Context

• Recently, International North South Transport Corridor’s (INSTC) western corridor was operationalized to connect India with Europe for the first time.

Key Details

• 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.

Back to Basics

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:

• Central branch: It begins from the Jawaharlal Nehru Port in India’s western state of Maharashtra (in the Indian Ocean Region) and connects to the Bandar Abbas port on the Strait of Hormuz. It then passes through the Iranian territory via Nowshahr, Amirabad, and Bandar-e-Anzali, runs along the Caspian Sea to reach the Olya and Astrakhan Ports in Russia.
• Western branch: It connects the railway network of Azerbaijan to that of Iran via the cross-border nodal points of Astara (Azerbaijan) and Astara (Iran) and further to Jawaharlal Nehru port in India via sea route.
• Eastern branch: It connects Russia to India through the Central Asian countries of Kazakhstan, Uzbekistan, and Turkmenistan. 
• 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.
• 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.
  • India has signed DTAAs with Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russian Federation, Turkmenistan, Ukraine, and Uzbekistan. Negotiations are ongoing for signing the same with Azerbaijan and Tajikistan. Steps are being taken for initiating negotiations with Georgia and Moldova.
  • India has signed BIPAs with Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan, Tajikistan, Ukraine, Russian Federation, Armenia, and Belarus. Steps will be taken for signing BIPAs with the rest of the Commonwealth of Independent States (CIS) countries, that is, Azerbaijan, Georgia, and Moldova.

Potential transport and logistics gains from INSTC

• Short distances and faster deliveries lead to cost reduction: INSTC boasts of the shortest trade route connecting India with Russia. According to a study conducted by the Federation of Freight Forwarders’ Association of India (FFFAI) in 2014, INSTC was 30 percent cheaper and 40 percent shorter than the traditional Suez route, slashing the transit time to an average of 23 days for Europe-bound shipments from the 45-60 days taken by the Suez Canal route.
• Increased market access along with creation of new markets: Cheaper cost of transport will lead to increased competitiveness of Indian exports, opening access to unfulfilled markets.
• Facilitation of transit by helping develop regional transit and logistics hubs: Under the agreement, Iran and Azerbaijan are expected to develop into transit hubs. In India, Nagpur and Bhiwandi from Maharashtra state are identified as potential logistics hubs. With an estimated capacity of 20-30 million tons of goods per year, the corridor facilitates transit and trade connectivity.
• Creation of regional supply chains across Eurasia: The creation of diverse supply chains across Eurasia might surely alter the stereotype of East as the producer and West as the consumer.
• Increased trade volume between member nations: The trade statistics among the member nations of INSTC reveal a dismal picture so far. Exports from India form a mere one percent of total exports in the CIS region. With Russia, India’s trade has so far been restricted to energy and defense. India also has a huge trade deficit with Russia. The most cited reason for negligible trade in other goods is lack of information on Indian markets among the Russian business class. The trade situation in the Central Asian Region is no better with India having a negligible share in the countries’ imports. The main reason for low trade with the landlocked Central Asian countries is lack of connectivity, which has now been taken care of with Iran’s Chabahar Port. The INSTC will not only enhance physical connectivity but will also improve knowledge and information sharing mechanisms.
• Creation of backward and forward linkages: The member nations along the INSTC will get the opportunity to transform themselves into specialized transit and manufacturing hubs through infrastructural development. This will also simulate local industry, manufacturing, and trade along the way, thus transforming this transport corridor to a developmental corridor. It will also help in creating further employment and growth opportunities, leading to betterment in overall economy of the bloc.
• Supply of energy as a commodity: With India being the fifth largest energy consumer in the world, consuming 4.4 percent of the world’s total, improved connectivity and trade prospects with the energy rich member nations cannot be overlooked. Also, another prospect of an oil pipeline development along INSTC cannot be ruled out.
• Synchronization of INSTC with Ashgabat Agreement and Organization of the Black Sea Economic Cooperation (BSEC): Linking INSTC to existing transport initiatives in the Central Asian region like BSEC (Europe-centric) and the Ashgabat Agreement (Central Asia-centric) will expand trade linkages and opportunities in the region.
• Potential materialization of free trade agreements (FTAs) in the region: There have been talks of signing an FTA between India and the Eurasian Economic Union (EAEU): It will provide the much-needed impetus to the trade momentum between different countries in the region. Access to the EAEU nations alone will open India to a market of 173 million people.
• Possible synchronization with Baltic, Nordic, and Arctic corridors in the future: Alongside the North Sea-Baltic Corridor, INSTC may synchronize with the Scandinavian-Mediterranean (ScanMed) Corridor and the planned Arctic Corridor in the future.

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.
• 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.
• 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.

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. 

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.
• Other important sectors that can expect a surge in exports are:
  • Agriculture and allied products (coffee, tea, spices, edible fruits, fish)
  • Articles of apparel (not knitwear)
  • Engineering – aircrafts and parts thereof
  • Organic chemicals
  • Rubber and articles
  • Optical, photo, and medical instruments
  • Project exports pertaining to petroleum, heavy engineering, and hydrocarbon sectors

What is the progress of INSTC?

• 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.
  • From April 2021, under the Biden administration, the US has been working towards reversing Trump’s abrupt move of pulling out of the Joint Comprehensive Plan of Action (JCPOA) concerning Iran and renegotiating US entry into it, thereby easing economic sanctions on Iran.
  • On June 21, 2021, INSTC’s western corridor was operationalized to connect India with Europe; a Finnish logistics company will be the first to use the multimodal corridor to dispatch consignments from Vuosaari in Finland to Mumbai in India.
• Recent developments including resumption of nuclear talks between Tehran and the international community as well as an agreement signed at the St Petersburg International Economic Forum in June have sped up or made possible the early operationalization.

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 INSTC has four main routes

• The Caspian route connects the Russian and Iranian ports on Caspian Sea. Only about 12-16 percent of Russia-Iran container traffic use these links. Indian shipping companies rarely do. 
• The western route connects the Russian and Iranian railways through the territory of Azerbaijan, which is emerging as a key hub for the INSTC. 
• The eastern route links the railway systems of Russia, Iran, Turkmenistan, Kazakhstan and Uzbekistan, and is fully operational and considered to be the most successful. Iran’s gateways to Central Asia are at Sarakhs (Serakhs in Turkmenistan) and Incheboron (Ak-Yayla in Turkmenistan).
• The Armenian North-South Road Corridor is an ongoing 556-km project to connect ports on the Persian Gulf with Georgian ports on the Black sea. This will link landlocked Armenia (with its borders on the west with Turkey and on the east with Azerbaijan closed) to the INSTC and beyond.

Challenges for INSTC

• Development of the required infrastructure has been slow.
• INSTC projects are mostly financed through loans provided by the ADB, the Eurasian Development Bank (EDB), and other institutions, or by INSTC members investing directly in their own or their neighbors’ projects.
• Several ongoing conflicts among INSTC member states.
  • Artsakh (Nagorno-Karabakh) conflict between Armenia and Azerbaijan, the Turkey-Armenia-Azerbaijan and Armenia-Nakhijevan (Azerbaijan)-Iran railways are not operating.
  • The connection between Russia and Georgia through Abkhazia is also not operating because of the conflict between Georgia on one side and Abkhazia and Russia on the other side.
  • The Russo-Ukrainian conflict makes transportation through Eastern Ukraine extremely difficult.
  • The chaotic situation in Syria and the unstable situation on the Turkish-Syrian border are making it impossible to develop the INSTC in that direction. In addition, Iran’s economy and financial sector are under the heavy sanctions imposed by the US.
• Russia also faces Western sanctions due to its military and political involvement in Ukraine, making it harder for Moscow to make major investments in infrastructure projects in other INSTC member states.
• Russia is also participating in China’s BRI through the New Eurasian Land Bridge and the China-Mongolia-Russia Economic Corridor.

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.

Source: India Briefing

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