India’s Export Opportunities Along The International North South Transport Corridor


Posted: 23rd June 2021 10:16

The recent Suez Canal blockage, which cost the global economy a hefty damage amounting to US$9 billion, has amplified the optimistic outlook towards the International North South Transport Corridor (INSTC) as a cheaper and faster alternative multimodal transit corridor.

The INSTC connects India with Central Asia, Russia, and has the potential to expand up to Baltic, Nordic, and Arctic region.

This connectivity initiative, when viewed with its underlying commercial advantages, can bring about a transformative development in the region, facilitating not just transit but humanitarian assistance as well as overall economic development.

For India, it provides a shorter trade route with Iran, Russia, and beyond to Europe, creating scope for increased economic engagement.

Furthermore, when looked at in sync with the Ashgabat Agreement, the INSTC could be the key to India’s “Connect Central Asia’’ policy.

What Is The International North South Transport Corridor?

The INSTC is a 7,200 km-long multimodal transportation network encompassing sea, road, and rail routes to offer the shortest route of connectivity. It links the Indian Ocean to the Caspian Sea via the Persian Gulf onwards into Russia and Northern Europe. It is aimed at reducing the carriage cost between India and Russia by about 30 percent and bringing down the transit time by more than half.
 

It was launched in 2000 with India, Russia, and Iran as its founding members and work on actualizing the corridor began in 2002. Since then, INSTC membership has expanded to include 10 more countries – Azerbaijan, Armenia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkey, Ukraine, Syria, Belarus, and Oman. Bulgaria has been included as an observer state. The Baltic countries like Latvia and Estonia have also expressed willingness to join the INSTC.

Architecture Of The INSTC: Transport Routes And Modes

The INSTC spirals across the following branches:

Recently at an event called “Chabahar day”, organized March 4, this year, during the Maritime India Summit, India proposed the inclusion of the India-invested Chabahar Port in Iran within the scope of the INSTC. India also suggested the extension of membership to Afghanistan and Uzbekistan and envisaged an “eastern corridor” comprising a land route between Kabul (Afghanistan) and Tashkent (Uzbekistan). Chabahar port holds significance for India as it helps India bypass its fractious neighbor Pakistan, which has blocked India’s access to Afghanistan and other landlocked Central Asian Region (CAR) countries. Chabahar is also often pitted against the China-invested Gwadar port in Pakistan. Meanwhile, the Iranian government has invited China and Pakistan to consider the integration of Gwadar into the INSTC, calling it Chabahar’s “twin sister”.

What Is The Economic Rationale For The INSTC?

Even though the progress of the corridor has been sluggish in the last two decades, it has recently picked up pace, motivated by several geopolitical and geo-economic developments. While there may be several factors, including rebalancing of power, at work in the conceptualization and steering of the corridor, its sustainability and success mainly rests on its economic viability as well as commercial benefits accrued by the participating nations. The primary reason it may hold solid ground in the future is its equality-based approach, which provides the same level playing field to all the members, juxtaposed with its Chinese counterpart, the patronage-based Belt and Road Initiative.

India has accorded priority to economic integration with the member nations and has accordingly concluded Double Taxation Avoidance Agreements (DTAA) and Bilateral Investment Protection Agreements (BIPA) with some member states.

Potential Transport And Logistics Gains From INSTC

The INSTC envisages development and simplification of transportation services catering to both goods as well as passengers, while at the same time providing an increased market access to the member nations who can also benefit through various backward and forward linkages.

The member nations can develop themselves as logistics and transit hubs but can also focus on developing themselves as manufacturing hubs through hard and soft infrastructural development. The focus is also on enhancing route security, besides focusing on environmental protection.

What Are India’s Export Opportunities Along The INSTC?

Iran

Indian exports to Iran have substantially reduced by half since 2020, following the harsh economic sanctions placed by former US President Trump on Iran. However, with US President Joe Biden taking office in January 2021, some relief in the sanctions can be expected. India and Iran’s relationship has deepened with India being Iran’s major oil importer. Despite the sanctions, India and Iran have managed to sustain this relationship, with few hiccups.

In the period between April 1996 to March 2015, the cumulative approved Indian FDI in Iran stood at US$183.4 million. Large Indian companies, such as ESSAR, OVL, Tata Steel, Persia Rohit Mines & Industries Company, etc., have a presence in Iran.

India’s exports to Iran include rice, machinery and instruments, metals, primary and semi-finished iron and steel, pharmaceuticals and fine chemicals, processed minerals, manmade yarn and fabrics, tea, organic/inorganic/agro chemicals, rubber manufactured products. Over 80 percent of India’s imports from Iran are comprised of crude oil.

Other potential items that can enhance Indian exports to Iran are machinery and instruments, electrical, electronic equipment, vehicles other than railway, tramway, plastics and plastic articles, optical, photo and technical apparatus, pharmaceutical products, animal vegetable fats and oil, ceramic products and pearls, precious stones.

Afghanistan

Although Afghanistan is not yet formally a part of INSTC, India has proposed its inclusion at the recent 2021 maritime summit. India’s exports to Afghanistan have almost doubled in the last five years, touching almost US$1 billion in 2020. India’s imports from Afghanistan have also increased by 72 percent between 2015-16 and 2019-20 to reach around US$530 million in 2020. Lacking a direct border with Afghanistan, India has been denied connectivity by Pakistan. Therefore, India and Afghanistan instituted an Air-Freight Corridor in 2017.

The Chabahar port in Iran is operational, and was used to ship 75,000 MT of wheat as humanitarian food assistance to Afghanistan in September 2020 due to the pandemic.

The top five items that India exports to Afghanistan are textile, sugar, transmission towers, tobacco, and medicines. The import basket from Afghanistan to India is dominated by dried figs, asafoetida, raisin, saffron caraway fennel, and onion.

Russia

The bilateral trade between India and Russia stood at US$11.6 billion in 2019 wherein Indian exports stood at US$3.92 billion and Russian exports, US$7.24 billion. Both countries have agreed to grow bilateral trade to reach US$30 billion by 2025.

Major items of export from India include electrical machinery, pharmaceuticals, organic chemicals, iron and steel, apparels, tea, coffee, and vehicle spare parts. Major items of import from Russia include defense equipment, mineral resources, precious stones and metals, nuclear power equipment, fertilizers, electrical machinery, articles of steel, and inorganic chemicals.

Turkey

India and Turkey have robust trade ties with trade volume reaching its pinnacle in 2018 at US$8.6 billion. In 2020, the trade volume declined to US$5.7 billion due to political disagreements and possibly the pandemic.

The major Indian exports to Turkey include petroleum products, auto components/parts, man-made yarn, fabrics, made ups, aircraft and spacecraft parts, plastic raw materials, organic chemicals, dyes, industrial machinery, etc. Imports from Turkey include industrial machinery, broken/unbroken poppy seeds, machinery and mechanical appliances, iron and steel articles thereof, inorganic chemicals, pearls and precious/semi-precious stones and metals (including imitation jewelry), granite and marble, etc.

Several major multinational Indian companies like TATA, Mahindra, TAFE, etc. have invested in Turkey. The total Indian FDI in Turkey is US$125 million and Turkey has invested FDI worth US$223 million in India as per data provided by the Embassy of India in Ankara.

Azerbaijan

India’s bilateral trade with Azerbaijan has increased substantially from around US$50 million in 2005 to around US$1,093 million in 2019. However, due to the pandemic, it declined to US$583 million in 2020.

The exports from India to Azerbaijan comprise of rice, mobile phones, drugs/human vaccine, centrifugal liquid pumps, taps and valves, kali and natrium bromide, devices and equipment of automatic regulation and control, meat, mechanical spades and excavators, stones, tiles and granites, etc. The primary import from Azerbaijan to India is crude oil. Other import items from Azerbaijan are iodine, jet fuel, and plants for perfumes. The surge in bilateral trade can be put down to the launching of the Baku-Tbilisi-Chaney (BTC) oil pipeline to the Mediterranean port, from where Indian oil companies have been buying substantive quantities of crude oil.

What Are The Potential Export Sectors In India That Stand To Benefit From INSTC?

The sector that stands to gain most out of the inherent advantages that INSTC offers in terms of shorter distances, is that of perishable goods, including fruits and vegetables, that comprise more than 50 percent of India’s export basket to the European Union.

Another sector that can gain from the shorter distance and faster delivery time are high value items like ATMs, industrial printers, 3D printers, robotic assembly accessories, etc.

Also, it has been seen that trade between India and the CIS region is inclined towards primary commodities and lower-end manufactured goods. In recent years, though, India is in active pursuit to become a global manufacturing hub, as also indicated by the recently launched production-linked incentive schemes. India aims to establish itself as a leading manufacturer of pharmaceuticals, electronics, aircrafts and accessories, etc. and these Indian manufactured goods can find attractive markets along the INSTC corridor.

Another sector poised to benefit the most out of this corridor is cross-border e-commerce. Domestic e-commerce has been growing at an exponential pace and with the internet connectivity of the region strengthening, the scope for global e-commerce has also widened. High freight and shipping charges have always been a roadblock but with the INSTC logistics network, especially rail connectivity, these shipping and freight charges will be substantially cut. In India, Aurangabad in Maharashtra state has been identified as having the potential to emerge as a hub catering to e-commerce firms.

Other important sectors that can expect a surge in exports are:

What Is The Progress Of INSTC? A Look At Funding And Other Logistics

Often hailed as a game changer in India’s Eurasian and Central Asia policy, the pace of INSTC development was unfortunately slow. However, with connectivity prospects improving after India’s accession to the Shanghai Cooperation Organization (SCO) in 2017 and Ashgabat Agreement in 2018, developments along the corridor have picked up pace.

In 2020, the state-owned Container Corporation of India (Concor) and Russian Railways Logistics Joint Stock Company (RZD) signed an MoU to transport cargo via the INSTC. Now with US President Biden displaying a more progressive approach, the outlook for full operationalization of the corridor looks promising. Also, it is expected that under Biden, the US will reverse Trump’s abrupt move of pulling out of the Joint Comprehensive Plan of Action (JCPOA) concerning Iran and renegotiate US entry into it, thereby easing economic sanctions on Iran. If that happens, it will bode well for economic integration in the INSTC bloc.

Funding

While India has backed the development of the port, free trade zone, and railway line at Chabahar, Azerbaijan has loaned a sum of US$500 million to Iran for the completion of the 167-kilometer standard gauge rail line connecting Rasht and Astara. The Asian Development Bank (ADB) has increased the line of credit to Azerbaijan from US$200 million to US$400 million for the development of the 441-kilometer Baku-Yalama railway line – connecting the capital of Azerbaijan with the Yalama border at Russia. This railway line comes within the framework of INSTC. 

Both ADB and Islamic Development Bank have provided loan financing to the Kazakhstan-Turkmenistan-Iran railway link that is also being funded by the governments of Kazakhstan, Turkmenistan, and Iran.

Iran has also invited China to invest in the corridor. Japan, through the Japan International Cooperation Agency (JICA), Japan Bank for International Cooperation (JICA), and other banks has also expressed interest in financing INSTC projects and investing in the Chabahar Free Trade-Industrial Zone.

The Path Forward

Although the INSTC, if realized in full, can open massive opportunities for all the stakeholders, the actualization of all its potential advantages will require a lot more in terms of finance, cooperation, political will, as well as strategic planning. The ambitious INSTC needs a regular, dedicated, and planned source of funding to bring its objectives to fruition, which is unfortunately absent. In fact, lack of proper funding and a single large investor has been widest bottleneck till date. It also lacks private sector funding mainly because of certain security threats like spread of the Islamic State (IS) in the region, domestic political instabilities etc. Another issue which needs to be looked at is differential tariffs and customs in the region. Although many countries in the region are in talks for harmonization of duties along the corridor.

For the trade volume to increase, a more important step is to increase informational connectivity to create demand. A look at the export of goods from South Asia and Southeast Asia to Europe via the Suez Canal route presents a disappointing picture. Unless an effort is made to correct this demand deficit, a project as huge and ambitious as INSTC will lay under-tapped and unfulfilled.

However, the INSTC provides the opportunity to member countries to collaborate in a manner that fosters increased economic integration. Creation of industrial parks and special economic zones (SEZs) to develop sectors of mutual interest, such as pharmaceuticals and agriculture, will also add commercial and substantive value to this connectivity corridor.


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