Beyond oil: India’s deep stakes in its relationship with Iran amid regional conflict

Israel’s attack on Iran, probably with tacit support from the US, should be a reason for India to worry as its Islamic neighbour has been a long-standing diplomatic and economic partner.

Iran is important to India for multiple reasons, including its geographical location and rich energy resources. In fact, the Chabahar port project — being jointly developed in Iran — is of crucial importance to India as it would be crucial for connectivity to Afghanistan and the resources-rich Central Asian countries, bypassing Pakistan.

Here is a detailed look into some important aspects of India’s relations with Iran.

1. What kind of historical ties do India and Iran share?

Besides sharing a civilisational history, including a common homeland, linguistic and racial past, Iran continued to be an important neighbour for India after it gained independence in 1947. Way back on March 15, 1950, India and Iran signed a friendship treaty for perpetual peace and friendship.

In more recent times, the Tehran Declaration signed in April 2001 by then Prime Minister Atal Bihari Vajpayee and Iranian President Seyyed Mohammad Khatami, highlighted the potential for economic cooperation and directed the formation of time-bound frameworks for cooperation in agreed areas.

This was followed by the New Delhi declaration which covered various areas of bilateral cooperation, including economic collaboration, hydrocarbons, science and technology, education, reconstruction of Afghanistan, and combating international terrorism. In 2015, India and Iran signed an MoU to jointly develop the Shahid Beheshti Port at Chabahar, Iran.

2. How important has Iran been as a supplier of oil to India?

Before the West imposed stringent economic sanctions against Iran for its alleged nuclear activities, the country used to be amongst the top three suppliers of oil to India for a long time. Critical infrastructure, such as the Mangalore Refinery and Petrochemicals Ltd (MRPL), was built with the capability to process Iranian crude oil.

Iran was a preferred supplier for India as it used to extend favourable terms, including discounted prices and extended credit periods. Oil supplies continued irrespective of the UN sanctions against Iran.

When the nuclear-based sanctions against Iran were lifted in 2015 by the Western countries, including the US, after the Iran nuclear deal (JCPOA), was agreed upon, it came as a big relief to India.

In 2018, when the US re-imposed its sanctions after getting out of the nuclear deal, India set up a rupee payment mechanism, to partly pay for the oil in Indian rupee, to get past the US sanctions. This system worked for a short while.

3. When did India stop buying oil from Iran and what was the outlook going forward?

India had to stop purchasing oil from Iran in 2019 after the US ended oil waivers granted to eight countries, including India. Some experts are of the view that India respected the sanctions on Iran as it was already, in certain ways, ignoring some of US’ sanctions against Russia and probably did not want to upset America too much.

However, India had maintained hopes of resuming oil supplies from Iran before the West Asia crisis flared up last year. Now, with Israel attacking Iran, India’s aspirations of buying oil from Iran have been forced to the back seat, yet again.

4. How important is Iran as an export destination for India?

While traditionally Iran has had a substantial trade surplus with India because of its oil supplies, it also was an important export destination for certain items from India including semi/wholly milled rice, black tea, fertilizers, organic/inorganic/agro chemicals, pharmaceuticals, yarns and fabric. In fact, exports to Iran were as much as $5.3 billion in 2013.

However, the fall was sudden and sharp since 2019, after India stopped buying oil from the country, with exports in FY25 at $1.24 billion. Rice exports to Iran at $ 757 million contributed more than half to total exports.

Exporters hope for return of normal relationship with Iran as the country holds a lot of potential for growth.

5. How is Iran strategically important to India and what is the significance of the Chabahar port?

At present, Iran is extremely important for India as a strategic partner as it offers connectivity, particularly through the Chabahar Port and the International North-South Transport Corridor (INSTC). These provide alternative trade routes, bypassing Pakistan and enhance access to Central Asia and beyond.

India is looking at increased economic engagement and cooperation with Central Asian countries including Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. Central Asia — endowed with natural resources such as crude oil, natural gas, gold, copper, aluminium and iron — is likely to remain the fastest growing sub-region this year and next, according to the World Bank.

India’s investment in the Chabahar port project is also seen as a move to counter China’s growing influence in the region, particularly its Belt and Road Initiative (BRI).

Because of the economic and strategic importance of the Chabahar port, India had been continuing its collaboration with Iran despite lack of clarity on US sanctions. However, if the Iran-Israel conflict escalates, it may not be physically possible for India to continue the development of the port