The Developing Strategic Partnership between India and Mongolia: Challenges and Opportunities

January 27, 2017 Posted by India Briefing Reading Time: 5 minutes

By Zolzaya Erdenebileg

In May 2015, Narendra Modi became the first Indian Prime Minister to visit Mongolia. In a trip that included patting a horse and trying his hand at bow and arrow, Modi also made a significant announcement hinting at the future of diplomatic relations between India and Mongolia – a US$1 billion credit line, as well as promises of increased trade and support. Mongolia, which has always held a third-neighbor policy to decrease the looming presence of Russia and China, welcomed the announcement, highlighting the religious and political affinities of the two nations.

A possible India-Mongolia alliance has economic and geopolitical significance. This was highlighted throughout Modi’s visit, and further underlined when Mongolia announced its intent to use the US$1 billion credit line to invest in oil refineries and energy capability. At present, Mongolia imports most of its refined oil from Russia. Oil refining capabilities would go a long way towards increasing the energy independence of the country, and flowering other subsequent industries, such as chemicals production.

While Modi’s visit raised eyebrows, Indian-Mongolian relations have a long history. India was the first country outside of the Soviet bloc to establish diplomatic relations with Mongolia in 1955. Since then, the two countries have signed a number of cooperative agreements and MOUs, including agreements in the industries of health and medical, geology and mineral resources, nuclear energy, biotechnology, animal health, and dairy, among many others.

On May 17, 2015, India and Mongolia upgraded their relations to a “strategic partnership”, with special focus on trade, training, and defense.

Economic cooperation

In 1996, during Vice President K.R. Narayanan’s visit to Mongolia, the two countries signed an Agreement on Trade and Economic Cooperation, elevating each other to most-favored nation (MFN) status for a number of considerations including customs, duties, and taxes on imports and exports. In 2001, during President Bagabandi’s visit to India, the two sides signed an Investment Promotion and Protection Agreement.

Trade volume between India and Mongolia reached a peak in 2012, during the period of Mongolia’s fast tracked growth. Since then, volumes have suffered, although there was an uptick in 2015. Indian exports to Mongolia largely consist of medicines, mining machinery, and auto parts. Mongolian exports to India include raw and prepared wool and animal hair.

In December 2016, Mongolia was incorporated into the Asia-Pacific Trade Agreement (APTA), formerly known as the Bangkok Agreement, joining Bangladesh, India, China, South Korea, Sri Lanka, and Laos as members, and raising the prospect of increased trade with South Asian countries. As part of the agreement, India decreases duty rates on over 3,000 items by five to 100 percent.

Below is a representation of the trade volume between India and Mongolia as of June 2016.

China controversy

The new age of India-Mongolia relations ushered in by Modi’s visit was tested after a visit by the Dalai Lama to Mongolia. The high-profile visit was objected to by China, which views the Dalai Lama as a separatist. When the visit went through, China retaliated by raising tariffs at the Mongolian border and suspending talks for a US$4.2 billion loan. In economic strain, Mongolia called upon India to put the credit line into effect. The Ministry of External Affairs’ spokesperson responded positively, saying, “We are closely working with the Mongolian government to implement the credit line in a manner that is deemed beneficial to the friendly people of Mongolia by its leadership.” However, with a debt deadline looming, Mongolia’s Foreign Minister, Tsend Munkh-Orgil, released a statement acknowledging that the Dalai Lama will likely not be visiting Mongolia for the duration of the current administration.

Future outlook

The incident resurfaced existing regional tensions, and placed some uncertainty on what seemed to be a robust partnership developing between India and Mongolia. Further, the US$1 billion credit line is still to be implemented at some point soon. Meanwhile, Mongolia is continuing to negotiate with the Import-Export Bank of India to build oil refineries and pipelines, a project that could increase Mongolia’s GDP by 10 percent. Finally, it is likely that bilateral trade will continue to increase as Mongolia steadily revamps its economy after a difficult period of stalled growth.

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