BRI versus India’s Logistical Masterstroke International North-South Transport Corridor (INSTC)

While China is aggressively pushing its ambitious Belt and Road Initiative (BRI) to export its surplus capital and merchandise, India is slowly and steadily moving on an alternative network of sea and rail routes called the International North South Transport Corridor (INSTC), in partnership with Iran.

This ambitious project – if successfully implemented – could have a significant impact on businesses in the region, lowering transportation costs, and boosting trade and commerce. However, it is not without its challenges.

The 7,000-kilometer transport corridor will connect Iran, Azerbaijan and Russia along the Caspian Sea and provide a shorter and cheaper route for shipping merchandise to Russia, and potentially to West European nations than the one in use today.

What is Driving India’s Push?

Once operational, the INSTC will cut the time taken in moving cargoes through the traditional route (from JNPT, Nhava Sheva, Mumbai via the Suez Canal, the Mediterranean Sea and the Strait of Gibraltar to Saint Petersburg, Russia) from 30 days to 20 days, according to an assessment by India’s Ministry of Commerce and Industry.

The substantially reduced shipment time, and in turn, reduced freight charges, will likely give a big boost to India’s economic engagement with the largely untapped Eurasian and Central Asian region, by making trade more efficient and cost-effective for manufacturers and traders.

The bilateral trade and investment relationship can get a further boost if India can also expedite its free trade pact (which is currently under negotiation) with the Eurasian Economic Union comprising Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia, which has a combined GDP of over $4 trillion at purchasing power parity (PPP), by substantially improving the traders’ margins.

Two-way trade, which at present stands at $11.9 billion (FY2017-18) according to India’s Department of Commerce, is far below potential and currently suffers from inefficient logistics and a series of tariff and non-tariff barriers that need to be addressed on priority. The INSTC and the India-EEU free trade deal can provide the much needed negotiating platforms to address economic barriers. 

India has already invested $500 million in the development of Chabahar port in the Persian Gulf and also has plans to invest an additional $16 billion in Chabahar free trade zone. Besides, it is also funding a rail road project to link Chabahar to Zahedan on the Iranian border, which will further be extended to Zaranj in Afghanistan. Separately, India has already built the Zaranj-Delaram highway, which is well connected to major cities in Afghanistan including Kabul, Herat and Kandahar.

Therefore, the INSTC, along with now partly functional Chabahar port and related transport links, will open up an access to mineral rich but landlocked Afghanistan and other central Asian republics such as Tajikistan, Turkmenistan and Uzbekistan while bypassing a direct but virtually unavailable land route through Pakistan that doesn’t provide transit trade facilities to India.

These infrastructural developments will also make it commercially lucrative to ship merchandise to the largely untapped Eurasian region when traditional markets such as the EU and the U.S. are turning protectionist and creating new trade barriers for competitively priced imports from emerging economies like India. Moreover, India can also use the INSTC to move in oil and gas, fertilizers, minerals and metals that it is short of, from the Eurasian and Central Asian countries in a cost-efficient manner.

A Win-Win for Iran

Chabahar is also an interesting and viable prospect for Iran as its main sea port, Bandar Abbas, which accounts for over 85 percent of its merchandise trade, is not a deep-sea port and large ships can't dock there. Thus, Iran has to use Dubai as its major transshipment hub, which costs it millions of dollars, and adds to the transaction costs for both exporters and importers.

In contrast, Chabahar port is underused but it’s a deep-sea port. Thus, Iran would want to use it as its trade and transshipment hub like Dubai. It also makes strategic sense for Iran as Chabahar is outside the Strait of Hormuz and provides direct access to the Indian Ocean. Even if the Hormuz is closed for Iran, Chabahar can continue to function. Thus, it reduces Iran's vulnerability to international pressure, especially following the U.S.’ withdrawal from the nuclear deal.

Moreover, Chabahar also scores over Gwadar port in Pakistan, which lies 72 kilometers to the east and has been developed by China. Major commercial ports allow a draft depth of 20 meters so that cargo can be easily shifted from large ships to smaller ones. Gwadar, however, has a draft depth of less than 15 meters, and that could limit its commercial potential as it cannot handle larger vessels. Besides, it has only three berths at present while Chabahar has 10, and another deep-water berth is under development, that will have the capacity to handle very big oil tankers. All of this increases its potential for facilitating energy trade.

The INSTC will also bring benefits to other parties to the initiative, in addition to India and Iran. For example, it will increase Russia’s influence in the region from a geo-strategic perspective. Economically speaking it can open up new routes for the transport of Russian gas. Additionally, the initiative will generate transit fees for all countries through which the corridor route passes – and this will result in both direct and knock-on effects on their domestic economies as they will see growth in their industries and services.

Economic Potential Runs into Geopolitical Considerations

That, however, doesn’t mean that these projects will not face any problems. Of the many issues, the U.S. administration’s U-turn on the Iran nuclear deal is perhaps the most important one. creates further complications for investors and infrastructure companies, particularly when it comes to importing equipment for the development of projects or in terms of arranging financing. This could result in a slowing down of work on the infrastructure projects.

Moreover, following U.S. withdrawal, Japan too appears reluctant to continue investing in the region despite Iranian assurance that other than the U.S., everyone else is still on board.

Additionally, there’s also increasing pressure on India to stop buying oil from Iran, a country that needs to cooperate with India if the latter’s strategy around the Chabahar port project, the Chabahar-Zaranj-Delaram link and the INSTC are to work.

It is clear that there are discernible economic benefits to all the economies involved, and indeed to businesses in these economies. However, geopolitical gamesmanship in the region could yet trump the economic imperatives for greater cooperation.

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This article was first published by Brink Asia here