India's ties with Iran need urgent attention as an unresolved row over oil payments threatens to drag the relationship, once described as “strategic,” to a new low.

The problem arose in December 2010 when the Reserve Bank of India, under U.S. pressure, decided to no longer use a clearing mechanism to pay Iran for its crude. 

Faced with these objections, India, according to the Financial Times, began using the German bank, EIH, for making payments. However, this channel broke down in May 2011, after the European Union imposed sanctions on Iran.

Iran is India's core energy partner — its second largest oil supplier. Nearly 12 per cent of India's total demand, around 4,00,000 barrels a day, feeds India's refineries and petrochemical complexes. The Mangalore Refinery and Petrochemicals Ltd (MPCL) is the largest oil importer from Iran. The IOC, BPCL, HPCL and Essar are also major consumers of Iranian crude.

Because of the difficulties over payments, Indian companies have accumulated a debt of nearly $5 billion. With the payment row festering, Iran decided to halt supplies to Indian firms for August. However, as the deadline for the payments neared, both sides scrambled to achieve a breakthrough. On July 31, Iran's Oil Ministry website SHANA reported that the payment row had been settled. India would pay part of the debt “promptly” and the rest would be “gradually settled.” The Ministry's optimism notwithstanding, details of the inner workings of the new mechanism and the prospects of its durability remain far from clear. (Media reports say that India and Iran have finalized the settlement of dues through a Turkish bank arrangement.)

The possible collapse of Iranian supplies will have far greater ramifications than a mere commercial impediment in a buyer-seller relationship. Iran's decision not to supply oil, if implemented, will deliver a serious blow to the evolution of a robust geostrategic relationship between New Delhi and Tehran, of which a highly developed energy partnership has to be the core. 

Aware of the importance of establishing a strong political relationship, India and Iran, with Pakistan as the third party, had begun negotiations on the Iran-Pakistan-India (IPI) pipeline. Had the pipeline materialized, it would have not only generated obvious economic benefits but also imparted regional stability, premised on mutually beneficial interdependence.

Before threatening to stop supplies, Iran had begun to show fresh interest in seeking Indian investments in its oil and gas sector. Alive to the recent Indian energy forays in neighboring Central Asia, Iranians were also considering working with India on a possible fuel swap arrangement in the future.

 Under this mechanism, Iran could export energy to India from its terminals, in return for an equal amount of oil delivered across the border to Iran, which may have been tapped by Indian firms in Central Asia.

Apart from energy, there are two key elements that define the relationship. One of them is trans-continental transit. Iran's port of Bandar Abbas is the starting point of the north-south corridor which can ferry goods northwards towards the Caspian, and further into Russia and Europe. But, more critically, India needs Iran to physically access Afghanistan. It can do so from the Iranian port of Chabahar, from where a land corridor extends northwards before entering Afghanistan. For reasons of geography, Iran is central to India's Afghan policy.

It is, therefore, disappointing that India, instead of quickly arriving at a new payment agreement with Iran and defusing a major crisis, has apparently decided to place heavier reliance on Saudi Arabia as an alternative fuel supplier.

The decision to increase dependence on Saudi Arabia and reduce procurements from Iran is particularly ill-timed because of the rapid escalation recently of a Cold War between the two countries. 

(Source: The Hindu)

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