India’s Need for Iran’s Oil a Sticking Point for U.S. and Its Sanctions Regime

India's Foreign Minister S.M. Krishna and Hillary Clinton.

India’s Foreign Minister S.M. Krishna and Hillary Clinton.

The drift in Indo-U.S. relations noted by many observers during President Obama’s current term may be reversed if the coming American elections change the setting in Washington. The same may be said of the Indian national elections, which could be held next year (instead of 2014) if the Prime Minister so chooses under India’s electoral system.

In recent days, there have been some interesting developments in the relationship that have caused some optimism in American circles, not entirely matched by Indian commentators. Secretary of State Hillary Clinton recently returned from a trip to Asia, during which she held talks with India’s Foreign Minister, S.M. Krishna, on May 8th, preparatory to the 3rd U.S.-India Strategic Dialogue to be held in Washington, D.C. on June 13th.

Both parties agreed on the importance of their economic relationship, with Clinton stressing increased trade and investment, and Krishna hoping the relationship “would grow much faster and realize its enormous potential.” There was agreement also on Afghanistan, with Clinton welcoming India’s support for the “people’s efforts to build a more peaceful and prosperous future.” Among other things, India has organized a meeting of potential investors in Afghanistan from the surrounding states, to be held in June.

But beneath the diplomatic rhetoric, Clinton hinted at India’s need to open its markets to American retailers (like Walmart). Krishna in turn urged that more mobility be allowed for their IT and other specialists in the U.S. The Foreign Minister raised with Secretary Clinton India’s concern with American protectionism, a particularly troublesome intimation of which was the restrictive nature of visa applications (challenged by India at the WTO last month) that Indian professionals from the services industry are required to complete, the recent increase in visa fees to $2,000, and the high rejection rate of these applications. Instead of being reassured by the Secretary on this score, he was undoubtedly disappointed to hear that U.S. policy would persist, as would the rise in rejections.

As for the historic civil nuclear agreement signed in 2008, which raised so many hopes in both countries, all that could be claimed by the Secretary was discussions by public-private agents (of India and the U.S., respectively) on how “to move forward together.” But the Foreign Minister urged faster progress “towards contractual steps.”

Finally and most significantly, India’s continued import of Iranian oil was discussed. This is, of course, a key issue for the U.S., which believes strongly that Iran is intent on developing nuclear weapons. To deter these plans, it has declared an oil embargo on Iran, and has been imposing harsh sanctions on those who import oil from that country. But while several nations (mostly European as well as Japan) have been exempted, Washington threatens to impose sanctions on India and China after June 28th, two of the biggest importers of Iranian oil. While India agrees, in general, with Washington on the nuclear issue, and did in fact decrease its much-needed oil imports from Iran several times, Clinton was not prepared to say that India’s concessions (which New Delhi perceives as substantial) would be enough to exempt New Delhi from sanctions by the end of June. Indeed, Clinton repeatedly pressed India — not only during the talks with Krishna, but also in several hard-hitting and unyielding public statements — to make further cuts.

The Foreign Minister continued, nevertheless, to acknowledge Iran’s rights as a member of the Non-Proliferation Treaty, and stressed India’s full implementation of all United Nations-mandated sanctions on Iran. He thereby signaled India’s disapproval of what India views as punitive sanctions imposed on Iran by the U.S. and the West in general, which moreover do not adequately take into account India’s urgent need for increasingly expensive fuel imports (with the Rupee weakening sharply) which can be met only partially from alternate sources, due to financial, technical and other reasons. As if to underscore New Delhi’s stance, Indian exporters were holding talks with an Iranian trade delegation in one part of the capital, while Secretary Clinton was meeting with India’s Foreign Affairs Minister in another part.

It remains to be seen if the relationship will indeed be hurt, as Indians have warned, if the U.S. proceeds to impose sanctions on India because of its continued imports of Iranian oil on which the nation is so heavily dependent. Both sides hope that some of the outstanding issues can be resolved at the June 13 “strategic dialogue.” Washington may be more optimistic, given India’s greater flexibility in negotiations (especially compared to China). The pot may have been sweetened the previous week when Defense Secretary Leon Panetta is in New Delhi for talks with Prime Minister Manmohan Singh and Defense Minister A.K.Antony, when India is expected to sign additional arms deals. On the other hand, New Delhi may surprise Secretary Clinton this time.