India-Iran Relations – Significance & Challenges – Explained Pointwise

The India-Iran bilateral relationship is a deeply historical, civilizational, and strategically complex partnership. It is characterized by India’s enduring need for energy security and regional connectivity balanced against the immense pressure of US sanctions and the need to maintain strong ties with Israel and the Gulf states.

Historical development of India-Iran Relations:

Significance of India-Iran Bilateral Relations:

1. Energy Security:  Iran was one of India’s most reliable and crucial suppliers of crude oil, often providing favorable credit terms. Cooperation in petrochemicals, urea plants, and energy transit remains important for India’s long-term needs.
2. Gateway to Eurasia (Chabahar Port): The port of Chabahar on Iran’s southeastern coast is India’s most critical strategic asset in the country. It provides a reliable sea-land route that allows India to bypass Pakistan entirely to reach Afghanistan and the resource-rich Central Asian Republics (CARs). This port ensures humanitarian and trade access to landlocked Afghanistan.
3. Regional Stability: India and Iran share a common interest in a stable Afghanistan, free from extremism and drug trafficking. This convergence of security concerns allows for crucial dialogue and cooperation on regional security challenges.
4. Economic Complementarity: Iran has abundant natural resources (oil, gas, fertilizers), which India requires, while India can supply engineering goods, pharmaceuticals, and agricultural products. This economic complementarity ensures a natural basis for trade, provided the financial transfer mechanisms can be secured.
5. Historical Ties: India and Iran share millennia of cultural, linguistic (Persian), and intellectual links, creating a foundation of trust and people-to-people bonds. This “civilizational partnership” adds legitimacy and public support to current diplomacy.
6. People-to-People: There are strong academic and religious links, with India being home to large Shia and Zoroastrian communities. This shared history provides a foundation of goodwill even when diplomatic ties are stressed.

Challenges in India-Iran Bilateral Relations:

1. Oil Imports Halt (2019): Under immense pressure from the Trump administration’s “maximum pressure” campaign, India was forced to halt all oil imports from Iran in 2019. This eliminated the historical economic foundation of the relationship and cost India a reliable supplier that offered favorable payment terms (like rupee payments).
2. Delayed Execution of Projects: Delays in operationalizing the Shahid Beheshti terminal at Chabahar Port and related railway/INSTC projects, caused by sanctions, bureaucratic inertia, and lack of commercial certainty, have limited the transformative impact of India-Iran connectivity.
3. Rail Link Abandonment: The crucial Chabahar-Zahedan railway link, intended to connect the port to Afghanistan and the INSTC, saw India withdraw from a major financing role due to the sanctions risk, severely undermining the port’s long-term utility for regional connectivity.
4. Geopolitical Rivalries & Balancing Act:
   • India’s warming relations with the US, Saudi Arabia, and especially Israel (Iran’s regional foes) have made it harder to pursue a robust Iran partnership.
   • Iran’s increasing engagement with China and Pakistan (including strategic and infrastructure projects) creates additional friction and limits India’s influence in West Asia and Central Asia.
5. Economic & Trade Constraints: With oil trade diminished, India’s exports (pharmaceuticals, food products) have also stalled, and Rupee-Rial payment mechanisms remain vulnerable to external disruptions.
6. Divergences on Regional Security & Terrorism: Conflicting approaches on Afghanistan, Iran’s support for non-state actors (Hezbollah, Hamas), and periodic statements by Iranian leaders on Indian domestic issues (e.g., Kashmir, treatment of Muslims) cause diplomatic discomfort.
7. Religious & Societal Sensitivities: India’s Sunni-majority Muslim community and Iran’s Shia leadership sometimes lead to divergent positions and occasional rhetorical friction, especially on issues like the status of Indian Muslims and Kashmir.

Areas of Cooperation:

1. Strategic Connectivity:
   • Chabahar Port: Joint development and operationalization of the Shahid Beheshti terminal at Chabahar provides India critical access to Afghanistan, Central Asia, and Europe. This investment is a geopolitical imperative for India because it:
     • Bypasses Pakistan for trade and humanitarian aid access to Afghanistan.
     • Secures a foothold on the Gulf of Oman, enhancing India’s maritime reach.​
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   • International North-South Transport Corridor (INSTC): Iran is a vital transit country for the INSTC, a multi-modal network designed to connect India to Russia and Europe via sea, rail, and road. Cooperation here aims to reduce freight transit time and costs by up to 40%.
2. Energy Partnership:
   • Oil and Gas Trade (Historical): Before US sanctions forced a halt in 2019, Iran was one of India’s most reliable and crucial suppliers of crude oil, often offering favorable terms and payment arrangements (including rupee payments).
   • Natural Gas and Fertilizers: India continues to explore long-term deals for natural gas and has a strong interest in procuring urea and other fertilizers from Iran, which are critical inputs for Indian agriculture.
   • Collaboration includes oil field exploration, development of LNG infrastructure, and power transit.
3. Trade & Economic Engagement:
   • Non-Oil Trade: India exports essential commodities like rice, tea, pharmaceuticals, and engineering goods to Iran, while importing chemicals, raw materials, and fruits. Efforts are ongoing to find viable, non-sanctioned payment mechanisms to sustain this commerce.
   • Newer engagements include cooperation in petrochemicals, renewable energy, machinery, and the auto sector.
4. Shared Interests in Multilateral Forums: Both nations cooperate in multilateral organizations (e.g., NAM, SCO) on sovereignty, regional security, and rule-based order, supporting India’s profile as an independent, pluralistic voice.​
5. Science, Technology & Education:
   • MoUs on cooperation in science, technology (including pharmaceuticals, biotech, nanotechnology, water management), academic exchange, and joint research.​
   • Student and researcher exchanges, government scholarships, and scientific workshops deepen educational ties.
6. Cultural & People-to-People Ties:
   • Longstanding civilizational bonds, including shared Persian heritage, language, and cultural exchanges are fostered through cultural centres, tourism, and artistic collaborations.​
   • India hosts a vibrant Iranian diaspora and continues to promote cross-cultural understanding.
7. Healthcare & Pharmaceuticals: Enhanced collaboration on pharmaceutical exports and regulatory standards, especially after 2025, and joint initiatives in healthcare supply chains.​

Way Forward:

1. Prioritize Chabahar Port and Connectivity Projects:
   • Ensure timely completion and expansion of Chabahar Port and associated infrastructure (Zahedan rail link, integration with INSTC), positioning India as a reliable connector to Central Asia and Afghanistan.​
   • India must finalize the long-pending long-term lease agreement for the Shahid Beheshti terminal at Chabahar. This provides stability, confidence to operators, and secures India’s presence.
   • Use Iran’s full membership in the Shanghai Cooperation Organization (SCO) and regional trilaterals (e.g., with Armenia) to advance connectivity and trade.
2. Establishing Sustainable Financial Mechanisms:
   • Rupee-Rial Mechanism: India should explore reviving and formalizing a rupee-rial payment mechanism for non-oil trade, focusing on essential Indian exports like pharmaceuticals, tea, and rice. This mechanism avoids the US dollar system entirely and is crucial for sustaining commercial ties.
   • Barter Arrangements: Encourage structured barter arrangements where India can receive Iranian fertilizers or raw materials in exchange for Indian finished goods, bypassing cash transactions that trigger sanctions flags.
3. Expand Trade & Investment:
   • Conclude trade agreements and bilateral investment treaties to diversify the trade basket—pharmaceuticals, agriculture, engineering goods, and new services—with a special focus on MSMEs.​
   • Promote mutual FDI and joint ventures, modernize customs cooperation, and reduce red tape for smoother bilateral commerce.
4. Strengthen Counterterrorism & Security Collaboration: Institutionalize intelligence sharing, joint military exercises, and crisis management, addressing mutual concerns in Afghanistan and broader regional instability.
5. Maintain Strategic Autonomy & Balance Geopolitics:
   • Sustain India’s de-hyphenated approach—robust ties with both Iran and Israel/US/Arab Gulf—while asserting independence in foreign policy decisions and regional engagement.​
   • Engage in dialogue with the US/EU to mitigate the impact of sanctions on vital connectivity and energy projects for regional stability.
6. Leverage Cultural & People-to-People Bonds: Strengthen educational, cultural, artistic, and diasporic engagement, capitalizing on shared historical ties to build goodwill and resilience.
7. Utilise Multilateral Forums: Advocate for common interests in SCO, BRICS, UN, and regional platforms to promote a multipolar order, support rule-based engagement, and coordinate on Afghanistan and counter-terrorism.

Conclusion: By prioritizing the physical connectivity through Chabahar and securing innovative financial channels, India can ensure the relationship survives the current geopolitical winter and is positioned to flourish when external conditions change.