Changing Dimensions of India and Iran Bilateral Relations: An Energy Investment Perspective

Iran and India have had bilateral relations for centuries. However, their relations entered into a new era after the partition of the Indian subcontinent into India and Pakistan, the Iranian Islamic republic revolution and the Iranian nuclear issue. But India has reviewed relations over the last few years as Iran became the contentious issue for its ties with United States. India has also been under pressure from Israel – one of India’s leading military equipment suppliers – and the Gulf states – where millions of Indian migrants live and work – to re-develop relations with Iran. Due to the partition of the Indian subcontinent, in 1947 India lost its closeness with Iran and the two countries followed different foreign policies due to post-partition political challenges. On the other hand, Iranian Islamic revolution modified Iran’s relation with the world including India. But in the recent years and after the international sanctions against Iran’s economy, India and Iran are facing a tough commercial and political relationship.

The economic relation between India and Iran are mostly related to Indian import of Iranian crude oil. At one level, India is the second largest buyer of Iranian crude oil. On the other, Iran is the sixth biggest supplier of crude oil to India. Iran is also a major source for India’s imports of petrochemical substances. When the sanctions imposed on Iranian crude exports, India and Iran decided a rupee payment system for continuing oil business, because foreign banks had refused to deal with Iran fearing penalties by the US. Therefore India continues to import Iranian crude oil using exemptions from the US sanctions, but it backed out of a multi-billion-dollar natural gas pipeline project with Iran due to the complications from US sanctions and the fact that the pipeline was going to traverse Pakistan.

India has one of the world’s five largest Muslim populations, but 90% are Sunni – while Iran is predominantly Shi’ite. So India-Iran relations – and contacts – center narrowly on three main issues: Oil and gas, with entrepreneurs in both state-owned and private firms pushing for more opportunities; Regional issues, notably Afghanistan and Pakistan, which are pursued mainly by Indian intelligence agencies; Defending Indian freedom of action in foreign policy, which has been a priority for politicians and thinkers who want to protect Indian national sovereignty. On energy, India and Iran are natural trade partners. India depends on imports for up to 80% of its crude oil needs and 25% of its natural gas needs while Iran has the world’s fourth-largest proven oil reserves and second-largest natural gas reserves. India imported $11.6 billion of Iranian oil in fiscal year 2012-2013. New Delhi is Tehran’s second-largest oil customer. Some of this trade was conducted in Indian rupees, which was beneficial to India.

Recently India and Iran in the Joint commission meeting have discussed on various projects, including the IPI gas pipeline project, A long term annual supply of 5 million tons of LNG, development of the Farsi oil and gas blocks, South Pars gas field and LNG project, Chahbahar port project (Chabahar port is often referred to as the ‘Golden Gate’ to the landlocked Commonwealth of Independent States (CIS) countries and Afghanistan). But broader political coordination on Afghanistan is now minimal compared to the 1990s. They have not as yet joined forces, for example, to influence the succession to President Hamid Karzai or to counter Pakistani influence in Afghanistan. India and Iran have also signed a Bilateral Investment Promotion & Protection Agreement (BIPPA) and are in the process of finalizing a Double Taxation Avoidance Agreement (DTAA). Indian companies which had or have a presence in Iran include ESSAR, ONGC Videsh Ltd. (OVL) and TATA. Joint ventures between India and Iran include the Irano-Hind Shipping Company, the Madras Fertilizer Company and the Chennai Refinery.

As in the today’s world, the high ratio of the energy consumption reflects the development of countries and those without enough energy resources face many economic and political difficulties and have to prepare their required energy at any costs. India’s share in world energy demand is projected to increase from 5.5% in 2009 to 8.6% in 2035 . India hopes to maintain an annual gross domestic product (GDP) growth rate of about 8–10 per cent over the next quarter century to meet its goals for poverty eradication. This level of growth will require India to at least triple its primary energy supply.

As India already imports more than 2/3rd of its hydrocarbon requirements and any further escalation would adversely affect its energy security. Therefore India has to diversify its manner of energy supply. It seems that investing in other countries to explore and exploit their oil fields is the best way to supply more petroleum to India. Iran is close to India geographically and has good political ties with it. Iran also shares several joint oil fields with its neighbors like Iraq, Qatar, United Arab Emirates and Iran’s other neighbors by entering in to contracts with powerful oil companies have increased their production in their joint oil fields with Iran. But due to the international sanctions, Iran is not able to cooperate with those companies to develop its joint fields. As New Delhi welcomed the nuclear deal struck by Iran and the world’s six major powers in November 2013, which it hopes will eventually lead to the lifting of sanctions. India’s one concern, however, is that Iran’s return to the global oil market will cut its interest in trading oil with New Delhi in Indian rupees – on terms favorable to India. Therefore and since Indian companies have the technology and funds, Iran badly needs Indian investment in its hydrocarbon sector.

As Over the last decade, the Indian government had made some efforts to promote a natural gas pipeline from Iran to India through Pakistan. Pakistan had signed on to the project and even executed a gas purchase agreement with Iran. But US sanctions on Iran and Indian apprehension about Pakistan derailed the project. Even if US Govt. lifted its sanctions, India’s interest in the pipeline project would be unlikely to revive without significant improvement in India-Pakistan ties. But Coordination between India and Iran on Afghan development is likely to remain limited.

As India’s overall development assistance to Afghanistan outweighs what India does there in association with Tehran. Surprisingly, India and Iran do not appear to be coordinating their public positions on future political developments in Afghanistan, even with the prospect of the imminent US withdrawal. Therefore the problem in India’s position has been that it has not been willing to accept the connection between the nuclear issue and its oil and gas trade with Iran. The United States and Israel view Iran’s oil wealth as a key resource for Iran’s nuclear program – and sanctioning its trade as a way to pressure Iran into dismantling the program. But India has wanted to treat the issues separately out of self-interest. But due to the new development like Geneva agreement between Iran and P5+1 (UN Security Council permanent members Britain, France, Russia, USA and China as well as Germany), experts are so optimistic about the lifting of sanctions against Iranian oil and gas industry. Now many companies are waiting for the green light from the sanction-imposers to invest in Iran’s vast oil and gas fields.

Sunil Dasgupta
Iran-India Economic Ties”, at
Joint Press Statement on 17th India-Iran Joint Commission Meeting, May 4, 2013, at
OPEC Annual Statistical Bulletin, 2013, at
Iran Implementing South Pars Projects at,
Sun-Joo Ahn and Dagmar Graczyk, “Understanding Energy Challenges in India” , at
Sujata Ashwarya Cheema, “India-Iran Relations: Progress, Challenges and Prospects”, India Quarterly: A Journal of International Affairs 2010 66: 383, at
India Snubs US Sanctions on Iran”, The Times of India, June 1, 2012, at


Dr. Tabrez Ahmad | Professor & Associate Director | University of Petroleum & Energy Studies ( College of Legal Studies) | Dehradun, U.K, INDIA | Tel Off: +91 135-2770137 Extension 148, Web: ; Linkedin<>
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