India-Iran Relations: Part Two – After A “Belated” Re-Start

14 July 2016 Vikas Kumar, FDI Associate Download PDF

Key Points

  • Strained relations with Pakistan have blocked India’s overland access to natural gas and mineral-rich Central Asia and Afghanistan, while access to Iranian energy resources was, until recently, impeded by sanctions. With the end of sanctions India hopes to overcome both these hurdles by partnering with Iran, while the latter wants to reclaim its share in the energy market and rebuild its economy.
  • Unlike other potential partners of Iran, India has lesser bargaining power vis-à-vis Iran, which enhances its attractiveness as a partner. On the other hand, Iran’s quest for autonomy constrains its engagement with other regional powers that desire dominance in their foreign relations and provides India with a valuable opening.
  • Given the two countries’ penchant for dogged negotiations, their relationship is unlikely to progress at a galloping pace, but slow progress should not be interpreted as a lack of interest. At the moment, neither country seems to have more attractive alternatives.
  • The success of India’s economic diplomacy in Iran will depend upon both the speedy completion of infrastructure and energy projects and partnership in the new economy. At the moment, the bilateral relationship is standing on just one leg as the latter has not received much attention. This imbalance has to be corrected if India wants a lasting partnership with a youthful Iran, which does not view oil and gas as its future.


India and Iran complement each other in the energy sector and share an interest in stabilising Afghanistan and connecting resource-rich Central Asia to the Indian Ocean. Chabahar Port in south-eastern Iran could serve as a focal point for the economic diplomacy of the two countries. The development of a modern port in Chabahar and of a transport corridor that connects it to Afghanistan, the Caspian Sea and Turkmenistan will provide Afghanistan and Central Asia with an alternative access route to the rest of the world. This corridor will contribute to the economic development and stability of these countries and improve their bargaining power vis-à-vis their larger neighbours. On the other hand, it will improve Iran’s bargaining power in the region and enable India to bypass Pakistan to access the energy and mineral-rich region. Chabahar Port and Chabahar Free Trade and Industrial Zone could also help Iran emerge as a regional trade, manufacturing and energy hub. India is an attractive partner to Iran as it does not have any alternative to Chabahar. Other potential partners of Iran are already well-entrenched in the region and enjoy much better bargaining power than India does with Iran.

On the other hand, Tehran’s quest for autonomy in international affairs constrains its engagement with other regional powers that desire dominance in their foreign relations. This in turn provides India with a valuable opening in bilateral relations with Iran that can be used to access economically and strategically important Central Asia. These factors and the history of relatively close relations in the post-Cold War period have again brought India and Iran together. Given their penchant for dogged negotiations, however, the bilateral relationship is unlikely to progress at a galloping pace, yet slow progress should not be interpreted as a lack of interest as, at the moment, neither country seems to have more attractive alternatives. Both countries have so far focussed on the brick-and-mortar economy, but a sustainable twenty-first century partnership will depend on the deepening of ties in the new economy because oil and gas are not the future of Iran, which boasts a youthful and well-trained workforce.



India, one of the biggest importers of raw materials, has long desired overland access to natural gas and mineral-rich Central Asia and Afghanistan. The lack of geographical contiguity,[1] the absence of a suitable transport corridor, and uneven relations with Indian Ocean littoral states that border upon Central Asia have blocked India’s access to the area. Of these, the last is the most critical factor. India’s relations with Pakistan have always been less than cordial. Relations with Iran have, so far, lacked consistency despite age-old cultural ties, natural complementarities in the energy and transportation sectors and shared strategic interests in the region. Until the 1979 Islamic Revolution, Iran was much closer to Pakistan than to India, which perhaps explains the lukewarm India-Iran relationship.[2] This changed in the 1980s, after Pakistan drew closer to Saudi Arabia and the two promoted Sunni rebels in Afghanistan and even in Iran’s Sistan and Baluchestan province. In the mid-1990s, Iran helped India to shoot down Pakistan’s Kashmir resolution in the Organisation of the Islamic Conference (renamed as Organisation of Islamic Co-operation in 2011). In the 1990s and early 2000s, the two sides exchanged state visits, sailed together to Antarctica, co-ordinated moves in Afghanistan and jointly issued commemorative stamps of saint-poets. That was when they agreed to collaborate on Chabahar and began the preliminary work on upgrading the port. Later, despite its support for international sanctions targeting Iran’s nuclear energy programme, India continued to be one of Iran’s biggest trading partners and remained diplomatically engaged with Iran. This history of engagement, and their quest for autonomy in international relations, frames their relationship and the perception of their other potential partners. Occasional differences notwithstanding, this history, in combination with their geography, also limits the possibility of either side actually walking away from the bargaining table. Part One of this paper argued that the perception that there was a delay in re-engagement between the two countries after the lifting of nuclear sanctions against Iran is factually incorrect. This part discusses the possible course of their relationship after the implementation of the Joint Comprehensive Plan of Action (JCPOA).

A Mutually Beneficial Relationship

Pakistan’s refusal to allow India transit rights to Afghanistan and beyond into Central Asia,[3] and the bleak chances for any breakthrough in India-Pakistan relationship, has pushed India to approach other countries. Iraq is not only unstable, but is also located to the west of the Caspian Sea, while India is primarily interested in the region to its east. Iran is not only stable, but also shares a direct border with Central Asia that, just as importantly, lies on both sides of the Caspian Sea. Iran shares land and (inland) sea borders with Afghanistan, Armenia, Azerbaijan, Turkmenistan and Turkey. Unlike Pakistan, Iran can access Central Asia bypassing Afghanistan.[4] Iran’s Chabahar Port, therefore, offers India an ideal Central Asian gateway in addition to the role it can play as a hub for Iran’s energy supplies to India.[5] Equally importantly, Chabahar Port and the related transport corridor can provide the landlocked Central Asian countries and Afghanistan an alternative access to the rest of the world, which cannot but enhance their bargaining power vis-à-vis Russia, China and Pakistan by providing them with some degree of economic and strategic autonomy. The resultant change in the balance of power in the region will benefit both India and Iran. The transport corridor can also be used to provide material support to the Afghan Government in times of crises and help India maintain and expand the infrastructure it has built in Afghanistan over the last decade.[6] Iran is home to a large Afghan refugee population and has a stake in the stabilisation of Afghanistan.

On the other hand, Iran has to engage India to regain its pre-sanctions share in one of the fastest-growing economies amid oversupply in the global energy market, to ensure that India remains neutral in the Middle East, to enhance the viability of its transport corridor connecting the Indian Ocean and Central Asia,[7] to emerge as a regional energy hub, and to access the low-cost space, IT and pharmaceutical technologies available in India. The last is very important for Iran as, unlike most other Middle Eastern countries, it has a large and highly-qualified young workforce.

Other potential partners of Iran – China, Russia, the United States and the Gulf countries – are its direct economic, strategic and/or ideological competitors. China, for instance, has already acquired an important role in the transport and pipeline network connecting Central Asia to China and China to the Indian Ocean via Pakistan. Allowing China a similar presence in Chabahar and the related transport network leading up to Central Asia will further consolidate its influence in Central Asia and Afghanistan, where Iran has independent ambitions. Similar arguments apply to Russia, which is already deeply entrenched in the energy and defence sectors in Central Asia and is also a competitor of Iran in the Caspian Sea.

Unlike other regional and world powers, India will have to depend completely upon Iran for its access to Afghanistan and Central Asia. In this relationship, Iran will be the decisive player, which makes India an attractive partner. Iran also recognises that India can co-ordinate with Japan, whose prime minister is likely to visit Tehran later this year, and Oman. Both these countries, like India, will have to depend entirely upon Iran to access Central Asia from the Indian Ocean.

There are other factors that further strengthen Iran’s bargaining position vis-à-vis India. While the negotiations on the development of the transport corridor leading up to Central Asia and the modalities of its use are underway, India remains locked out of Central Asia, but Iran continues to use the existing Chabahar Port and road and railway networks, although not to the extent it could after the early completion of the infrastructure upgrades. Also, in the worst case scenario, Iran can attract other partners, while India has no alternative. So, Iran has both an inside option while the bargaining drags on, as well as an outside option should the negotiations breakdown or differences arise at a later stage, while India has neither.[8] Unlike India, Russia and, particularly, China have inside and outside options because they are already well-connected with the Central Asian countries. Also, China already has access via shorter routes to the Indian Ocean through Pakistan and Myanmar. Observers in Pakistan point out that Chabahar is not critical to Chinese economic, foreign and defence policies in the way that Gwadar is and argue that China’s overtures to Iran are, among other things, signals to Pakistan to get its act together. This means that Iran’s relative bargaining power is lesser in these bilateral relations than with India. This perhaps explains why – complaints about delay and threats of approaching third countries notwithstanding – Iran waited for India to take the initiative. As discussed in the first part of this paper, both sides use delays and engagement with third parties to strengthen their bargaining power in the ongoing bilateral negotiations.

Not an Exclusive Relationship

It is not the case that India and Iran aim at an exclusive/special relationship that seals them off from other countries in the region. Both are simultaneously pursuing relationships with Russia and China. The process of India’s accession to the SCO as a full member has begun, while Iran is also trying to join the organisation. Likewise, both countries remain engaged with Russia with regard to the International North-South Transport Corridor (INSTC). India has not abandoned the idea of importing Central Asian gas through pipelines cutting across Pakistan. Its Iranian investment, however, is important both for diversifying its energy supplies and making sure that Pakistan does not have a veto over India’s access to Central Asian energy.

Both sides have repeatedly stressed that they are not teaming up against third countries and are open to engage others but, at the same time, they would like to preserve the room for mutually-beneficial autonomous action in the region. This quest for autonomy, however, seems to limit their engagement with countries, such as China, that seek dominance in foreign relations. Iran has paid an exorbitant price since 1979 to maintain strategic autonomy and to claim its “natural” status in US-dominated Middle East. These sacrifices, combined with its self-image as a legatee of one of the oldest civilisations of the world, the most important non-Arab centre of Islam, and the largest Middle Eastern country, make it difficult for Iran to bandwagon behind any outside power (the Indian experience in South Asia is comparable in many ways to that of Iran in the Middle East).

While there has been talk of linking Iranian trade and transport corridors with those of the China-Pakistan Economic Corridor (CPEC), Iran’s desire for autonomy circumscribes the scope of such a project. The Indian media paid a lot of attention to the Chinese President’s arrival in Tehran ahead of the Indian Prime Minister, but it seems to have overlooked a recent development that says a lot about the limits referred to above. The joint statement issued on the occasion of Xi’s Tehran visit noted Chinese support for Iran’s application for full membership of the SCO. This year’s SCO summit deferred a decision on the Iranian application on specious grounds, however, despite Russia’s open support for Iran ahead of the summit and a prior Chinese declaration of support.

The proposed Iran-Pakistan-India pipeline is another illustration of the limits to engaging other countries in the region. Among the many overland and submarine pipelines being discussed in the region, this pipeline project was one of the easiest to complete. The Indian leg of the pipeline was abandoned for obvious reasons, but now even the Iran-Pakistan section seems to be going nowhere. During his Pakistan visit, President Rouhani said that his country can start supplying gas to energy-starved Pakistan within months. Yet, no progress has been seen on this project. In fact, Rouhani’s visit is remembered for the Pakistani Army’s controversial tweet suggesting that Iran was allowing its territory to be used for launching subversive activities in Pakistan, not for his pipeline optimism.[9] The rationale behind the timing of the tweet remains unclear, though it appears that the Pakistani Army wanted to weaken public support for the parliament’s stance of remaining neutral in the Saudi-Iranian rivalry (and to divert attention away from investigation of the terrorist attack on India’s Pathankot airbase). There could not have been a better way of doing this than by accusing Iran of hosting Indian spies. Added to that is the second-class status of Shias in Pakistan. While it would be grossly unfair to claim that Iran’s foreign policy is driven by sectarian considerations, the fact that the Pakistani Government has mostly looked the other way even as Shias have been under attack from home-grown terrorists and that Pakistan has, along with Saudi Arabia, supported Sunni rebels in Iran’s Sistan and Baluchestan cannot but affect Iran’s relations with Pakistan. Unsurprisingly, a Pakistani observer argued that the Iran-Pakistan relationship is a case of staged cordiality. While the growing proximity between Iran and India seems to have revived Pakistan’s interest in the Iran-Pakistan pipeline project and its government claims that it will be ready by 2018, work has not yet started on the domestic section of the pipeline and other necessary infrastructure.

The Way Forward

Given their penchant for dogged negotiations, it would be unfair to expect the India-Iran relationship to progress at a galloping pace, but slow progress should not be interpreted as being uninterested because, at the moment, neither country seems to have more attractive alternatives.[10] The recent state visit of the Indian Prime Minister to Iran is a major step on the way to the slow, but steady reengagement of the two countries. During the visit, the two sides signed a number of agreements on infrastructure projects.

The Iranian President announced that 23 May will be celebrated as the “Day of Chabahar”, to commemorate the signing of an agreement on Trilateral Transport and Transit Corridor between Afghanistan, India and Iran. Whether there will be good reasons to celebrate this day in the years to come will depend on the speedy development of Chabahar Port and the integration of the Port and the Chabahar Free Trade and Industrial Zone with Iranian and Central Asian railway, road and pipeline networks, as well as with India’s Arabian Sea ports. On the one hand, India and Iran have already agreed to build the Chabahar-Zahedan railway line. Zahedan is already connected with the Iranian national railway network that is, in turn, linked with the railways of Turkmenistan and Azerbaijan. Indian steel companies are likely to ship rail lines worth US$150 million this July. This consignment is about one-third of the overall agreed supplies. India has already built the Delaram-Zaranj highway connecting Zaranj, on the Iran border, with Afghanistan’s Garland Highway. India is also likely to independently build railways inside Afghanistan. On the other hand, India is in the process of acceding to the Ashgabat Agreement to be able to seamlessly use transport networks in Iran, Kazakhstan, Turkmenistan and Uzbekistan.

In comparison to the infrastructure sector, apart from an agreement to jointly explore the possibility of manufacturing aluminium, bilateral projects in the industrial and energy sectors have seen much less progress. Negotiations on developing gas fields and gas-based industries are likely to be completed later this year as a consensus has emerged within the Iranian Government over the format of energy sector contracts with foreign companies. In the meantime, Indian imports of Iranian oil have picked up significantly. Two gaps remain, however. So far, Indian private sector companies have not shown much interest in Iran, except for purchasing more oil after the lifting of sanctions. More importantly, the service sector is completely missing from the agenda. Minor exceptions include the Shipping Corporation of India, which will soon resume services to Iran. There is a need to deepen ties in the financial and transportation sectors, which are critical for the flow of goods.

Last, but not the least, given the fact that, by Middle Eastern standards, Iran has a very large and well-trained workforce, India should deepen the bilateral ties in high-skills sectors such as information technology, pharmaceuticals, biotechnology and space. India has to recognise that Iran should not be viewed as a consumer but, rather, as a partner because it has experimented with all kinds of technologies during the sanctions regime. India could, for instance, contribute to building the infrastructure and software for e-governance in Iran and co-develop satellites with Iran.

It bears emphasising that the bilateral agreements on construction of ports and railways are significant, but this is something that should/could have been done decades ago. Investment is needed in the new economy to lay down the foundations of a twenty-first century partnership. It is indeed intriguing, therefore, that the Indian Prime Minister, who never tires of advertising India’s strengths in the new economy, completely skipped this in Iran. Ultimately, the success of India’s economic diplomacy in Iran will depend on both the speedy completion of infrastructure and energy projects and a partnership in the new economy. At the moment, the bilateral relationship is standing on just one leg. This imbalance has to be corrected if India wants a lasting partnership with Iran, with its youthful and well-trained workforce that does not view oil and gas as its future.


[1] India’s Jammu and Kashmir shares a narrow stretch of border with Afghanistan, but the territory concerned is presently occupied by Pakistan.

[2] Iran, Turkey and Pakistan launched an organisation called Regional Co-operation for Development (RCD) in 1964. These countries were also part of the Central Treaty Organization (CENTO). Both organisations lapsed after 1979. The RCD was revived as the Economic Co-operation Organization (ECO) in 1985 and expanded in 1992 to include Afghanistan, Azerbaijan and all five Central Asian republics. Additionally, India’s commitment to Non-Aligned Movement and close relationship with the USSR affected its relations with Iran, which was then aligned with the US and feared potential irredentism along its northern border with the USSR.

[3] The refusal of Pakistan to allow India transit rights to Afghanistan, the only country in the Indian Sub-continent that does not share a border with India, should be viewed along with its unwillingness to support initiatives from the South Asian Association for Regional Co-operation (SAARC) aimed at improving connectivity in the region. Pakistan’s attitude has forced other members of SAARC to launch sub-regional initiatives.

[4] Moreover, unlike Iraq and Pakistan, Iran enjoys cultural influence in Central Asia insofar as Persian was the language of the courts, culture and religion in parts of the region. Tajiki, the national language of ethnically Turkic Tajikistan, and Dari, an important language of Afghanistan, are closely related to Persian.

[5] Narendra Modi is the first Indian Prime Minister since Jawaharlal Nehru to have visited all the Central Asian republics and is also the first to have paid two visits to Afghanistan in less than a year. During these visits he referred to Chabahar in his interactions with his counterparts. This reflects the importance India attaches to its outreach to these landlocked countries through Chabahar Port. India is also engaging Central Asian countries through regional multilateral fora and has even decided to join the Shanghai Co-operation Organisation (SCO) despite the perception that it is a China-dominated organisation.

[6] As of now, Bandar Abbas is the preeminent port of Iran and is already fully integrated with its railway and road networks. The development of Chabahar Port, the only oceanic port of Iran, is domestically important for Iran. This port will facilitate decongestion at Bandar Abbas, enable handling of heavier cargoes without trans-shipment to other countries, and help maintain Iran’s trade flows in the case of a conflict in the Persian Gulf. Moreover, the development of the port and other industries in Chabahar will boost development in the economically-backward Sistan and Baluchestan province that is home to Shia Iran’s restive Sunni Baloch minorities. Incidentally, similar considerations are driving the development of the neighbouring port of Gwadar. Pakistan is developing Gwadar, among other things, to deal with the potential naval blockade of Karachi in the event of a war with India and to develop its own restive province of Balochistan, which is its most underdeveloped province. In passing, note that, unlike Balochistan in Pakistan, Iran’s Baloch areas account for a small share of the country’s population and area and are far less disturbed.

[7] The Chabahar route for Indian trade with Afghanistan and Central Asia out-competes other routes via Bandar Abbas and Pakistan. Zaranj, on the Iran-Afghanistan border, is closer to Chabahar than Bandar Abbas, whereas Bandar Abbas is closer to the Central Asian republics than Chabahar. Chabahar’s proximity to India more than offsets any advantages that an already congested Bandar Abbas may offer with respect to transit to Central Asia. It bears emphasising that the Pakistan route does not hold any advantage if the manufacturing hubs in western and southern India, which are close to major Indian ports, are to be connected to Central Asia.

[8] Both Iran and India have outside options in the petroleum sector but, as one of the largest producers in the world (that is struggling to regain its market share) and one of the world’s largest energy consumers (that is struggling to diversify its supplies), they cannot profitably stay away from each other.

[9]  Incidentally, Pakistan’s prime minister and president paid three barely-remembered visits to Tehran during President Rouhani’s tenure before the latter visited Pakistan.

[10] Contrary to the often jingoistic expectations of the media, the Indian Government will remain focussed on the economic side of the Chabahar project, in particular, and Iranian engagement, in general. India understands very well that it would be futile to court Iran to openly ally with it against Pakistan, as the former does not want openly hostile relations with a nuclear-armed country that is a close ally of the Sunni monarchies of the Gulf region. Also, India is well aware that it should not entertain any hope of using Chabahar for naval purposes as Iran is unlike Pakistan, whose strategic assets are available to the highest bidder as long as it shares the objective of containing India. This is not a problem from the Indian perspective, however, as the experience of China in Myanmar and Sri Lanka and that of the US in the Middle East and Pakistan, counsels against an overbearing approach. While showing its earnestness in deepening ties, India should allow Iran to choose the pace and scale of engagement.


About the Author

Vikas Kumar is an assistant professor of economics at Azim Premji University, Bengaluru.
Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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