TEHRAN IS JUST A FOUR-HOUR hop from Mumbai, but gets a fraction of Indian visitors compared to other West Asian cities. The headlines that the birthplace of Omar Khayyam makes—cyber battles, executions, disputed elections—overshadow the numbers, which hint at an economy waiting to boom. But Iran’s international isolation and China’s eagerness to rush in where others fear to tread prompt fears that India is missing a big opportunity.
Iran is West Asia’s largest economy—bigger than Saudi Arabia or Israel. It’s the world’s fourth largest oil producer. It’s also the biggest exporter of caviar. Internal and regional trade are thriving. The Tehran Stock Exchange (TSE), up nearly 55% since January, was the world’s second best performing market as of September. Oil is the third largest sector of the economy after manufacturing and agriculture, accounting for 10% of the economy. While oil grew by an average of 3% per year between 2000 and 2008, manufacturing grew by 11%. Iran’s consumer goods market is worth $200 billion (Rs 8.87 lakh crore)—nearly one-third the size of India’s. Like India, Iran has a young population (58% under 30). At the current exchange rate, its economy is as big as India’s was in 1991. Its gross domestic product ($360 billion) is similar to India’s on the eve of reforms ($327 billion in March 1990), and roughly one-third of India’s present GDP. In the eight years up to March 2008, Iran’s economy grew more than 6% a year on average. In purchasing power parity terms, it’s the world’s 16th largest—worth nearly $900 billion—with a per capita income of nearly $12,000. This puts it in the same league as Eastern Europe.
Rushda Siddiqui, faculty member and Iran expert at the Indian Council of World Affairs, New Delhi, says India must be innovative if “we want to protect our economic interests in Iran and not let countries such as China fill the vacuum.” Indian investment there is puny compared to China’s. Some fear that hesitation will lead to lost opportunities, as it did in Myanmar, where China has a 30-year concession to build hydroelectric dams and is building an 1,100 kilometre oil and gas pipeline.
Taking advantage of U.S. and E.U. sanctions, China has already displaced Germany as Iran’s biggest trading partner. In the first four months of 2010, its exports to Iran were worth $3.1 billion, up 42% from the previous year, according to the Chinese commerce ministry. Its imports from Iran during that time rose by nearly 50% to touch $5.4 billion. At this rate, trade between the two countries is expected to touch $25 billion in 2010. By contrast, India imported Iranian crude worth over $10 billion in fiscal 2010, while exports to Iran were around $1.85 billion, down nearly 27% year-on-year. China is displacing the E.U. as Iran’s key supplier of capital goods and industrial knowhow. For example, Chinese oil majors have reportedly invested $40 billion in Iran, and plan to partner it to build seven oil refineries.
“Sanctions have put India in a spot,” says Siddiqui. “They’re hurting us, but New Delhi cannot be seen defying the international community and openly embrace Tehran.” K.C. Singh, former secretary in the external affairs ministry and former ambassador to Iran, concurs: “The government has to balance India’s relationship with the West and its strategic interest in Iran. However, the environment for developing business relationships with Iran is adverse. The Indian private sector is caught in the crossfire of U.N. resolutions and unilateral sanctions by the U.S. and E.U.” Reliance Industries, once among the largest Indian exporters to Iran in dollar terms, no longer trades with it. ONGC Videsh, which has a 40% stake in the Farsi offshore block of the National Iranian Oil Company is reportedly seeking exemption from U.S. sanctions. Neither Reliance nor ONGC Videsh were available for comment.
Foreign ministry veterans say India lacks the leverage that lets China invest there. The U.A.E. has begun to conform to U.S. sanctions, they say, and the E.U. is pulling back, too.
An investor who is happy with his multimillion-dollar factory in Iran insists that Fortune India identify neither his company nor even the industry he’s in, for fear of a backlash from his North American and European partners. His firm is so anxious to hide its links to the theocratic Islamic republic that people don’t even utter its name: They just call it ‘I’.
So India’s presence remains small even where opportunity lurks. For instance, in 2009, Iran produced more than 1.3 million cars, making it the world’s 10th largest car maker. In this lucrative components market, India is represented only by a clutch of small-scale manufacturers based in Ludhiana and Delhi. In fiscal 2010, car parts exports to Iran were less than 0.003% of total auto component exports worth nearly $4 billion.
Some blame media scaremongers. “Iran’s image has been distorted by Western media. One visit will transform your perception of the people and economy,” says a senior official at a leading Indian businesses house, who does not want to be identified.
H. Ramesh, promoter of the Hyderabad-based TSS Group, probably one of the largest Indian investors in Iran with a steel billet mill and three pharmaceutical additives factories there, says he was drawn by Iran’s “growing market, abundant raw materials, and environmental laws that are not as restrictive as India’s”.
Indians who do business in Iran laud its modernity. “It feels like a European country, with wide roads, plush hotels, and express trains. Top brands vie for space on Tehran’s shelves,” says Mumbai-based petroproducts importer Tanvir Shroff.
Dubai-based H.K. Chopra, vice president, international sourcing and sales, at JK Tyre & Industries, says: “Indian food is easily available in Tehran, and there’s a beautiful gurdwara where I pray whenever I visit the city.” He’s there often: Iran accounts for nearly 6% of India’s tyre exports, and JK Tyre is one of the biggest players.
Iran, for its part, is open for business. A few years ago, it began to allow foreign portfolio investment on the TSE. Indians are among the privileged few who can get visas on arrival. During his April 2008 visit to India, Iranian president Mahmoud Ahmedinejad voiced optimism on ties with India. But the hurdles are many and complex.
It’s tough, for instance, to transfer funds. “An increasing number of international banks refuses to participate in transactions involving Iran. It takes less than 24 hours to transfer funds to Indonesia, but up to a week to Tehran. And banks charge five times the commission,” says Shroff.
“If things continue as they are, there is a danger of India-Iran trade and business relations falling into the hands of free-floating middlemen, which would hurt India’s economic interest in Iran in the long-term,” warns Siddiqui.
billion—nearly one-third the size of India’s.
“We can still trade if India ends the regulatory uncertainty. Right now, no one is sure how long the banking arrangement will last,” says Shroff, referring to the State Bank of India’s ad hoc system to facilitate trade with Iran in non-dollar currencies.
A senior official at a leading business house says the government is avoiding seeing what it doesn’t want to. “Love is blind. New Delhi is madly in love with Washington right now.”
With no policy overhaul likely, business relations with Iran are likely to remain small, hush-hush affairs.