests of countries which have signed up for BRI.

The Corona Virus has shaken the whole world, not just China, and the immediate priority of most countries is to control the spread of the pandemic and minimize the number of casualties. Countries dependent upon China, especially those which have joined the BRI, are likely to be impacted. What remains to be seen is the degree to which BRI is affected, and how developing countries which have put high stakes on BRI related projects respond.

How will Imran Khan’s electoral triumph affect Pakistan’s relationship with China?

All eyes are on how Imran Khan will fulfill the ambitious promises which he and his party (Pakistan-Tehreek-i-Insaaf, or PTI) have made for creating a ‘Naya Pakistan’ (New Pakistan). Khan, who will take his oath as Prime Minister on August 11, 2018, needs to hit the ground running given the myriad of economic (Pakistan’s external debt is well over $90 billion, and accounts for over 30 percent of the country’s GDP) and geopolitical challenges. As Pakistani senior officials were drawing up plans to approach the IMF for a loan (estimated at $12 billion), US Secretary of State Mike Pompeo warned the IMF that there is absolutely no justification for ‘IMF Dollars’ to bail out ‘Chinese bond holders’ or China.

Given the high expectations as well as the impatience amongst the youth, Khan is not likely to have a very long honeymoon period.

Pakistan-China relationship under PTI government

It will be interesting to see how the crucial Beijing-Islamabad relationship pans out under Imran Khan. During his first address (after his party’s victory) to the Pakistani nation, he dubbed the Pakistan-China relationship as the most important for Pakistan. Khan also emphasized the point that Pakistan had a lot to learn from China in the context of poverty alleviation, as well as the latter’s anti-corruption campaign.

China’s relationship with Imran Khan

In the past, Khan, while supporting the China-Pakistan Economic Corridor (CPEC) project in principle, had expressed certain apprehensions during his meetings with Chinese diplomats. Khan had also stated that the government of Pakistan needs to be more transparent with regard to the contours of the project, and that each province should get it’s rightful due.

The Chinese in turn were uncomfortable with Khan’s dharna (protests) of 2014 (it was as a consequence of these protests that the inauguration of the CPEC Project had to be delayed). Khan’s 2016 protests against the Nawaz Sharif government (after the names of three of Sharif’s family members, who held offshore accounts, appeared in the Panama leaks) were also watched with skepticism by the Chinese.

It would be pertinent to point out that the PTI manifesto, while praising the project, has pointed to some of CPEC’s short comings, including investments as a consequence of ‘insufficient transfer of knowledge and capabilities, fewer partnerships with local businesses and Pakistan’s high dependence on imports of goods and services from China’.

PTI’s chief rival, the PML-N, often spoke about the need for an independent foreign policy, but never ever alluded to this aspect.

Beijing’s preference for PML-N

It would also be pertinent to point out that while Beijing has had problems with Pakistan, it has had a close relationship with the Pakistan Muslim League (Nawaz), or PML-N. Beijing, which has maintained robust relations with the army, also shared cordial relations with Shehbaz Sharif, the President of PML-N and former Chief Minister of Punjab. China has praised Shehbaz Sharif for his efficiency more than one occasion, even referring to his style of working as ‘Shehbaz Speed’ and Punjab speed. When Shehbaz was appointed President of the PML-N, he received a congratulatory message from senior members of the Chinese Communist Party.

The PML-N also sought to take credit for the CPEC project on more than one occasion. In August 2016, while addressing a meeting of his party’s parliamentary committee, then-Prime Minister Nawaz Sharif stated:

He [Xi Jinping] said this is a gift to you from China. They were also waiting for the time when our government would be in power so that they could make this investment.

Chinese Media’s comments on Imran Khan and CPEC

Post the election results, Chinese media has sought to be positive, and has been confident that the CPEC project will go ahead as planned. One op-ed published in the Global Times (‘Will Imran Khan pivot Pakistan from US to China’) referred to how the West was creating unnecessary paranoia with regard to the economic ramifications of the CPEC project. The op-ed also said that Imran Khan may take Pakistan further into the ‘Chinese orbit’ and that he had no problem with the CPEC project. The article cites the PTI manifesto to bolster its argument (saying that PTI has dubbed the project as a ‘game changer’). Other sections of the Chinese media have also welcomed Imran Khan’s election. Only one analyst, Tom Hussain, has categorically made the point that PTI had strained ties with China in the past. Said Hussain:

the PTI has been working overtime to repair its relations with the Beijing, which had been damaged by its disparaging remarks and allegations of corruption about CPEC projects in the past.

Likely developments in the short run

Imran Khan doesn’t have too many options, but there could be some re-examination of some of the CPEC projects. While Pakistan is now dependent upon China given Islamabad’s rock bottom ties with the US, the question on many people’s minds is if Khan can do a Mahathir (Malaysia’s Prime Minister), where maintaining good ties with China does not mean shying away from questioning the financial feasibility of certain projects within CPEC.

In the short run, this is impossible, and many would argue that even in the long run this may seem like nothing but a pipe dream. Yet, if Imran Khan can harness relations more effectively with neighbors (as he emphasized in his speech) and build a robust economic relationship with India (something which the Chinese may not mind), we could witness a course correction. One of the reasons why Nawaz Sharif advocated good ties with India was so that Pakistan could develop an independent foreign policy and end its dependence upon the US. One of Sharif’s slogans in 2013 was ‘Trade not Aid’. While Imran himself has spoken about trade ties with India, will the establishment allow him to go ahead.

Changing geopolitical dynamics in South Asia

If one were to look beyond economics, even in the context of Afghanistan, one of the significant developments in South Asia has been a decision by India and China to work jointly in Afghanistan. It remains to be seen how Imran Khan’s government perceives this. India and Pakistan are also likely to participate jointly in anti-terror drills in Russia, in August 2018, under the umbrella of the Shanghai Cooperation Organisation (SCO).

Conclusion

It is very tough to predict how Imran Khan handles ties with China, but one thing is for sure: Beijing may publicly be welcoming Khan’s election but from the opinion pieces in the Global Times, there is a worry deep down concerning his maverick nature. Imran, unlike the Sharif’s (who were businessmen), may not be as transactional in the economic sphere. His economic ideology is left-of-center (with a strong thrust on welfare). While he needs foreign direct investment, he is not as obsessive about mega projects as the Sharif’s.

Imran on his part will have numerous challenges to contend with, and needs to strike a fine balance. A less hostile relationship with the neighbors will benefit him, and a slightly less hostile relationship with the US would give him space. Given the plethora of challenges he is likely to face, no real changes should be expected in the context of Pakistan-China ties, though over a period of time, recalibration of policies should not be ruled out.