India – Iran A Dawn of South Asia’s Transformation

India is one of the most important target markets for Iran in oil export. India purchased around 20% of Iran's exported crude oil during sanction era. India's crude oil import in January, 2016 increased slightly as compared to the previous month. Accordingly, India's average imported crude oil in January hit 3.86 M barrels per day representing 0.5% growth compared to the previous month.

The Tehran Chamber of Commerce earlier announced that China remained Iran's main trade partner with import of over $5.678 billion. Iraq, the UAE, India and Afghanistan imported 24.7, 20.5, 10.69 and 10.62 percent of Iranian exports respectively to rank second to fifth among Iran's main trade partners after China. Turkey also imported more than five percent of Iran's exports during the mentioned time to become Iran's sixth trade partner.

For India, energy pipelines have always been an attractive prospect whose advantages are seemingly tangible but always just out of reach. India has felt constrained by its lack of land access to energy-rich Central Asia, hemmed in as it is by China and Pakistan. With the Iran-Pakistan-India (IPI) pipeline still stuck and the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline yet to take off as the countries have failed to appoint a consortium leader that will build and maintain the line, India is very keen to kick-start an undersea pipeline project that would bring Iranian gas to India via the Arabian Sea, bypassing Pakistan. The Associated Chambers of Commerce & Industry of India reported that “Lifting of western sanctions on Iran throws up a great opportunity for India to transport natural gas from Iran to Porbandar port in Gujarat, bypassing Pakistan – the main sticking point for other multilateral projects of Turkmenistan-Afghanistan-Pakistan-India (TAPI) and Iran-Pakistan-India (IPI).”

Iran Post Sanctions

During the sanctions period, India was among few countries of the world who continued to make crude oil imports from Iran. However, India adopted a rupee-based payment mechanism with Iran to skirt western sanctions that prohibited purchases from Iran made in dollars. In that model, India purchased Iranian oil with rupees by depositing the payment in an Indian state-run bank account, funds from which Iran would use to buy Indian goods, including food, drugs, consumer products and auto parts.

The lifting of sanctions from the west will mean that India can now freely buy crude-oil from Iran.

India is Iran’s biggest oil client after China, although its imports from Tehran gradually declined in recent years under pressure of Western sanctions that required India and some other countries—including China and South Korea—to steadily diminish their purchases.

The nuclear agreement between India and Iran is very positive news as Iran will gradually ramp up production over the next few months, giving India an opportunity to pull up its oil trade with Iran once again, Indian oil imports experts and authorities believe.

ONGC went to Iran through a gas exploration project in 2008, but had to leave the project after 2010 as the pressure mounted from US to quit doing business with Iran because of its nuclear program. But just before the sanctions were getting lifted from Iran, which was later part of 2015, ONGC started the discussion with Iranian authorities to revive or restart that relationship.

Ref: //blogs.wsj.com/indiarealtime/2016/01/18/what-lifting-sanctions-on-iran-means-for-india/

Recent Developments in Positive Directions

1. Brief Backgrounder in last two years

India-Iran enjoys economic and commercial ties covering many sectors. However, the trade relations have traditionally been buoyed by Indian import of Iranian crude oil resulting in overall trade balance in favour of Iran.

The India-Iran bilateral trade during the fiscal 2014-15 was USD 13.13 billion. India imported US$ 8.95 billion worth of goods mainly crude oil and exported commodities worth US$ 4.17 billion.  The unilateral economic sanctions imposed on Iran have had an adverse effect on the bilateral trade as the international banking channels have gradually become non-existent.

India and Iran hold regular bilateral discussions on economic and trade issues within the framework of India-Iran Joint Commission Meeting (JCM). The 18th India-Iran JCM was held in New Delhi on 28 December, 2015. It was chaired by Mrs. Sushma Swaraj, Hon’ble External Affairs Minister and Mr. Ali Taiebnia, Minister of Economy and Finance of Iran. A MOU on cooperation in trade, finance, energy, infrastructure and cultural issues was signed during the JCM. The Visa facilitation agreement for diplomatic and official passport holders was exchanged in the meeting.

A conference of private freight forwarders and other stake holders from INSTC countries was held in Mumbai on 12 June, 2015.  The Sixth Coordination Council Meeting of INSTC was held in New Delhi on 21 August, 2015.
Mr Rajeev Kher, Commerce Secretary visited Iran from 5-8 April, 2015.

Mr Rajiv Mehrishi, Finance Secretary visited Iran on 25-26 July, 2015.

A nine-member delegation from the Tata Group visited Iran on 30 May–01 June, 2015. A 15-member business delegation led by CII visited Iran from 22-24 July, 2015. ASSOCHAM led 97 Indian companies to textile exhibition “Irantex” in Tehran from 4-6 September, 2015. FIEO led a delegation of 45 Indian companies for participation in the Tehran Internal Industry Exhibition from 5-8 October, 2015.
Mr. Nitin Gadkari, Minister of Roads, Transport and Shipping visited Iran on 5-7 May, 2015. .

On the overall economy side, Iran has cheap natural gas and power that Indian businesses are keen to tap to build a 0.5-million tonne aluminum smelter plant as well as urea manufacturing units. Indian urea production will have a great boost once the Chabahar Port is active. The government of India spends Rs 45,000 Crore annually on urea subsidy, and if that can get manufactured in the Chabahar free trade zone and move it through the port to Kandla and onward to hinterland, this huge amount of money can be saved.

Nalco will set up the aluminium smelter while private and co-operative fertiliser firms are keen to build urea plants from Chabahar Free Zone, provided they get gas at less than USD 2 per mm Btu.

Railway PSU IRCON will build a rail line at Chabahar to move goods right up to Afghanistan.

Gadkari said India Ports Global Pvt, a joint venture of the Jawaharlal Nehru Port Trust and the Kandla Port Trust, will invest USD 85 million in developing two container berths with a length of 640 metres and three multi cargo berths.

Iran’s geographical position provides an excellent opportunity for oil and gas pipelines to run from the Caspian Sea to the Persian Gulf and the Gulf of Oman. In fact, only the Iran route offers India both an alternative to unresolved conflict and tension with Pakistan as well as the opportunity to overcome India’s geographic isolation from energy-rich Central Asian region. That is why Indian Prime Minister Narendra Modi, during a visit to Turkmenistan as part of his Central Asian tour, suggested an alternative land-sea route via Iran for transporting Turkmen gas to India. This route could be a turning point for India’s energy security. New Delhi’s efforts to secure the Iran-Oman-India pipeline can be interpreted as a smart diplomatic gesture aimed at China’s latest agreement with Pakistan to construct most of Pakistan’s segment of the Iran-Pakistan pipeline as well India’s desire to reverse the economic and strategic setbacks that New Delhi suffered from its withdrawal from the Iran-Indian-Pakistan pipeline.

1. PM Modi’s May 2016 Visit to Iran

On May 22, 2016 the Indian Prime Minister Mr. Narenrda Modi made a memorable visit to Tehran and within few hours of his stay in Tehran he signed 12 agreements, including a deal to develop Iran’s Chabahar port. As per this deal or an agreement, India will spend $500 Million developing the Chabahar Port, with a plan to invest an additional $16 Billion in the Chabahar free trade zone.

Heading a high-ranking delegation, Prime Minister Modi reached Tehran and began the activities for historic dialogues between the two great civilizations of Asia.

Iranian President Rouhani said the Indian Prime Minister’s visit has prepared the ground for the further enhancement of economic ties between Iran and India following the implementation of the nuclear agreement between Iran and the P5+1 group and the lifting of sanctions against the Islamic republic.

“Iran-India relations have always been of significance and today these ties can serve the interests of the two nations and the whole region,” said Rouhani, President of islamic republic of Iran.

Prior to the joint press conference, Iranian and Indian ministers signed 12 cooperation agreements, including an agreement to develop the southern Iranian port of Chabahar.

Afghan President Ashraf Ghani also arrived in Tehran on Monday to join Rouhani and Modi in signing a trilateral agreement.

Chabahar Port is located in the Gulf of Oman on the border with Pakistan. It is Iran’s closest and best access point to the Indian Ocean.

1. Recent Trade Pacts

1. Iranian Prospects for Indian Economy
2. Iranian Banks to Enter India

Indian refiners are looking at nearly doubling buying of crude oil from Iran’s national oil company, NIOC (National Iranian Oil Company) to 20 million tonnes this year and it having a permanent office would help trade.

Also, Iran has sought permission for three of its banks to open branches in India.

Bank Pasargad and Parsian Bank want to open offices in India while Saman Bank is interested in opening a subsidiary. The Iranian request is being looked into by relevant authorities including the Reserve Bank of India.

Establishment of banking channels is key to Iran regaining the trade it lost due to sanctions. But while the sanctions were listed in January, it still is not able to access past oil dues, including nearly USD 6.5 billion from Indian refiners, as it is yet to be accepted in global banking system.

Iran has ended the three-year old system of getting paid 45 per cent of the bill on selling crude oil to India in rupees and keeping the rest 55 per cent in abeyance for opening up of banking channels.

Iran plans to use its bank branches in India to settle not just the oil trade but also that of other commodities.

1. Infrastructure projects

Indian firms will have greater opportunities in infrastructure projects in Iran. This will include development of the strategic port of Chabahar, among others.

The Exim Bank cautioned that competition (for Indian oil and gas companies) will be stiff from American, Chinese and European oil firms, that can commit abundant resources and latest technology for the modernisation of Iran’s oil and gas infrastructure.

India also signed a $233-million contract to supply more than 150,000 tonnes of rail tracks to develop Iran's railways. But the project has run into delays. Lifting of sanctions is expected to speed up the implementation of this project.

The total project contracts supported by Exim Bank in Iran as on September 30, 2015 amounted to ₹900 crore, all of it in the railways sector.

1. Pharmaceutical ProductsIran’s imports of pharmaceutical products amounted to $1.228 billion in 2014, with India being the sixth largest import source for Iran.

The spokesperson said Iran has reported shortage of several specialised medicines, even though these are exempt from international sanctions.

Upon lifting of sanctions, India’s exports in this sector are expected to grow further on account of easier financial transactions.

2. Opportunities in Iran : Chabahar Port

Chabahar port, located in the Sistan-Baluchistan Province on Iran's southern coast, is of great strategic importance for India. Chabahar—located about 1,800 kilometres south of Tehran—is more than just a port with an adjoining free trade zone. In 2003, India and Iran had agreed to develop Chabahar port on the Gulf of Oman outside the Strait of Hormuz, near Iran's border with Pakistan.

The bilateral agreement to develop the Chabahar port and related infrastructure signed by Prime Minister Narendra Modi and Iranian President Hassan Rouhani, underlines the extraordinary strategic opportunities that present themselves for India in the region. The signing of commercial contract for the Chabahar Phase 1 will open a route to land-locked Afghanistan and cut transport costs/time by third. The development of the port for which India will provide $500 million will help Indian companies enhance engagement in Iran and gain access to Afghanistan & Central Asia. In the long run Chahabar will also serve as the point of origin for the proposed Iran-Oman-India pipeline.

A multiplier effect rests on the possibility that other international investors may also see the rationale of this important investment, thus paving the way for creation of a strategic bulwark that facilitates greater flow of people and goods among the three countries, as well as in the region and contributes to economic growth of Afghanistan.

Industry bodies and think tanks of both the nations looks at PM Modi's timely visit to Iran setting the stage for boosting trade in a big way. The 12 MoUs signed between the two countries cutting across culture, science & technology, exchange of info& knowledge and many another aspects of economic engagement, as a significant effort to build enduring partnership

Strategic Benefits of Chabahar:

• Chabahar port will help India bypass Pakistan.
• In contrast to the Pakistan’s Gwadar Port development which is a China supported Project, the Chabahar port is set to transform the logistics scenario of the world. About just 70 km away from Gwadar, Chabahar Port  will effectively use rail and road to connect to Sistan and Baluchestan’s capital city of Zahedan.
• Port in south east Iran that will enable India to bypass Pakistan and open up a route to land-locked Afghanistan with which New Delhi has close security ties and economic interests.
• The transport costs/time for Indian goods through Chabahar will be reduced a one-third.
• Chabahar port to become transit hub for immediate access to markets in the northern part of the Indian Ocean and Central Asia.
• From Chabahar, the existing Iranian road network can link up to Zaranj in Afghanistan, about 883 kms from the port. The Zaranj-Delaram road constructed by India in 2009 can give access to Afghanistan's Garland Highway, setting up road access to four major cities in Afghanistan -- Herat, Kandahar, Kabul and Mazar-e-Sharif.
• The port project will be the first overseas venture for an Indian state-owned port. India and Iran had in 2003 agreed to develop Chabahar on the Gulf of Oman outside the Strait of Hormuz, near Iran's border with Pakistan.

With Indian government’s joint investments in Chabahar Port of Iran, India will be connected through a reliable route to Afghanistan and countries in Central Asia.

Incentives for Indian Companies for investment in Iran’s Special Economic Zones

• Import of goods from the above mentioned zones for domestic consumption would be subordinate to export and import regulations, and export of goods from these areas will be carried out without any formalities.
  • Import of goods from abroad or free trade zones or industrial area-would be carried out with minimal customs formalities and good internal transit cases would be performed in accordance with the relevant regulations.
  • Log entry of merchandise subject to this article will be done without any customs formalities.
  • Goods imported from outside or industrial areas or other commercial zones can be exported without any formalities of the country.
  • Management of the region is allowed to assign the region to qualified natural or legal persons after classification and valuation.
  • Owners of goods imported to the region can send all or part of their goods for temporary entry in to the country after doing customs clearance regulations.
  • If the processing of imported goods is to some extent that changes the tariff of goods, the rate commercial benefit of the goods would be calculated equal the commercial benefit of raw materials and spare parts of the country.
  • Importers of goods are allowed to hand over to others part or all of their products against warehouse receipt to be issued by the district administration, in this case the breakdown warehouse receipt holder would be the owner of the goods.
  • The management of each district is authorized to issue certificated of origin for goods per applicant out of the area with the approval of the customs.
  • All the goods imported to the region for the required production or services are exempted from the general import-export laws. Imports of goods to other parts of the country will be subordinated to export and import regulations.
  • Percentage of goods produced in the zone, based on paragraph (d) of clause (25) of the law of the second economic, social and cultural development plan of the Islamic republic of Iran imported to the country, the proportion of total value added and domestic parts and materials used in the total price of the commodity production is allowed without any limitation and in addition to not having to order and open letter of credit.
  • Goods manufactured in special economic zones, as well as raw materials and imported CKD parts into the country is not subject to price regulation due to unutilized resources and allocated currency

List of the Special Economic Zones of Iran:
1-Salafchegan special economic zone
2-Shiraz special economic zone
3-Assaluye special economic zone
4-Arge Jadid special economic zone
5-Payam Airport  special economic zone
6-Persian Gulf special economic zone
7-Lorestan special economic zone
8-Amirabad port special economic zone
9-Bushehr Port special economic zone
10-Shahid Rajaee Port special economic zone
11-Sarakhs special economic zone
12-Sirjan special economic zone
13-Yazd special economic zone
14-Bushehr special economic zone

The list of the Trade-Industrial Free Zones of Iran:
1-Qeshm Trade-Industrial Free Zone
2-Chabahar Trade-Industrial Free Zone
3-Aras Trade-Industrial Free Zone
4-Anzali Trade-Industrial Free Zone
5-Arvand Trade-Industrial Free Zone
6-Kish Trade-Industrial Free Zone
7-Maku Trade-Industrial Free Zone

Reference //www.freezones.ir

1. Road Ahead & Strategic Concerns

In the coming years, Pakistan and China will certainly intensify their efforts to “integrate” Iran into their strategic vision of the emerging regional order, as this will enable them to inflict high-leverage strategic harm on India. Strategic think tanks of India will stay in close contact with Iran and consciously and consistently pursue good diplomatic and economic relations with it. India needs to remind Iran that Pakistan has become a country where political stability remains very fragile.

India’s commitment and relations with Iran has lead to greater prospects. The business community in India is looking at a greater trade opportunity which will flourish the two great economies. With projects such as Chabahar, the entire face of South Asia is expected to get changed. With the advent of India and Iran coming closer to each other, a new dawn prospects is emerging. This new dawn is motivating the entire business ecosystem of the two countries.

About the Author /Report Curate

Mr. Faiz Askari is an Economic Analyst, Journalist specialized into SME issues.  Apart from being the founder and Editor of India’s one of the fastest growing MSME community – SMEStreet, Faiz has personally interacted with more than 1000 entrepreneurs in last few years. An in-depth business communications professional, Faiz also work with MSMEs who often struggle in any form of business communications. Have worked in Leading Indian national dailies and business dailies such as Hindustan Times, Financial Express, he has developed an analyst’s acumen for SMEs since 2008.

Can be approached at faiz@smestreet.in Or 9871762630