Here's how Trump's decision to pull out of the Iran nuclear deal may affect India

Here's how Trump's decision to pull out of the Iran nuclear deal may affect India
Prime Minister Narendra Modi with Iranian President Hassan Rouhani releases a postal stamp commemorating growing economic and trade ties between India and Iran, at Hyderabad House in New Delhi on Saturday.Photo by Manvender Vashist

In an unsurprising turn of events, US President Donald Trump decided to withdraw from the Iran nuclear deal yesterday (May 8th), four days before the May 12th deadline.

In doing so, the President, a self-described expert on deals, made good on a long-standing threat to pull out from what he called the “worst deal ever”, which was painstakingly negotiated by seven countries over the course of two years. He has also decided to reimpose the economic sanctions that were placed on Iran prior to the signing of the agreeement, and instructed the Treasury Department to draw up further penalties.

While our global edition has offered a rundown on the nearest winners and losers from the US’s withdrawal, the negative effects of the decision will be felt all over the world, including in India.

Here is how India stands to lose in the short term.

Oil prices may increase, and Indian consumers may suffer

The imposition of sanctions on Iran will lead to a reduction in the global supply of oil, which in turn will lead to higher prices. Iran’s oil exports, which currently stand at 2.5 million barrels a day, could fall by as much as 500,000 barrels a day. Prices are already high owing to a production cutbacks by OPEC countries and falling production in Venezuela.

Concurrently, India’s financial health has taken a turn for the worse as oil prices have risen. The country imports 80% of its oil and is already dealing with the depreciation of the rupee, which closed at a 15-month low of 67.13 to the US dollar earlier this week. Higher oil prices will lead to a heavier import bill relative to exports, and India’s current account deficit will widen further. The current account deficit increased by nearly 70% to $13.5 billion last year-, more than 2% of GDP.

The widening of the current account deficit means that India will have lower foreign exchange inflows, leading to a further fall in the relative value of the rupee. As a result, Indian consumers will have to deal with higher prices of imported goods other than oil. They will also have to contend with the duties imposed on oil by the government in the last few years when oil prices were low. These are an important source of revenue for the government, and since it needs the money more than ever, it will be forced to pass on the impact of higher oil prices to consumers.

A number of deals with Iran will be suspended for the time being and China could benefit

In addition to looking elsewhere to supplement its oil import requirements, India could also be forced to suspend a number of deals with Iran amid the ongoing uncertainty.

In February 2018, a visit to New Delhi by Iran’s President, Hassan Rouhani, led to the signing of nine bilateral deals. The most significant of these was the agreement to develop and lease the Chabahar port in southeastern Iran. As part of a plan to counter China’s regional influence, India has promised to invest $500 million in the port, which will help it bypass the China-Pakistan Economic Corridor and gain access to Central Asia and Afghanistan from Iran.

The port will provide new trading routes and greater connectivity to the region. In fact, in October last year, the Indian government successfully sent a consignment of wheat to Afghanistan from Chabahar.

However, new sanctions from the US could threaten India’s involvement in the port and derail its investment plans. Despite India’s support for the Iran deal, it is also beholden to the US and its allies in the Middle East - Israel and Saudi Arabia. Additionally, sanctions from the US could also stall the operation of the International North South Transport Corridor, a trade agreement between Iran, Russia and India that will give the latter an unprecedented level of access to the Central Asian region.

If India reneges on its commitment to the Chabahar port, Iran could be forced to seek the assistance of China, which will further isolate India. Hence, its ability to counter China’s expanding influence is contingent on it’s relationship with Iran. The Modi government’s foreign policy heads will have a tricky balancing act to maintain in the short term.