India has strengthened its alliance with Iraq over the past year, primarily due to energy dependence. The ISIL crisis in Iraq could have repercussions for India’s energy policy as well as its foreign policy dealings with the Middle East.
When the BJP took charge in New Delhi, a fragile Iraq was beginning to face a full-blown crisis as a brutally confident ISIL made inroads into regions beyond its traditional strongholds. Over the last three years, India never prepared itself adequately for the spill-over effects of the Syrian conflict into Iraq.
As a consequence, the new government is facing a situation, where it has to negotiate the release of 40 Indian workers abducted by militants, as well as plan the evacuation of 100,000 others spread across Iraq. The government is also staring at inflated oil prices that could well play spoil sport in reviving economic growth and restoring much-needed fiscal balance.
Reviving ties post Saddam
Almost a year ago, the now discredited Iraqi Prime Minister Nouri al-Maliki paid a historic three-day visit to India with a high level delegation on the personal invitation of former Indian Prime Minister Manmohan Singh. The strategic objective of policy makers in New Delhi was to forge a long-term partnership with Iraq on the energy front, including joint exploration and production and an agreement on crude supplies for a decade.
In the wake of expanding energy needs and a deadlocked Iranian nuclear crisis, New Delhi’s attempt to restore closer ties merged with Iraq desperately needing investment and expertise in re-construction. This energetic engagement, however, was happening at a time when Iraq was getting more fragile by the day.
ISIL spoiler
The crisis in Iraq came as an unanticipated challenge for the Indian government’s economic management and more broadly, its foreign policy approach towards the volatile region. As conflict spread, and ISIL advanced, international oil prices increased quite rapidly. 80 percent of India’s oil needs are met from abroad, and a prolonged spike in international oil prices could well disrupt the government’s plans to reignite economic growth as the inflation rate will climb.
Rising inflation will restrain the central bank from slashing key lending rates. If the government decides not to pass on the price to consumers, then the subsidy burden on the state-owned oil marketing companies, which Moody estimated to be USD 12 billion for fiscal year 2014, will increase. On the external front, there is a risk of higher oil import bill widening the current account deficit to bring down the value of the rupee.
The silver lining, however, is that the current account deficit is less than 2 percent of the GDP and at a four-year low. Forex reserves are comfortably high at USD 341 billion in the last week of June.
Any government must be prepared for all sets of contingencies, including a break-up of Iraq and a full-blown sectarian war in the region. Nonetheless, the Modi government can breathe a little easy as the ISIL journey may not last long. The despised group could soon face an all around assault from government forces across the region.
There is also a high possibility of history repeating itself by ISIL weakening from within due to a rift between different elements in the motley alliance. Moreover, the dip in oil production in Iraq so far is more a function of its own infrastructural shortcomings. It could fall more only if ISIL gains control over Baghdad, which is only a remote possibility. The only factor that could lead to a point of no return would be al-Maliki’s reluctance to cede power.
India’s long term challenge
Though the Modi government in the immediate moment has to worry more about the monsoon than Mosul, instability in its extended neighbourhood will persist for some years. The unravelling of order and security in the oil rich region will lead to more vacuous spaces in the event of American withdrawal under the comfort of shale boom.
India as the world’s fourth largest consumer of oil receives almost 63 percent of its imports from the Middle East. With the International Energy Agency projecting India’s oil import proportion to increase to 90 percent by 2030, dependence on the Middle East could well increase if the government does not revive domestic production, push for alternative sources and diversify imports.
Another crucial task for the government would be to secure against the spread of Islamism from the Levant all the way to Afghanistan and Pakistan. The Indian foreign policy approach to the Middle East has reached a watershed moment, compelling it to devise new ways to deal with rapidly changing political alignments and increasing number of stakeholders to protect its energy and security interests.
