Oil shock and surprise

Print edition : February 16, 2018

April 29, 1974: When Prime Minister Indira Gandhi called on the Shah of Iran at Niavaran Palace in Tehran. Photo: The Hindu Archives

March 25, 1974: Saddam Hussein, Vice-President of Iraq, in New Delhi. Indira Gandhi set up two task forces to maximise exports of projects, products, technology and skills to OPEC countries to pay for the oil India was importing. Photo: The Hindu Archives

How the Indira Gandhi government dealt with the oil price hike of 1973 by signing beneficial agreements with Iraq and Iran.

IN retaliation for Israel’s victory in the Yom Kippur Arab-Israeli War of 1973, the Arab countries of West Asia together set up a new international organisation, the Organisation of Petroleum Exporting Countries (OPEC). The first thing it did was to hike the price of crude oil from the then prevailing $18 a barrel to $40 a barrel.

At that time, India was importing about 50 per cent of its crude oil requirements from OPEC in hard currency and 50 per cent from the then Soviet Union on rupee payment terms. So, India was badly hit by OPEC’s sudden and steep increase in oil prices. How did it respond to this development? It responded in two ways—first by conserving oil consumption to the maximum extent and, secondly, by maximising exports to Arab member countries of the OPEC.

Prime Minister Indira Gandhi set up two inter-agency task forces, one under Mantosh Sondhi, Secretary, Heavy Industries, and the other under Lovraj Kumar, Secretary, Ministry of Petroleum. The mandate of both task forces was to maximise exports of projects, products, technology and skills to OPEC countries to pay for the oil India was importing from them. Thus, the Sondhi task force facilitated the setting up of a 110-km railway line in Iraq by the Indian Railway Construction Corporation (IRCON), on a turnkey basis and a major TV transmitter and TV studio complex in Baghdad by the public sector company Engineering Projects (India) Ltd (EPI) in collaboration with Mitsubishi Heavy Industries of Japan. The railway project was worth $300 million (all of which came to India), while the TV complex project was worth $100 million, of which 50 per cent came to India. Another major initiative was a series of new townships in Iraq. Five such projects executed by EPI were worth $800 million.

Meanwhile, the Lovraj Kumar task force planned and facilitated the setting up of two oil refineries, each with a capacity of four million tonnes of oil a year. The basic and detailed engineering for these refineries were undertaken by Engineers India Ltd (EIL), India’s premier design engineering and consultancy company. The plants and equipment were supplied entirely from India. The two projects were worth $1.2 billion. Meanwhile, President Saddam Hussein of Iraq asked Indira ji, whom he used to write to and whom he called “My dear Sister”, for senior pilots of the Indian Air Force (IAF) to train his pilots, as the mainstay of both air forces was the same military aircraft—the MiG-21, which both countries had imported from the then Soviet Union and which were already being manufactured in India. Thus, between 1974 and 1978, IAF pilots trained some 300 Iraqi pilots in both Iraq and India. Iraq paid India $100 million for this.

Projects in Iran

Many and major as our projects in Iraq were, we did not “put all our eggs in the Iraqi basket”. Apart from several projects in Kuwait, India undertook several major projects in Iran—again railway transportation systems and revamping and upgrading of existing petroleum refineries and construction of new refineries—all by EIL and Indian Oil Corporation (IOC), India’s largest oil refining company in the public sector. Through that programme the country earned around $1.5 billion.

After having set up a broad-based cooperation with Saddam’s Iraq, doing likewise with the Shah was next on India’s agenda. So, after the ground had been carefully and comprehensively prepared by Ram Sathe, India’s Ambassador to Iran, Indira ji visited Iran from April 28 to May 2, 1974, along with a large delegation. External Affairs Minister Sardar Swaran Singh and Minister for Petroleum and Natural Gas Dev Kanth Barooah were members of the delegation as the Iranians had evinced, through diplomatic channels, a keen interest in collaborating with India in advanced science and technology. I was also a member of the delegation.

On the first day of talks with the Iranian delegation, led by their Prime Minister, around 10:30 a.m. there was rustle all around, and members of the Iranian delegation got up. To the surprise of one and all, in walked the Shah in full military uniform. The Iranian Prime Minister gave his chair to the Shah and all of us settled down.

The Shah began by recalling at length the civilisational ties between Iran and India. He then came to his main agenda. He said: “Madam Prime Minister, I seek assistance from your great and highly competent country two things. The first derives from the fact that I am acutely conscious that I am sitting on a wasting resource called crude oil. My petroleum scientists tell me that in 20, or at best in 25 years from now, our oil reserves will run out. So I have to urgently use the financial surpluses my country is generating today from oil in building up the only inexhaustible source of energy which mankind has invented up till now, viz. nuclear energy. My scientists have briefed me as to how advanced your country [India] is in nuclear power generation. So, I seek from you, Madam Prime Minister, a broad, deep and long-term cooperation in nuclear energy. The second area is higher education in science and technology. So, over just the last one year, I have lured back to Iran around 270 experienced Iranian scientists and engineers who have hitherto been working in North America and Western Europe. But I need to generate such specialists in Iran itself. You, Madam Prime Minister, have those wonderful higher technological institutes in training and research—your I….”

Foreign Minister Swaran Singh completed the word for the Shah—“You mean our IITs your Highness.” The Shah said, “Yes IITs, IITs. I want you, Madam, to set up one such IIT in Isfahan.” The Shah then waited for a moment. He then said with a grand flourish of his hand: “If you can do these two things for Iran, we need not discuss oil.”

Indira Gandhi’s response

It was then Indira ji’s turn to speak in response to the words of the Shah. She began, as he had, by recalling the long-standing civilisational links between the two countries. She then came to the Shah’s two requests. She said: “Your Highness, as for your request for us to cooperate with you in the peaceful uses of nuclear energy and particularly in nuclear power, it so happens that the Chairman of our Atomic Energy Commission, Homi Sethna, is of Farsi origin. He, along with a team of our top nuclear scientists, will be in Tehran in three weeks from now to work out a long-term, broad-based programme of cooperation between our two countries in the nuclear energy area. As for your wish that we set up an IIT at Isfahan, I would greatly welcome it. Our two Foreign Ministers can work out the modalities.”

Thus, topmost level agreement had been reached in the first two hours of the talks on the first day of Indira ji’s visit and there were two and a half days left! In the afternoon that day, I went to see the Nuclear Research Centre (NRC) of Iran, about 25 km from the centre of Tehran. After spending around three hours at the centre, I came away with the distinct assessment that Iran had a long way to go in nuclear energy.

Cooperation agreement

The next morning, the Foreign and Oil Ministries of the two countries had a meeting to hammer out cooperation agreement in crude oil purchases by India from Iran. The Iranian Foreign Minister opened the meeting by asking India what the terms of its oil supply agreement with Saddam Hussein were. Mr Barooah indicated the “Saddam terms”—30 years payback period, 10-year moratorium and 3 per cent interest. Thereupon, the two Iranian Ministers said: “Our terms will be: 40 year payback period, 15-year moratorium on payment of interest or principal and 2.5 per cent interest.” The Ministers said that they were offering these terms because on every count, they were better for India—which was the instruction of the Shah. The whole meeting, including the drafting and signing of the supply agreement, was completed by 1 p.m.

On the second day of the visit, Indira Gandhi paid her formal call on the Shah. He opened the meeting by saying how happy he was that the crude oil supply agreement had gone so smoothly and had been signed so quickly. Indira Gandhi echoed the Shah’s view.

The Shah then asked Indira ji whether she had ever been to Persepolis, the 1,000-year-old capital of Iran, now in ruins. Indira ji said she had not. The Shah’s response was: “How can you come to my country and go back home without seeing Persepolis. I will give you a grand dinner in Persepolis by starlight!” And so he did on the third and last night of our visit. The ruins of Persepolis were beautifully lit, there were 3,000 guests and the food was superb. The Shah wanted his dinner at Persepolis to be unforgettable, and so it was.

On the night before we left, the Shah hosted a fantastic reception for 3,000 people. Of course, the beautiful and magnificently dressed and bejewelled Shahbanu, Queen Farah, was also present. Indira Gandhi was also beautifully dressed in a bright red sari with a broad border. Her jewellery was immaculate and stunning. Her hair was beautifully coiffured with her famous white slash across it standing out brilliantly. The Iranians had a “cruel” practice: the Shah, his consort, the Shahbanu, and the visiting VVIP stood in the centre of the gathering with spotlights fixed on them. Indira ji, unlike the Shah, had no consort, so, she had to play two roles simultaneously. She did both wonderfully! We were all so proud of her and of the great civilisational nation that we belonged to.

Indira ji had led us to get the best deals for oil from both Saddam and the Shah—a miracle only she could have achieved.

As a result, when her government fell in March 1977, Finance Minister C. Subramaniam could stand up in Parliament and say to the incoming Janata Party Prime Minister, Morarji Desai: “Mr Prime Minister, despite a two and a half times increase in crude oil prices in August 1973, Indira ji’s government is leaving for you a legacy of a positive reserve of $4 billion.”

Ashok Parthasarathi is former Science and Technology Adviser to Prime Minister Indira Gandhi and former Secretary to the government in several major Science and Technology Ministries/Departments.