Setback for Modi after Trump’s withdrawal from Iran nuclear deal

President Trump’s unilateral withdrawal from the Iran nuclear deal may have major consequences for Indian Prime Minister Narendra Modi. The leader of the right wing BJP party, who is reportedly considering early general elections by the end of this year, will face several economic challenges in light of Trump’s decision to renege on the agreement known as the Joint Comprehensive Plan of Action (JCPOA), concludes a report by the American think tank Brookings.

With the deal, which Modi described as a “triumph of diplomacy and sagacity” requiring lifesaving intervention by European leaders, the Indian Prime Minister may see the political gains that he was able to make during years of low oil price wiped off as he contends with the threat of sanctions and a high oil price.

India is the world’s third largest oil consumer and imports three-quarters of its supplies. Iran has been a major source of its oil; third to Saudi Arabia and Iraq, who are first and second respectively. While Delhi, like other European capitals, may seek exemptions in order to continue trading with Tehran, which is in no way guaranteed, its main concern will be a hike in the price of oil.

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According to the report, India under the Modi government have benefited from lower oil prices in recent years. “When Modi took office, the price for the Indian crude basket was $108.05 per barrel; just before the Iran deal, it was $57.19 per barrel; and by the end of 2015, it was $33.36 per barrel. This gave India’s economic policymakers more fiscal space and Modi more political space—both of which will be hurt by much higher prices”. With oil prices already crossing $70 per barrel and likely to go up, Modi may find that his fiscal and political space is narrowed. In an election year this may be detrimental says the report.

Trump’s withdrawal also threatens one of Modi’s major infrastructure projects. Regional connectivity is a major goal for India and Iran is seen as being vital to constructing a corridor to Afghanistan and Central Asia (and eventually via the International North South Transport Corridor even further). “This objective—and China’s base in Djibouti and its role in developing the Pakistani port of Gwadar- has shaped India’s desire to invest in upgrading the Iranian port of Chabahar”, says Brookings.

There has been a significant growth in bilateral deals between Delhi and Tehran in non-oil sectors. Expanding the non-energy sectors was one of the main reasons why Iranian President Hassan Rouhani, visited India last February.

The extent to which Modi will feel the pinch of Trump’s withdrawal from the deal is likely to depend on wheatear India can negotiate exemptions from the US to continue with things as they are. But the likelihood of Delhi, negotiating hard bargain for such an exception and jeopardise its relations with Washington is unlikely, concludes the report.