INDIA: INTERESTS IN THE PERSIAN GULF

Created: 8/1/1981

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India: Interests in the Persian Gulf I

Intelligence Assessment

!Information available as ofas been used in the preparation of this report Additional Information was obtained, bul the conclusions of the report were not

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India: Interests in the Persian Gulf mm*

Judgments

Persian Gulf provides India with aboutercent of the oil it importsarket forercent of iis exports. Fur the past decade. India has sought to strengthen ties with states in the Gulf for the purpose ofecure oil supply, expanding Irade, offering Indian technical expertise and skilled labor, and more recently encouraging Arabin India.

In large measui. ndia was able to cope with the changed conditions in world energy and trade inecause of its close ties with the nations of the Persian Gulf. Expanding economic relations substantially reduced India's trade deficit,teadily increasing flow of remittances from Indian laborers working in the Gulf strengthened the balance of payments. With payments prospects now deteriorating, India more than ever will count on dealings with the Gulf countries to ease its economic difficulties, j

has pursued two main political goals in the region. It has sought to prevent the emergence of an Islamic-Pakistani alliance directed against India. And it has sought to mitigate the danger of superpower conflict by urging Gulf countries to be nonaligned. especially by rebuffing US efforts at closer mililary and security coopoation. Boih goals were at the core of Prime Miniucr Gandhi's visit to Kuwait and the United Arab Emirates inhe trip was Gandhi's first official visit abroad since returning to power in0 and the first by an Indian Prime Minister to the Gulf area. |

A constant supporter of Arab causes, India has bolstered its standing with the Gulf countries by demanding Israel's unconditional withdrawal from all occupied Arab territories, including East Jerusalem, and by recognizing the PLO as the sole and legitimate representative of the Palestinian people. India nonetheless carries some heavy political baggage in its dealings with the Gulf stales. Three wars with Muslim Pakistan, frequent domestic outbreaks of violence between Hindus and Muslims, and strong ties tooviet Union continue to tarnish India's image in the Gulf.

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jE-rly Relalions With tbc Gulf

In the years fc4lowihg independence from Britain, India's preoccupation with economic dcvclop-meni and its rivalry with Pakistan precluded much movement into the Persicn Gulf. Without theand military capacity totrong presence, India inased its ties to the Gulf states prirmrily on emotional commitments to anti-olonialism. India supported Arab causes partly out of moral conviction but also to counter Pakistan'sin the area. New Delhi saw Pakistan's design to forge an Islamic alliance with Iran and tbe Gulf Arab statesons-range challenge to its security even though Pakistani efforts never set well with the Gulf countries who viewed them as ill-conceived andPan-Islam ism continues to get majorin India's strategic thinking as well as in its foreign and domestic policy because of India's large Muslim minority ofillion people.^|

The introduction of superpower rivalry into theGulfajor issue for India in. India sought to counter ihe intrusion wilh the concept of nonalignment. As conceived by Prime Minister ': Jawahorlal Nehru, who led India until his deathonalignment held that national independence could not be sustained without independence in for-eign affairs. The concept found bespreadmong the growing national me ements in thelates and beyond and helped create conditions that kd to active cooperation between India and thetales in the late sixties. The closest ties to the Araborld developed with Nasser's Egypt, but theseiability as the Gulf slates competed wiih Egypt for regional leadership. The Indo-Pakistani5 and the declining position of Egypt inrab world further weakened India's influence inulf. By the, India reacted lo its growing j. isolation in the region by cultivating stronger lieshe Gulf countries, reducing |ts involvement in inter*rab rivalries, and loosenlntt lies with Egypt. (|

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Indian moves to improve relations1th the Gulf states began to show positive results in the. India's decisive military victory over Pakistan1 left it the dominant power in South Asia, and New Delhi sought to extend its influence into Ihe Gulf. India war therefore concerned about the Shah'sbuildup and his plans to extend Iran's naval influence beyond the Gulf into the Indian Ocean. In addition, India was again fearful lhat Pakistan would successfully turn calls for Islamic solidarity into financial and military support for yet another con-

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India's drive lo improve ties with the Gulf states alsotrong economic basis. As its oil import bill grewew Delhi aggressively sought export markets in the Gulf, particularly for such nontradittonal items as manufactured goods andn.Mer laK Collaboration in construct km and industrial projects was abo promoted, as wasof Indian uiborers. The higher cost of oil imports was eased by credits from Iran and Iraq lhat deferred payments. Indian exports to the Gulf increased al rates considerably greater than to any other single area, and remittances by Indian nationals from the Gulf slates pushed foreign exchange reserves to record levels. On the political front India avoided entangling itself in inter-Arab squabbles and was able lo maintain good relations with the Gulf countries by supporting the Arab consensus denouncing the Camp David Accords. The result was that India's new relationship with the Gulf both contributed to its econornic well-being during the tatter half ofnd enhanced its stall ,

Recent Danlopnults New Delhi sees Ihe political turmoil that has swept (he Gulf countries9 is threatening to iu economic and security interests. The collapse of the Shah's regime in Iranovernment that was developing strong economic tics to India and that sponsored programs bringing India closer to the Gulf states. Tho outbreak of ihe Iran-Iraq war0 cut

off India from iu major oil suppliers, forcing New Delhi io make costly spot market purchases toontinuing flow of crude oil. The Soviet invasion of Afghanistan increased superpower rivalry in the region as the United Slates countered Ihe Soviet -invasion by strengthening iu ties to Pakistan. This has given life to one of New Delhi's worstakistan rearmed through US military aid and Arab financial assistance for Pakistani arms purchases. After fighting three wars with Pakistan, New Delhi is concerned thai Islamabad will use iu new weaponsourth confrontation.

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Since her return to office inrime Minister Gandhi has moved to strengthen relations with the Gulf stales. Last year, the PLOin New Delhi was elevated to full diplomatic statusesture toward ihe Arab world. The rnnv-was designed to deflect domestic and foreign criticism of Gandhi's soft line toward Ihe Soviet invasion of Muslim Afghanistan. Gandhi's visit to Kuwait and the United Arab Emirates in1 marked ihe first time an Indian Prime Minister had visited the Gulf. She sought long-term oil supplies from both countries, pushed for joint ventures involving Arab financing, and apparently lectured her hosts on the virtues of nonalignment h

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Gandhi's effc-ts, however, have probably done liitl to enhance India's influence among the Gulfndiaupplicant in seeking long-term guarantees for oil imports, Arab petrodollars, and other economic advantages. Inlcr-Arab disputes make il difficult for New Delhi lo preserve good lies with all ihe countries in Ibe area, and balancing the conflicting interests is difficult. New Delhi's reluctance to lake sides in ihe Iran-Iraq war has not helped India's standing in either Tehran or Baghdad. In addition, Gandhi is on the defensive at heme and wiih countries in ihe nonaligned movement, including Saudi Arabia,her foreign policies are increasingly seenongruent wiih Moscow's.^

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Feono-nic Relations

Trade. India's trade with Persian Gulf countries grew spectacularly during the last decade. Eiporufrom about SIillion1 to more0hile imporu. reflectinghigher oil prices, climbedillion in ihe same period. The importance of the Gulf in India's total trade has also changed significantly since ihe. Eiporu to the Gulf, which amountederccni of India's foreign salesccounted forercenthile the share of imports roseerceni toercent as shown insss

Exports. The composition of India'so ihe Gulf changed dramatically duringrom tea and spices to manufactured goods. Eiporu nowa growing share of capital- and technology-intensive items where India competes directly against developed countriesarket share.he Ilsi year for which complete trade data arcercent of India's exporU of iron and steel products andercent of metal manufactures went tolfales of these ilems for industrial development programs have resulted in sizablein csponsudi Arabias well as to Kuwait and to the UAE. Exports to Iran peaked65 million but have slumped badly since then, while sales lo Iraq have been erratic. Indian businessmen arc looking lo both countries aslucrative markets*]however.(Thcy hope thai once the fighting slops India will participate in rebuilding both economiesoajanjj

Continued growth of manufacturedivotal if India is io avoid serious balanct-of-pay menuin. As India's fastest growing markcu in the less developed countries, tbc Gulf slates are being counted on as major contributors lo boosting Indian export growth. New Delhi's Sixth Five-Yearrojects an average volume growth of exportsnnually, upercent in. Export growth of manufactured products is projected to grow even more rapidly: iron and steel products, for example, are slated to increaseercent annually and enginee; ing goodsercent Implicit in (he Plan's export projections is continued success in tapping Persian Gulf markets |

Imports. Crude oil and petroleum products account for nearly all of India's imports from the Persian Gulf countries. Prior io the outbreak of the war, Iran and Iraq together were providing India with two-thirds of

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1 'I'll I* I ts oil imports, and the Persian Gulfhole and may notrovided aboutercent. Although Iran resumed oil productioneliveries toon after the war began, Iraq was nol able with! Iran ando do so. The loss of Iraqi crude forced New Delhi to suppliers andurchase oil on Ihe spot market'at higher prlcet and Persianajor factor In/pushing India's oil Import bill,AE andp byillion1 billion in the fiscal year ,ndings of, Iraq's oil ndia's oil import shipments to India had stillprewar lewis 'shown Injtable 3.

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the war is settled ar ts. As an outgrowth of, India has lined up seven Iso diversifying iU sources iliers. This year, for examr

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Exports of Key Cwismodllles to tbe8

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I tract workers brought inio the region legally,ntered on visitors visas and stayed to seek wor*ntered illegally by small boat or across sparsely policed borders. There have been some crackdowns and deportations of these illegals, but for the most part this horde of workers remains, doing menial work. There are also Indians in the Gulf who own and operate businesses, usually with an Arabhese establishments hire Indian executivesast army of clerks from the homeland. Outsideran. Indian engineers, bankers, and otherare scattered throughout the Golf inined numbers (see table 4)

I Prospects in theoint lo slower growthremittances from the Gulf lhan inorld Bank projeetionson India's balanceradual increase In total privatetransfers from an7 billionillionemittances couldthan the World Bank has projected ifopportunities open: up as Iran and Iraq 1 I

their damaged economies. Indian labor is generally well received in the Gulf, and Indian firms, especially contractors, are optimistic another boomhe offing. Thus New Delhi will continue to seek better relations with the Gulf states in order toavorable climate for Indian labor and for garnering

new construction contracts.

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Aid and Foreign Investment

Official development assistance from the Persian Gulf

countries to Indiaelatively new phenomenon.

The' aid flows began4 following the initial rise

in world oil prices. At its peakhis aid

reached0 million, roughlyercent of

the aid India received. For the, aid

disbursements from Gulf States amounted to SI.8

biilton or aboutercent of the aid disbursements .

India received. The bulk of the aid, nearlyerceni,

was provided by Iran during the Shah's regime. Since

the Shah's ouster, Iran has stopped disbursing aid to

India, and the aid flow from the Gulf countries has

also eased considerably. So far this year, India has

illion loan from Kuwait for balance-

of-payments supportillion loan from

Saudi Arabia for electrical power projects. Generally.

India wants credits on soft ter.ns from the Gulf

countries with small service charges, low interest

rates, and long repayment terms like the Kuwaiti

loan.which carries an interest rate ofercent and

repayment terms spread overears (see

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boat, ihe level of aid from ihe Persian Gulf countries is likely lo hover aroundillkm annually in the next few years despite recent Indian efforts to boost both aid and investment inflows.olicy chance announced latendia said it would welcome OPEC equity investment in ihesector, even if new investors are unable to conlrihuic technological skills. The actionecade-old policy discouraging all foreign investment lhat did not bring technological or marketing skills with it. New Delhi is giving piSority lo attracting OPEC funds into fertilizer, cement, petrochemicals, and other priority industries in an effort to reduce imports of these products. OPEC capital inflows would also help finance India's growing currentdeficit, which8 billion in the fiscal year ending1 and is eipecied to be in4 billion range again this yearl

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Petrodollar investment, like investment from other

counlries. will be restricted toerceni of total

equity under most circumstances. For the first time.

however. India's foreign inveslmenl policy openly

discriminates among countries to Ibe detriment of

American and West European capital. Even so. the

response to dale by Persian Gulf counlries has been

slow. There has been considerable talk, and Ihe

Indians appear optimistic, but no significant amount

of capital has been forthcoming. While Gulf countries

appear willing lo invest in India, ihey are more interested in quick-yielding inveslmenl opportunities than in providing capital for the long-gestationndustry projects thai then:J

Bilateral Relations

Iran. Indiaong way to go before relations wiih the Khomeini regime are as close as thev were with ihe Shah's. During Ihe Shah's era. India'} relations with Iran grew substantially, although conflicting attitudes toward Pakistan, Iraq, and the USSRposed problems. The Shah cultivated India by providing oil and economic aid and by his visionegional common market in which India would play an important role. Ke also developed close personal relations with Prime Ministers Gandhi and Desai. For its part, India valued Iran as Ihe major source of its crude oil. some of which was supplied on long-term credit, androwing market for exports.

The centerpiece of Indian-Iranian economicunder the Shah was an agreement signed5 lhat committed Iran io finance the Kudremekh iron ore project in the southern Indian state of Karnataka. Iran was toillion tons of iron ore concentrates per year forears for steel plants io be built at Ahwar and Esfahan. The export price of the iron ore was linked lo the project's capital cost, initially set0 million. Iran5 million

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loward the cost of the project0 million in advance payments for ore concentrates, but stopped payments inhegovernment has soured on the project and probably will not finance it under existing terms.s postponed construction of the sled plant a' Esfanan. and the Ahwaz plant is far behind schedule. Meanwhile, the cost of Kudremckhincreased to0 million.H

Unless the project is recast, and there are some signs that an accommodation may yet be worked out. India appears to be stockhite elephant. The ore concentrates from Kudremckh are designedfor Ihe gas-fired direct-reduction steel plants Iran was to build, and (here are few similar plants elsewhere in the world. Moreover, tbe high alumina and silica content of Kudremckh ore has madecustomers wary and the venture financially risky.artial solution.lanning toclletization plant,ost of0 million, to allow the ore to be used in conventional milb at home

and abroadajBfjaj

Other ambitious Indo-lranian schemes planned during ibe Shah's regime have been quietly put aside. These plans involvedillion of Iranian financing for projectsaper plant in Tripura, an aluminum complex in Orissa. and the extension of the Rajastlian canal in Northwest India. Despite Ihe loss of Iranian firsncing and the problem of settling the Kudremckh project. New Delhi has opted to play down its differences with Iran. India needs Iranian oil and is also looking to increcse exports and participate in construction when Iran begins rebuilding its damaged economy. Recentat improving bilateral economic relations have been frustrating for both countries. Tehran hni sought to hire Indian technicians, engineers, and medical personnel and to purchase Indian equipment for Its oil and fertilizer industries, but much of what Iran wnnts is either unavailable or in short supply in India. J

Iraq. Relations with Iraq haveteadier course than those with Iran. Close economicwas established in3 with an agreement that assured India crude oil supplies in exchange for construction of several infrastructure projects In Iraq.

Since then Iraq hasegular supplier of oil and. when the Iranian revolution deprived Indiaraq boosted its exports89 to help meet the Indian shortfall. Iraq became India's major tource of oil9roviding roughlyercent of import needs. Although tbe Iran-Iraq war temporarily halted Iraqi oil exports to India, they resumed in1 butate of. In addition lo supplying oil, Iraq provided credits69 lo help India pay for its oi'. Last year Baghdad4 million interest-free loan, which was billed as compensation for the higher prices charged for Iraqi oil (see tabic *)

In recent years, the Iraqis have shown increasini receptivity to clover relations withurge inils by high-level officials9 to the outbreak of the Iran-Iraq war led to further commercial links and exchanges in scientific and military fields. Indian companies have been active in Iraq wjih somendian contractors working on overrojects valued alillion. The large Indian projects in Iraq include the constructionouses in Baghdad (valued6refabricated houses at Khoraleveral sewerage projects, bridges, roads, hotels, office buildings, airports, grain silos, and an expansion of Baghdad University. About half of these contracts were grantedrior to the outbreak of war. Work on many had barely begun when it wasby ihe fighting. Indian contractors have since attempted to minimize theiwsr's effect by keeping enough workers al each project toresence and satisfy Baghdad that they have not violated their contracts.

India and Iraq have cooperated in military mat'ers, partly because both signed friendship agreements with the USSR in thend they depend heavily on Moscow for mililary equipment.

Million US I

Table 6

India:

Oil Credits From the Gulf Countries

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Saudi Arabia, India has had chronic difficulties in its relations with Saudi Arabia. Indian socialism, its friendship with the Soviet Union, communal problems with India's Muslim minority, and win with Pakistan make it difficult for New Delhi toloser relationship with the Saudis. An example of the difficulty India has had is the fact that the Saudis have banned the entry of Sikhs, an important and influential Hindu seel, from entry into the Kingdom.

Despite these difficulties, commerce between India and Saudi Anbia has grown steadily since the. Indian exports ofillion annually in ihclimbed0 million by the end ol the decade- The Saudis purchased industrial and construction materials while exporting cude oil.r abouterceni of India's oil imports. There are00 Indian worker* in Saudi Arabia, most of them from the southern state ofof India's most literatetheir knowledge of English has given them an advantage in finding jobs in Saudi Arabin.

Ths Saudis have shown some interest in investing In India under New Delhi's modified investment policy, Saudi Foreign Minister Saud's visit lo India in1 was the occasion for announcing an agreement tooint commission to identify projects for equily investment. At lhc same lime, tbe Saudis announced loansillion to India forof two powerJ

The Small Gulf States. India has historical lies with the smaller slates of the PersianBahrain, the United Arab Emirates. Qatar, and Muscat and Oman. Indeed, ihe smaller sheikhdoms were once ruled from New Delhi as part of British India, and the Indian rupee was legal lender in many of these countries until tbe. Guirand government leaders regularly t'jvel to Inu'ia for vacation and medical treatment, and many have been educated in India. |

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India's current economic ties lo the countries focus mainly on increasing exports to Kuwait and the UAE and on efforts to attract equity investments. India has shared in ihe development boom in Kuwait and the UAE by increasing exports of machinery andd sieel products, as well as byoreitems like spices and tea. Exports to the two countries,illionumped lo0 millionhe UAE began s'-oplying oil lo India5 and willn I'-Sl'Mogether the twoill provideercent of India's oil import needs this year. |

India's new foreign investment policy has had some success among the smaller Gulf stales. Two ArabEmirates Commercial Bank and the Bank ofestablished branches inThe Al-Ghurian Group of Industries, based in Dubai, may invest in two projects in the Indian slateillion alumina projectillion seamless steel tube manufacturing plant. The plan'calls for Al-Ghurian to import the entire aluminatonsa proposed aluminum plant in Dubai. In addition, the Indian slate of Maharashtra is negotiating forillion in equity investment from the UAE for ihe manufacture and export of oil rigs and forother oil-based equipment industries. There is also an Indian proposal for the UAE to setil refinery on India's west coast. Under ihe proposal, the UAE would finance the refinery, supply it with crude, and import the refined products. a_

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