India Caught in Coils of Washington’s Iran Policy

With Washington pushing ahead to end India’s beneficiary status as a developing nation under the Generalized System of Preferences, affecting as much as US$5.5 billion in Indian goods, while demanding that the country suspend Iranian and Venezuelan oil shipments, the Modi government finds itself in a sticky situation.

Iran is not only one of Delhi's main oil suppliers but has deep cultural and political ties with Tehran that make it difficult for it to join US efforts to launch punitive measures against the Islamic Republic. Nor is India alone. Turkey, China, Japan and others are seeking to resist the sanctions. But the cost of losing access to the US electronic financial system effectively would bring commerce to a halt.

The US decision has jacked up global oil prices, which could lead to higher domestic prices for petrol and diesel across India in a sensitive poll season. This can hardly be music to the ears of Prime Minister Narendra Modi, who is seeking a second term while battling an enlivened opposition and anti-incumbency factors like farmer distress, lack of jobs, tensions with Pakistan and a rise of Hindu nationalism. Six weeks of election voting began on April 11 across the country with the Bhartiya Janata coalition expected to squeak through with a narrow victory.

The US move on sanctions, which ends six months of waivers that allowed Iran’s eight biggest buyers of crude to continue to import limited volumes, is intended to bring Iran's oil exports to zero, denying Tehran its main source of revenue. In November 2018, the US reimposed sanctions on the core areas of Iran's energy, ship building, shipping, and banking sectors. However, Washington granted six-month waivers from economic penalties to the eight main buyers of Iranian crude – China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece – until the eight could find alternative sources for their energy supplies and avoid roiling global oil markets.

Trump’s decision to end preferential duty-free imports has pushed Delhi in the past several months to significantly diversify its energy basket by adding more biofuels and other eco-friendly fuels to reduce its dependence on crude.

But apart from the energy needs of a 1.3-billion strong nation, driven by an ambition to develop a world-class manufacturing base, other factors are at play. India is Iran’s second-biggest customer, importing 24 million tonnes of crude in 2018-19. Theoretically, state companies are free to price fuels according to international rates, but they come under pressure from the government to keep rates low, particularly during elections. Domestic fuel rates have changed little in a month while international crude oil prices have jumped by US$7 a barrel, or about 10 percent, in the same period. Worse, India is also under American pressure to whittle down oil purchases from Venezuela.

India’s Petroleum and Natural Gas Minister Dharmendra Pradhan has assured the country that New Delhi would get additional supplies from other major producing countries in order to deal with the situation arising out of discontinuation of Iranian imports.

“Indian refineries are fully prepared to meet the national demand for petrol, diesel and other petroleum products,” he said via Twitter, adding that the country has a robust plan to ensure the adequate supply of crude oil to refineries over the coming months.

Be that as it may, Indian officials have told Asia Sentinel they are studying the US decision on waivers and its implications, and that the US announcement will not deter them from pressing their case to make Washington rethink its decision.

Certainly there’s little doubt, according to foreign policy analysts, that American recalcitrance on the issue could well deepen the fault lines in India-US bilateral relations, already strained over issues of trade and commerce. Despite close political ties, Indo-US trade is widely seen to be performing sub-optimally at nearly a quarter of its potential at US$126 billion according to 2017 figures.

India may be the world’s largest beneficiary of the GSP, dating from the 1970s, but strains with the US have widened over what Trump calls its high tariffs and concerns over New Delhi’s e-commerce policies. Trade relations have particularly worsened since last year after India introduced new rules on e-commerce dictating how conglomerates such as Inc and Walmart Inc-backed Flipkart do business.

In a letter to the US, two US senators have urged a delay in adopting the plan against India and seeking more negotiations. “While we agree that there are a number of market access issues that can and should be addressed, we do remain concerned that the withdrawal of duty concessions will make Indian exports of eligible products to the United States costlier,” the senators, John Cornyn and Mark Warner, wrote. “Some of these costs will likely be passed on to American consumers.”

The co-chairs of the Senate’s India caucus of more than 30 senators called for withdrawal to be delayed until the end of India’s 39-day general elections, whose results are expected on May 23.

Political observers feel Washington should heed the senators’ call. “The move would help to minimize damage to Indian economy while presenting an opportunity to resolve market access issues and arrest the downward spiral in US-India relationship,” said Parel Mahajan, an analyst with a New Delhi-based think tank.

To assert its position as Asia’s third-largest economy and a significant US trade partner, however, New Delhi is also mulling over the prospects of retaliatory tariffs against the US. Economists are also advocating stronger and sustainable measures to streamline India’s oil procurement methods and minimize price fluctuations.

Suggestions include opening up the retail oil market to accelerate its integration with the larger retail industry in a move to lead to efficiency improvements and productivity gains. Also under discussion are initiatives like stepped-up resource allocation for electric bus fleets and public transport, a modern tax design for oil products to bring them under goods and services tax.

The Kirit Parikh committee is also reportedly working on a roadmap to liberalize oil retailing. The panel was set up by the Ministry of Petroleum and Natural Gas in June 2013 to advice on Pricing Methodology for Diesel, Domestic fuel. The committee has made several suggestions for improving the country's energy security including reducing the country’s dependence on oil imports.

Neeta Lal is a Delhi-based editor and journalist and a longtime contributor to Asia Sentinel. She tweets at @neeta_com