India can re-energise its engagement in Central Asia amid Iran sanctions

Central Asia represents an area of considerable strategic interest for India due to its geographical location, mineral and hydrocarbon wealth, and prospects for the development of multiple trade corridors through land and sea routes. The five Central Asian economies of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan, hold nearly 31.26 billion barrels and 415.4 trillion cubic feet of oil and gas reserves respectively. Given the enormous and ever increasing energy demand of India and the significance of Central Asia in connecting India to Russia and Eastern Europe countries, the region appears as a natural geo-strategic partner for India.

India's trade with Central Asia was valued at $1.48 billion in 2017-18, and total foreign capital expenditure from India to the region, as tracked by fDi markets, amounted to only $1.31 billion during January 2003-June 2018. Although trade and investment with the region has been limited, Exim Bank analysis indicates that India has an untapped export potential of nearly $1.2 billion in the Central Asian region, and realisation of this potential could more than double the existing exports from India to the region. Clearly, there exists significant scope for enhancing commercial engagements.

Connect Central Asia: Developing alternate transport corridors

India's exposure in Central Asia has been predominantly limited by geopolitical factors with issues of territorial sovereignty blocking prospects of a direct land corridor between Northern India and Central Asia. Recognising the need for direct connectivity with Central Asia, the government launched a broad-based 'Connect Central Asia' policy, which has been gathering considerable momentum. Development of Iran's Chabahar and Bandar Abbas Ports form crucial links in the mosaic of initiatives undertaken by the government under this policy.

Upon completion, the Chabahar port is expected to serve as a transit hub connecting Indian ports with Afghanistan, Central Asia and Russia. This has been complemented by plans to link Mundra Port, Gujarat with Bandar Abbas, which shall connect India directly with the Iran-Turkmenistan-Kazakhstan railway network towards Russia and Eastern Europe.

The development of these infrastructure projects are critical for the deployment of the India-led International North-South Transport Corridor (INSTC). While the renewal of US economic sanctions on Iran could derail India's progress in establishing physical linkages with the region, a recent US decision to grant India a waiver from the sanctions will present considerable maneuvering space for India-Iran engagement.

Emerging multilateral route

While sanctions on Iran pose a barrier to India's economic interests in the Central Asian region, the country is increasingly exploring the multilateral route for strengthening trade and investment linkages with the region. Indian firms have secured nearly 1.9% of World Bank contracts (by value) for projects in Central Asia. India, in July 2018, also joined the European Bank of Reconstruction and Development (EBRD) as its 69th shareholder. This is expected to increase the prospective business opportunities for Indian suppliers, contractors and consultants in Central Asia where EBRD has a cumulative investment of approximately €9.6 billion.

Contracts awarded through open tendering constitute majority of the EBRD contracts, and Indian firms can leverage its EBRD membership for securing these contracts. Concomitantly, Indian financers could explore opportunities for co-financing with the EBRD. Presence of EBRD as a co-financier could considerably mitigate cross-border and payment risks for Indian financiers, and help promote Indian business interests in the region.

China-India: Competing interests, similar channels

India's economic interests in Central Asia are similar to those of China, a strategic competitor of India in the region. China is currently the region's largest trade partner and foreign investor, substantially enhancing its role. China has also undertaken substantial infrastructure investments in the region, which was once the epicenter of the ancient Silk Route. Xi Jinping's Belt and Road Initiative (BRI) looks to revive the traditional trade route through both bilateral and multilateral trade connectivity initiatives.

The multilateral route has also been explored by Chinese firms for imparting momentum to China's trade and investments in the region. Chinese firms have secured nearly 7.1% of total World Bank contracts in the region. China also became a member of the EBRD a year before India, in January 2017, and its success in effectively leveraging the EBRD membership is reflected in Chinese firms securing nearly €83.2 million worth of contracts during 2017, making it the country with the fourth highest share in total contract value during the period.

Both China and India are vying for the geo-strategic and economic advantages which the region offers. India's INSTC is analogous to China's BRI, its foothold in Chabahar finds resonance in China's development of Gwadar port, and its pursuits through the multilateral channel meets more fervent project bidding by the Chinese. While the channels of engagement are similar, India needs to significantly scale up its efforts in order to engage more constructively in the region.

Way ahead

India's trade and investments in the Central Asian region has been restrained by geopolitical factors. However, the Connect Central Asia policy, coupled with India's growing engagements with multilateral institutions operating in the region and the INSTC initiative, provides India with a unique opportunity to overcome geographic and geopolitical obstacles that have hitherto limited the presence of Indian commerce and business in Central Asia. Alongside, India needs a deft balancing act in Central Asia—matching China's steadfast progress, while concomitantly using diplomatic dexterity to alleviate challenges posed by the US sanctions.

Jahanwi and Shaantanu Shankar also contributed to the article. The authors are economists with the Export-Import Bank of India

NEW OPPORTUNITY

• The five Central Asian economies hold nearly 31.26 billion barrels and 415.4 trillion cubic feet of oil and gas reserves respectively 
   
• India’s exposure in Central Asia has been predominantly limited by geopolitical factors