This article was downloaded by: [Adams State University]

On: 25 November 2014, At: 13:44

Publisher: Routledge
Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered
office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK

South Asia: Journal of South Asian

Studies
Publication details, including instructions for authors and
subscription information:
http://www.tandfonline.com/loi/csas20

India's Energy Dilemma with Iran

P. R. Kumaraswamy

Jawaharlal Nehru University

Published online: 09 Jul 2013.

To cite this article: P. R. Kumaraswamy (2013) India's Energy Dilemma with Iran, South Asia:
Journal of South Asian Studies, 36:2, 288-296
To link to this article: http://dx.doi.org/10.1080/00856401.2013.793646

PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of all the information (the
Content) contained in the publications on our platform. However, Taylor & Francis,
our agents, and our licensors make no representations or warranties whatsoever as to
the accuracy, completeness, or suitability for any purpose of the Content. Any opinions
and views expressed in this publication are the opinions and views of the authors,
and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content
should not be relied upon and should be independently verified with primary sources
of information. Taylor and Francis shall not be liable for any losses, actions, claims,
proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or
howsoever caused arising directly or indirectly in connection with, in relation to or arising
out of the use of the Content.
This article may be used for research, teaching, and private study purposes. Any
substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing,
systematic supply, or distribution in any form to anyone is expressly forbidden. Terms &
Conditions of access and use can be found at http://www.tandfonline.com/page/termsand-conditions

South Asia: Journal of South Asian Studies, 2013

Vol. 36, No. 2, 288296, http://dx.doi.org/10.1080/00856401.2013.793646

Essay

Indias Energy Dilemma with Iran

Downloaded by [Adams State University] at 13:44 25 November 2014

P.R. KUMARASWAMY, Jawaharlal Nehru University

Iran, being a major player in the hydrocarbon sector, is both an opportunity and a challenge
for India. While Irans hydrocarbons could partly address Indias growing appetite for
oil and natural gas and contribute to its energy security, its willingness to transform its energy
ties with Iran beyond purely commercial transactions coincided with its desire to negotiate
a civil nuclear deal with the US. Moreover some of the energy deals between the two countries
are stuck over price disputes and technology difficulties, while others have come under
international pressure and scrutiny. While international sanctions against Iran undermine
Indias ability to pursue its energy ties with Iran, maintaining the status quo has some economic
and political advantages. Hence, India is not yet ready to abandon Iran for the US.
Keywords: India; Iran; energy security; sanctions; nuclear controversy; LNG; Persian Gulf
If Indias post-Cold War economic liberalisation accelerated the countrys dependency upon
energy imports, it also ushered in tensions between its foreign policy and energy security
calculations. This is clearly demonstrated by Indias decision to seek energy security via the
Islamic Republic of Iran, and its inability to do so. As Iran came to figure more prominently in
Indias energy security strategy, its policy towards Tehran has come under constant scrutiny
and pressure from Washington. This has occurred against the backdrop of the countrys
growing economic clout and great power aspirations. Its failure to pursue an independent
policy over Iran, both regarding the energy component and the nuclear controversy, has also
cast doubts upon Indias ability to play a meaningful role beyond the confines of South Asia.
Indeed, in July 2009 Secretary of State Hillary Clinton depicted India as one of the selfappointed frontrunners for permanent UNSC (United Nations Security Council)
membership.1 This WikiLeaks remark evoked considerable anger in the country even though
it was an apt assessment. India had hyped its profile and campaigned for international
recognition of its influence in a rather brazen fashion. Its decision in 2006 to nominate Shashi
Tharoor for election to the post of UN secretary-general can be identified as the first real
manifestation of this desire. In recent years it has vociferously campaigned for recognition as
a great power. In the words of its permanent representative to the UN, Hardeep Puri, India
entered the UN after 19 years, and [has] no intentions of leaving when its term as a

This paper was given at the panel discussion Energy Security in Asia, Central Asia and Australia, at the 19th
Biennial ASAA Conference, University of Western Sydney, Parramatta, NSW, 11-13 July 2012. Prof.
Kumaraswamy was a guest of the South Asian Studies Association of Australia (SASA) as the South Asia
keynote speaker for the conference. SASA thanks the Australia India Council (AIC) for its timely and generous
support of this visit. SASA and the AIC are both encouraging scholars to work on global energy security issues,
especially on the intersection between the national interests of Australia, India, Pakistan, China and Iran.
1
US Secretary of State, Reporting and Collection Needs: The United Nations, WikiLeaks (31 July 2009)
[http://www.wikileaks.ch/cable/2009/07/09STATE80163.html#, accessed 14 Feb. 2012].
2013 South Asian Studies Association of Australia

Downloaded by [Adams State University] at 13:44 25 November 2014

Indias Energy Dilemma with Iran

289

non-permanent member of the UNSC ends in December 2012.2 Having failed to bring about
any change in the UN, in a last minute bid, India unsuccessfully propped up Bhutan to fill the
seat it would vacate.
Though an upfront campaign for international recognition is a recent phenomenon, the
roots of Indias desire can be traced back to the post-Cold War economic reforms brought in
by the Narasimha RaoManmohan Singh team in 1991. Driven by near economic bankruptcy
and impending economic default, the duo liberalised the Indian economy and pursued marketoriented reforms, which have since led to its gradual integration into the global economy. The
globalisation of the Indian economy was not without pitfalls however; unevenness of growth
and inadequate distribution of wealth are two of the major problems, and some of the socioeconomic problems facing the country today are the direct consequences of the three-decadeold economic reforms.
There is a fundamental difference between Indias foreign policy relations during and after
the Cold War.3 As a major recipient of Western aid and other forms of economic assistance,
its international economic influence was negligible during the Cold War period. Its political
activism was in decline following the 1962 debacle with China. Its pro-Soviet stance on a
number of international issues had also dented its Non-Aligned credentials. Hence, during the
Cold War its foreign policy and relations were dominated by political rhetoric and gestures of
Third World solidarity. The end of bloc politics coincided with Indias economic reforms and
integration into the global economy. In 1991, economic meltdown was averted by a massive
influx of IMFWorld Bank loans, but in March 2010 the Reserve Bank of India signed an
agreement to purchase US$10 billion worth of IMF bonds.4
The globalisation of the Indian economy also contributed to a significant shift in its
international profile, potential and hence power aspirations. From being the recipient of
international aid and assistance, India has emerged as the worlds fourth largest economy.
With the Japanese economy still in the doldrums, in coming decades India could emerge as the
third largest economy after the US and China. Indeed the country has become a potential
market for the West as well as the East. This economic growth has also resulted in growing
demands for energy, especially for hydrocarbon resources.
India has always been an energy dependent state and relies heavily upon hydrocarbon
imports.5 Its domestic oil and gas reserves have become increasingly inadequate to meet its
galloping demand. This became acute after 1991, as the growth spurred by economic
liberalisation accelerated the demand for oil and gas. Despite various efforts and exploration
offers, domestic oil production has been static since the mid 1980s. Recent inroads into nonconventional and alternate energy resourcessuch as biogas, wind energy, solar energy, as
well as nuclear energyhave not diluted the importance of oil. Until the 1980s, India met
two-thirds of its demand for oil domestically, but since the early 1990s the situation has
reversed and the country has been able to meet only a third through domestic production, and
even this share is rapidly eroding.
2

India May Enter UNSC by 2012 End, Says Envoy to UN Hardeep Puri, India Today (23 Sept. 2011) [http://
indiatoday.intoday.in/story/india-may-enter-unsc-by-2012-end-hardeep-puri/1/152474.html, accessed 14 Feb.
2012].
3
For a discussion on the impact of the end of the Cold War upon Indian foreign policy, see C. Raja Mohan,
Crossing the Rubicon: The Shaping of Indias Foreign Policy (New York: Palgrave, 2004).
4
As a sign of the changing times, in June 2012 India pledged to contribute US$10 billion to the IMFs plans to
stabilise the Eurozone in the wake of the Greek and Spanish financial crises.
5
For a most comprehensive study, see Tanvi Madan, The Brookings Foreign Policy Studies, Energy Security
Series: India (Washington, DC: Brookings, 2006) [http://www.brookings.edu/fp/research/energy/2006india.pdf,
accessed 30 July 2012].

290

South Asia: Journal of South Asian Studies

TABLE 1. Indias imports from the Middle East.

Downloaded by [Adams State University] at 13:44 25 November 2014

Year
199697
199798
199899
19992000
200001

200102

200203

200304

200405

200506

200607
200708
200809
200910
201011

Total imports in
millions of US dollars

Energy imports in
millions of US dollars

Energy imports as a percentage

of total imports

6,219.08
6,529.61
7,704.32
9,671.93
3,061.95
3,170.19
3,587.08
4,926.19
9,526.50
10,853.89
51,126.32
72,014.59
90,208.29
81,400.40
105,616.45

3,984.28
3,787.44
4,972.77
7,019.29
688.01
564.51
669.80
511.50
1,371.61
1,989.68
41,602.00
58,973.52
66,134.12
59,478.87
71,107.68

64.07
58.00
64.54
72.57
22.47
17.84
18.67
10.38
14.40
18.33
81.37
81.89
73.31
73.07
67.33

Between 200001 and 200506 the Director General of Foreign Trade did not publish a country-wise
breakdown of petroleum imports.
Source: Adapted from Director-General of Foreign Trade, New Delhi [www.dgft.gov.in].

Likewise, India Hydrocarbon Vision2025 candidly admits: The gap between supply
and availability of crude oil, petroleum products as well as gas from indigenous sources is
likely to increase over the years.6 An international assessment of the situation made a similar
prognosis. According to the Paris-based International Energy Agency (IEA), Indias overall
dependency on net energy needs will rise from 70 percent in 2007 to 90 percent by 2030.7
This dependency is more acute in the oil sector, where it is estimated at 94 percent. By 2024,
it is estimated, India will overtake Japan to emerge as the worlds third largest oil importer
after the US and China.8
The increase in energy dependency has enhanced the traditional importance of the Middle
East region for India, which supplies over three-quarters of Indias total oil imports (Table 1).
Though its share has declined recently, the Persian Gulf still accounts for about 60 percent of
Indias overall oil imports. In this context the Islamic Republic of Iran, a country with the
worlds third largest known oil reserves and second largest gas reserves, has assumed
considerable importance.9

Government of India, India Hydrocarbon Vision2025, Introduction, p.3 [petroleum.nic.in/vision.doc,

accessed 9 Mar. 2013]. The full text can be found in Jasjit Singh (ed.), Oil and Gas in Indias Security (New
Delhi: Knowledge World, 2001), pp.131230.
7
International Energy Agency, World Energy Outlook, 2007 (Paris: IEA, 2007), p.495.
8
Ibid., p.496.
9
US Energy Information Administration, Iran, Country Analysis (Nov. 2011) [http://www.eia.gov/countries/
cab.cfm?fipsir, accessed 7 Mar. 2013].

Indias Energy Dilemma with Iran

291

Downloaded by [Adams State University] at 13:44 25 November 2014

Political Relations with Iran

Closer political relations between India and Iran are a post-Cold War phenomenon. During
the reign of the Shah, Iran was firmly entrenched in the Western camp and aligned with the
US through military alliances. This also brought Iran closer to Pakistan, Indias arch-rival.
Its adherence to Non-Alignment meant that India was firmly in the camp of Arab
nationalists rather than with the Shah, so until 1979 its relations with Tehran were formal
and not close. Moreover, Indias oil imports were considerably smaller than at present and
the larger part came from Baathist Iraq. The Islamic Revolution of 1979 not only radically
altered reality in Iran, but also transformed its external relations. Moving away from its
former alliance with the US, it embraced Non-Alignment as an element of its foreign policy.
While this was a welcome development, the radical rhetoric coming from the new rulers of
Iran not only threatened the region, but their conservative ideology also ran counter to the
Indian ethos of secularism. Hence in the 1980s Indo-Iranian relations remained more correct
than cordial.
The onset of the 1990s saw several important changes which immensely benefitted the
bilateral relationship. The end of the Cold War and demise of the ideological divide
transformed the international political order and countries were forced to recalibrate
their policies. Bloc politics became irrelevant and countries had to look for friendships
not only in a US-dominated world, but also in a more diffused international order. The
post-Khomeini Iranian leadership sought to abandon the path of confrontation and seek
accommodation with the countrys Arab neighbours. The pragmatic leadership of Hashemi
Rafsanjani and Mohammed Khatami mended fences, toned down the political rhetoric and
sought to further Iranian interests abroad by seeking a commonality of interests. For India
there was another challenge too: the end of the Cold War meant the loss of Soviet support
and the need to befriend the US. The Kuwait crisis of 1990 and its aftermath also meant
that India lost its former partner in the region, Iraq, especially on the energy front, since
Iraq had been its principal oil supplier since the mid 1970s. All these factors culminated
in both India and Iran discovering one another politically.10 This was manifested in a
spate of high-level political contacts, growing economic ties and increasing energy cooperation.11
Both could have followed an economic trajectory whereby increasing energy ties would
strengthen political ties between the two. Their converging worldviews on a number of
regional issues could have benefitted from a strong energy partnership. Since the early 1990s,
both countries had been in favour of a multi-polar world rather than a US-dominated unipolar
world following the collapse of the USSR. Their opposition to post-Soviet Taliban domination
in Afghanistan galvanised both countries into supporting the Northern Alliance. Subsequent to
the 2001 US-led invasion of that country, Iran became an important conduit for Indias postwar reconstruction efforts in Afghanistan. This independent access to Afghanistan provided
both countries leverage vis-
a-vis Pakistan. Moreover, Iran was seen as an important transit
corridor for Indias trade with oil-rich Central Asia.

10

C. Christine Fair, India and Iran: New Delhis Balancing Act, The Washington Quarterly, Vol.30, no.3
(Summer 2007), pp.14559; and Harsh V. Pant, A Fine Balance: India Walks a Tightrope between Iran and the
United States, in Orbis, Vol.51, no.3 (Summer 2007), pp.495509.
11
Since the early 1990s the following visits have taken place between the two countries: Prime Minister
Narasimha Rao (September 1993); President Hashemi Rafsanjani (April 1995); Prime Minister Atal Behari
Vajpayee (April 2001); and President Mohammed Khatami (January 2003). In April 2008 President Mahmoud
Ahmadinejad made a brief stopover in New Delhi on his way back from Sri Lanka.

292

South Asia: Journal of South Asian Studies

Energy Security

Downloaded by [Adams State University] at 13:44 25 November 2014

The economic transformation was also reflected in Indias foreign policy, where external
relations were governed more by economic interests than political calculations. In the case of
the Middle East, this meant a greater role for fossil fuels to meet the countrys growing
demands for energy. While India was seeking an assured supply of energy resources, for the
oil- and gas-producing countries India represented a stable market for their products.
Realisation of its political objectives vis-
a-vis Iran, however, depended upon India giving
economic power to the bilateral relationship. In the Iranian context, this meant consolidating
and diversifying the energy dimension. Determined to move beyond the purely commercial
aspects of energy relations, in 2003 both countries identified the hydrocarbon sector as a key
component of bilateral co-operation. The Delhi Declaration, signed during the visit of
President Mohammed Khatami in 2003, stated:
India and Iran have a complementary interest in the energy sector which should
develop as a strategic area of their future relationship. Iran with its abundant energy
resources and India with its growing energy needs as a rapidly developing economy
are natural partners. The areas of co-operation in this sector include investment in
upstream and downstream activities in the oil sector, LNG (liquified natural gas)/
natural gas tie-ups and secure modes of transport.12
This was accompanied by a series of measures aimed at consolidating Indias energy
partnership with Iran. From being just a commercial transaction, energy became the driver of
Indo-Iranian relations. There were three main areas of Irans energy-driven relations with India:
 Ensuring long-term energy security in January 2005 both countries entered into a 25-year
deal whereby Iran would supply LNG at an estimated cost of US$40 billion.
 Setting aside earlier security considerations, India revived the IPI (Iran-Pakistan-India)
pipeline option whereby Iran would supply natural gas via an overland pipeline passing
through Pakistan.
 As part of their desire to secure overseas energy assets, Indian oil companies would begin
oil exploration in Iran.
These projects were attractive and could have provided the basis for strong political
relations. However political problems and controversies over Iran undermined Indias ability
to successfully engage in any of these projects and restricted the possibility of it pursuing
commercial ties irrespective of developments in the political realm.

Political Pitfalls
The desire to strengthen bilateral relations through energy partnership would have materialised
had Indias political leadership fathomed the magnitude of the challenges. But despite Irans
regional importance, since 1979 Iran has been a problematic country for the region. Its
continuing radical rhetoric, unconventional policies towards various issues, especially the

12

Ministry of External Affairs, Government of India, The Republic of India and the Islamic Republic of Iran,
The New Delhi Declaration, 25 January 2003 [http://meaindia.nic.in/mystart.php?id53015, accessed 30
July 2012].

Downloaded by [Adams State University] at 13:44 25 November 2014

Indias Energy Dilemma with Iran

293

Middle East peace process,13 and support for radical militant groups14 have meant that
countries interested in bilateral relations with it could not ignore certain regional and
international dynamics.
Prolonged tension between the US and Iran and their inability to resolve mutual differences
since 1979 largely impeded Indias ability to seek energy security through Iran. The historical
grievances between the US and Iran were far too painful for either country to seek
accommodation with the other.15 India, which sought productive and friendly relations with
both, was caught in the middle, in part because in seeking closer ties with Tehran and
Washington, India did not factor in the tense non-relations between the two. This was especially
palpable in 2005 during the run-up to the civil nuclear deal between India and the US, when
India was hoping for concessions from President George W. Bush Jr. but without having to
accommodate US concerns about Iran and its nuclear ambitions.16 Thus Iran has emerged as the
most controversial and contested foreign policy issue for India since the end of the Cold War.17
The general consensus of the 1990s, which had favoured a friendlier policy towards Iran, soon
dissipated and instead Iran turned into an irritant not only to Indias relations with the US, but
also within the ruling coalition headed by the Congress Party.18 Nevertheless there were serious
attempts by India and Iran to transform their energy relations from commercial transactions to
energy security for both via the Delhi Declaration. However a host of factors, largely outside its
control, prevented India from realising its long-term vision vis-
a-vis Iran.
Indias own aspirations for international recognition as a nuclear-weapons state
considerably weakened its position regarding Irans nuclear ambitions.19 In no position to
advise Iran to refrain from nuclear proliferation, New Delhi settled instead for a legal
argument: Iran had voluntarily signed the Nuclear Non-Proliferation Treaty (NPT) and entered
into additional IAEA (International Atomic Energy Agency) protocols and so should live up
to these commitments. This purely legalistic position also became Indias formal political
position. Hence, India and its leaders devoted most of their attention to the political, economic
and energy aspects of the bilateral relationship while repeating the same position over the
nuclear issue. This de-linking also enabled them to advocate a peaceful negotiated settlement
13

As part of its opposition to the Madrid and Oslo peace processes, Iran had consistently supported Hamas which
opposes any accommodation and co-existence with Israel. Hillel Frisch, The IranHamas Alliance: Threat and
Folly, BESA Perspectives Paper No. 28 (Ramat Gan: BESA Center for Strategic Studies, 1 May 2007) [http://
www.biu.ac.il/Besa/perspectives28.html, accessed 10 Feb. 2012].
14
Iran has provided ideological as well as material support to militant groups such as Hezbollah and Hamas
which are active against Israel, with whom India has had close political and military ties since relations were
established in January 1992. P.R. Kumaraswamy, Israel Confronts Iran: Rationales, Responses and Fallouts,
IDSA Monograph Series No.8 (New Delhi: IDSA, November 2012), pp.5867 [http://www.idsa.in/monograph/
IsraelConfrontsIran_PRKumaraswamy, accessed 24 Mar. 2013].
15
Kenneth M. Pollack, The Persian Puzzle: The Conflict between Iran and America (New York: Random House,
2004).
16
C. Raja Mohan, who accompanied the Indian entourage, captured the sentiments accurately when he observed:
There are growing concerns in the Indian establishment at what many call an orchestrated campaign here (that
is, in the United States) against Indias position on Tehrans nuclear proliferation. C. Raja Mohan, India
Signals Chill to US Heat on Iran, Indian Express (New Delhi) (17 Sept. 2005).
17
P.R. Kumaraswamy, Indias Persian Problems, in Strategic Insights, Vol.7, no.3 (July 2008) [http://www.
nps.edu/Academics/centers/ccc/publications/OnlineJournal/2008/Jul/kumaraswamyJul08.html, accessed 30 July
2012].
18
Atul Mishra, Necessary Oppositions: Domestic Debates on Iran, in Strategic Analysis (New Delhi), Vol.36,
no.6 (Nov./Dec. 2012), pp.88298.
19
P.R. Kumaraswamy, Indias Nuke Dance over Iran, in Strategic Insights, Vol.6, no.5 (Aug. 2007) [http://
www.nps.edu/Academics/centers/ccc/publications/OnlineJournal/2007/Aug/kumaraswamyAug07.html, accessed
30 July 2012].

Downloaded by [Adams State University] at 13:44 25 November 2014

294

South Asia: Journal of South Asian Studies

over the nuclear controversy without having to adhere to the multilateral sanctions imposed on
Iran to secure its compliance. In line with its pre-1998 position, India continues to support
Irans right to use nuclear energy for peaceful purposes as guaranteed by the NPT.
Between September 2005 and April 2012, the IAEA adopted four resolutions against Iran
over its nuclear program.20 During the same period, the United Nations Security Council
adopted seven resolutions,21 some of which imposed limited sanctions on Iran, its citizens and
entities. All eleven resolutions were supported by the worlds major powers including Irans
close friends on the Security Council, China and Russia. Whenever it was a member of the
Security Council or IAEA, India voted with the majority. (For narrow national considerations,
countries such as Venezuela, Syria, Cuba, Lebanon and Qatar either sided with Iran or
abstained). While the impact of these sanctions was minimal, they underscored Irans isolation
over the nuclear question.
While it has a number of advantages to offer, Iran has not been an easy customer to deal
with. The rising international oil price has resulted in Iran asking for an increase in the price of
IPI natural gas. Similarly, it has been reluctant to accommodate Indian concerns about the
security of the pipeline in Pakistani territory.22 On the question of energy exploration, Iranian
laws do not allow foreign ownership of natural assets and hence Indian oil companies could
not acquire energy equity in Iran but could only be paid a fixed rate of royalties for their
exploration and extraction. And even in the political arena, difficulties with Iran over foreign
policy issues such as the Middle East peace process and security in the Persian Gulf cannot be
ignored.
The growing international isolation of Iran over the nuclear issue and the increasing USled sanctions have forced India to scale down, reverse and then temporarily abandon the
energy-related co-operation initiatives delineated in the Delhi Declaration: the LNG deal
became stuck over technology because neither Iran nor India has sufficient conversion
technology; the IPI deal turned out to be a non-starter due to the price dispute and renewed
security concerns over Pakistan;23 and oil exploration became problematic due to investment
constraints. Although most of these issues appear bilateral problems, it is possible to notice an
American imprint: India could not proceed with the LNG deal because the US and the West
were not prepared to part with the required conversion technology; the IPI evoked strong
American opposition because of the fear that long-term energy co-operation would make India
more amenable to Iran than otherwise; and Indian investments in Irans energy sector were not
possible because of the threat of Americas Iran Sanctions Act. The imposition of sanctions
has also affected the Irano-Hind Shipping Company founded in 1974, making the carrying of
oil between the two countries problematic. Furthermore, the refusal of European companies to
cover the soaring insurance costs made its operation unviable.
While oil imports from Iran have been increasing since the 1990s, it is essential to
recognise that Iran is still not Indias principal oil supplier. Although Iran accounts for about

20

The IAEA adopted resolutions against Iran on 24 Sept. 2005, 4 Feb. 2006, 27 Nov. 2009 and 18 Nov. 2011.
They are UNSC Resolution 1696 (31 July 2006), UNSC Resolution 1737 (23 December 2006), UNSC
Resolution 1747 (24 March 2007), UNSC Resolution 1803 (3 March 2008), UNSC Resolution 1835 (27
September 2008), UNSC Resolution 1929 (9 June 2010), and UNSC Resolution 1984 (9 June 2011).
22
This was a constant issue but was sidestepped when the NDA (National Democratic Alliance) government was
in power and thereby made the IPI a feasible proposition.
23
For its part, Iran refused to take responsibility for the delivery of natural gas on the Indo-Pakistan border. IPI
Pipeline: India to Resume Talks with Iran, The Times of India (12 July 2010) [http://articles.timesofindia.
indiatimes.com/2010-07-12/india/28294967_1_peace-pipeline-iran-pakistan-border-pakistan-india-border,
accessed 24 Mar. 2013].
21

Indias Energy Dilemma with Iran

295

TABLE 2. Indias oil imports.

Year
200607
200708
200809
200910
201011

Total oil imports in

millions of US dollars
61,778.87
86,384.04
103,933.77
96,321.12
115,929.02

Oil imports from Iran in

millions of US dollars
6,793.82
10,048.97
11,248.63
10,362.04
9,377.88

Oil imports from Iran

as percentage of total
11.00
11.63
10.82
10.76
8.09

Downloaded by [Adams State University] at 13:44 25 November 2014

Source: Compiled from Director-General of Foreign Trade, Government of India [http://www.dgft.gov.in].

1012 percent of Indias total oil imports (Table 2), it reached this position largely due to the
relegation of Iraq following the Kuwait crisis and subsequent international sanctions.
In December 2010 the Reserve Bank of India (RBI) cancelled the ACU (Asian Clearing
Union) arrangements for oil payments to Iran. Headquartered in Teheran, this mechanism had
been established by the United Nations in 1974 to facilitate trade between nine Asian
countries, and India used this arrangement to pay Iran. The RBIs decision came in the wake
of US restrictions on dollar payments to Iran. India tried to use banking institutions in
Germany, Turkey and the UAE but could not reach long-term arrangements with them. In
early 2012 both countries agreed to a rupee arrangement whereby New Delhi would settle its
oil dues in the Indian currency which Iran could then use for its imports from India. Because
trade is heavily tilted in Irans favour, both countries agreed to settle only 45 percent of the
dues via this route, leaving the remaining method of payment undefined. (During 201112 for
example, Indias exports to Iran were about a tenth of its total imports from Iran). India hopes
that this arrangement will provide it with new opportunities to improve its bilateral trade with
Iran, especially in light of growing economic sanctions. However, there is a catch: India is yet
to find a mechanism to settle the remaining 55 percent of its oil dues. Unlike China, it does not
have major construction projects in Iran which can be set against the oil bill. Nor does it have
the necessary trade balance to work out a barter trade. Even if India could overcome the
political implications, yuan payment for oil imports from Iran is not feasible given Indias
heavy trade imbalance with China. Hence, settling the oil bill will be a major problem for
India, even if it wishes to reduce its future imports. Moreover Iran would be more
understanding of and amenable to Indias dilemma so long as the latter did not join the
Western oil boycott or sanctions.
Iran has also ceased to be a market for Indian exports of various types of petroleum oils
(Table 3). The problems faced by Iran in meeting its domestic energy needs provided India
with an opportunity to penetrate the Iranian market for energy products. Since 2004,
petroleum products have become one of Indias major exports and Iran a principal market. In
200809 India exported over a billion dollars worth of petroleum products to Iran. A 2010
US Congressional Research Service Report disclosed that Indias Reliance (a multi-portfolio
giant with strong petroleum business interests) has been a major supplier of gasoline to Iran.
However, in January 2009, Reliance reportedly agreed to terminate gasoline sales to Iran once
its current contractual obligations expire. Reliances decision has been attributed to threats
from the US to block US$900 million in loans to it by the US Export-Import Bank.24 As a
result, Indias oil-related exports to Iran during 201011 stood at a meagre US$31 million.
24

Shayerah Ilias, Irans Economic Conditions: U.S. Policy Issues, CRS Report (22 April 2010), p.22 [http://
www.fas.org/sgp/crs/mideast/RL34525.pdf, accessed 14 Mar. 2012].

296

South Asia: Journal of South Asian Studies

TABLE 3. Indias exports to Iran.

Year
200506
200607
200708
200809
200910
201011

Total exports to Iran in

millions of US dollars
1,188.35
1,446.48
1,943.92
2,534.01
1,853.17
2,742.26

Oil-related exports to Iran

in millions of US dollars
374.88
535.61
845.12
1,056.17
180.80
31.23

Percentage of oil-related
products in exports to Iran
31.55
37.03
43.48
41.68
9.76
1.13

Downloaded by [Adams State University] at 13:44 25 November 2014

Source: Compiled from Director-General of Foreign Trade, Kolkata [http://www.dgft.gov.in].

Conclusion
Being a major player in the hydrocarbon sector, Iran is both an opportunity and a challenge for
India. On one level, Iranian hydrocarbons could partly address Indias growing appetite for oil
and natural gas and thus contribute to its energy security. Geographic proximity, resource
diversity and political dividends are additional advantages for India. The January 2003 visit of
President Mohammed Khatami, during which both countries identified hydrocarbons as their
principal area of co-operation, was a step in that direction. However the situation has since
become complicated. Some of the proposed energy deals between the two countries are stuck
over price disputes and difficulties in technology, while others have come under international
pressure. Moreover, Indias willingness to transform its energy ties with Iran beyond purely
commercial transactions unfortunately coincided with its desire to negotiate a civil nuclear
deal with the US. This has brought India within the ambit of USIran tensions. While
expressing its opposition to a nuclear-armed Iran, New Delhi supports Irans right to the
peaceful use of nuclear energy. Although international sanctions against Iran undermine
Indias ability to pursue its energy ties with Iran, maintaining the status quo has some
economic and political advantages for India. Hence, India is not yet ready to abandon Iran for
the US.