By Prof. D. M. Deshpande
It was only a matter of time for a war to break out in the Middle East; the build up for the war had started months back and escalated in recent weeks. Though India’s trade relations with Iran date back to several decades, its present bilateral trade is not significant in value terms. It was just $1.61 billion which is 0.01% of India’s international trade.
In 2018-19 it was much higher at $17.03 billion. As the west led by the United States imposed sanctions on Iran, India’s trade value came down drastically, much in the same way as with its other trading partners. Viewed strictly from this angle, the conflict in the Middle East may not have a great effect on the Indian economy or its trade. The same cannot be said about Israel with whom India’s trade has registered a quantum 100 fold jump.
India has significantly increased imports of defence and related items from Israel. Just a couple of days before the war began, top leaders of both nations met and agreed to enhance trade relations and defence ties even further. In hindsight, it does not make for good optics with Prime Minister, Narendra Modi embracing Netanyahu, his Israeli counterpart just a day or two before the attack on Iran.
There are indirect effects of the war which are more profound. For example, the impact on global oil prices which have already escalated by more than 12% as Trump began elaborate plans to bombard Iran. As tensions rise and war escalates and spreads to other regions such as Dubai, Abu Dhabi and Qatar there will be significant impact on the world economy. The impact on India will indeed be greater as it is vulnerable to volatility in energy prices. It imports more than 85% of its crude oil requirements. Tension in the Persian Gulf region has put the oil supply chain at risk. After refining, India is also a major exporter of refined oil and its products. Disruptions in its major shipping routes can cause enormous damage by inflicting huge costs.
The Strait of Hormuz is an important maritime passageway in the Middle East; it accounts for transporting 20 to 25% of the global oil supplies. According to a Reuters report, it handled 20 million barrels of oil and its products daily last year. It is a narrow sea passage stretching for about 100 miles. Iran has already started its retaliatory attacks on U.S military bases and assets in the Gulf. Iran has closed the Strait of Hormuz. As shippers perceive higher risks, higher freight and insurance costs will manifest immediately. If this passage is blocked for long, global oil prices are bound to surge. There is already speculation that they may cross the psychological $100 a barrel mark.
Kpler, a global real time data and analytics provider is, however, optimistic that the blockage may at best be a temporary blip, a supply shock, not a permanent measure as Iran and other Gulf economies such as Saudi Arabia, UAE, Kuwait, Iraq depend upon the only sea passage they use for their oil transit. The US policies and high tariffs have put India under a difficult position. Despite high tariffs India continued buying oil from Russia.
But after the levy of sanctions on two major oil supplying companies of Russia, India was left with no choice but to look for oil in its traditional markets in the Gulf and the US itself. As Indian refiners pivoted away from Russian suppliers, Indian dependence on the Middle East has increased. As per vessel tracking data of Kpler, between 2.5 to 2.7 mbpd of oil gets transited through the Strait of Hormuz. This is about 50% of the nation’s requirement of crude oil. Hence, the risk exposure is high. Now, in the changed circumstances, it may still explore the option of importing oil from Russia. As per reports in the media, India has already made contingency plans; after all, at stake is the energy security for its people and the economy.
India has built Chabahar Port in Iran investing $120 million. It can operate the port for 10 years as per the agreement. Due to geopolitical tensions and US sanctions, there have been delays and disruptions in completing the project which is more than 75% complete. The functional port was used in 2023 to ship 20,000 tons of wheat aid to Afghanistan. Same goes for the ambitious road project International North-South Transport Corridor (INSTC) that allows India to bypass both Pakistan and Suez Canal. These are strategic assets with a long term objective of direct access to Indian goods to landlocked Afghanistan, Central Asia and Europe. The Iranian foreign Minister has expressed displeasure over New Delhi not making budgetary allocation this year to the ‘golden gateway’ project. The leadership vacuum, uncertainty and risk in Iran has a huge long term impact on India.
The history is replete with examples of the mess and the chaos created by the U.S earlier in Afghanistan, Iraq and Libya. The common objective was to reshape political order and ‘enhance security’. What the U.S achieved instead was a fractured polity, a weakened state and anarchy. It paid a huge price for its direct engagement in Afghanistan. Over nearly two decades, it spent $ 2.3 trillion in ‘rebuilding’, lost over 2300 troops and thousands of contractors. It removed Taliban from power; yet the Taliban returned to power in 2021 after the US and its western allies vacated Kabul after a long, futile and tiring expedition in Afghanistan! If the US makes the same mistake again in Iran, along with it India too, will suffer a huge collateral damage.
The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh
