Scenesetter for Transportation Secretary Mineta's

UNCLAS SECTION 01 OF 05 NEW DELHI 002511

SIPDIS

SENSITIVE

DEPT FOR SA, EB/TRA
SINGAPORE FOR FAA - NESBITT
FAA FOR LAVIN, NOSKOVIAK
USDOT FOR BHATIA, MODESITT

E.O. 12958: N/A
TAGS: EAIR BEXP ECON IN US
SUBJECT: Scenesetter for Transportation Secretary Mineta's
India visit

REF: A) New Delhi 986; B) New Delhi 751; C) New Delhi 7923
and previous


1. (SBU) Mr. Secretary, I want to welcome you to India, a
vibrant, diverse, multiethnic, multifaceted democracy that
is emerging as an economic powerhouse and has growing global
ambitions. Your visit comes close on the heels of an
extraordinarily successful visit of Secretary Rice, who
unveiled a new U.S. policy for South Asia that explicitly
seeks to strengthen India's role as a major world power in
the 21st century. A decade of economic reforms has raised
GDP growth to the 7-8 percent range, improved income levels,
reduced poverty, and instilled increasing confidence within
the country about its present and future international role.
The quite visible benefits accruing from these reforms have
created growing public support for more deregulation,
liberalization and openness. Successive governments are
moving these reforms forward, albeit within the political
constraints imposed by India's vigorous and sometimes
frustrating democratic system. Analysts predict several
decades of sustained robust economic growth, thanks in part
to India's youthful population and its technical and
scientific prowess, which will lift India into the top ranks
of global economic and political powers. One factor that
may stymie India's growth and derail its ambitions would be
if they fail to develop a world class transportation
infrastructure. For strategic and economic reasons, we want
to help India achieve these aspirations. The Indians
realize we are critical to their goals, which gives us
considerable leverage in shaping their regional and global
actions.

A Strategic Partnership
--------------


2. (SBU) Your visit to India, the first ever by a U.S.
Secretary of Transportation, is an important opportunity to

SIPDIS
advance the President's directive to add strategic focus to
our bilateral relations, which have strengthened on
virtually every front during the last four years. Today we
consult regularly at the highest levels on political,
economic, security, and global issues. Your visit is the
third to India this year by a cabinet member. It follows
the visits of Secretary Rumsfeld in January and Secretary
Rice in March. There are several other cabinet visits
scheduled for the balance of the year. We expect the Prime
Minister to visit this summer and the President to visit
sometime late this year or early next year. These high-
level exchanges are evidence of our changed relationship.
Our close coordination in responding to the December Tsunami
and the ongoing Nepal crisis are other cases in point. Even
when we disagree, as we did over Iraq, we are generally able
to deal constructively with our differences, and move on.


3. (SBU) The keystone for our recent progress with India
was Secretary Rice's visit, in which she proposed to the
Indian leadership:

-- launching a Strategic Dialogue to discuss global security
issues, India's defense requirements, defense co-production,
and expanded high technology cooperation;

-- creating a working group to strengthen space cooperation;

-- revitalizing our Economic Dialogue; and

-- establishing a high-level Energy Dialogue to include
civil nuclear cooperation.


4. (SBU) Your visit comes, therefore, at a time of
unprecedented optimism about the US-India relationship. It
will get heavy press attention both in Delhi and Bangalore.
It will be an opportunity for us to deliver the message to
the Indian public and the government that we want a strong
and prosperous India. It will allow us to highlight to the
Indian bureaucracy the economic benefits derived from a
strategic partnership with the US. While the focus of your
visit will be the civil aviation sector and Open Skies, we
should view it as an opportunity to advance our broader
agenda of forging enduring institutional ties in surface
transportation as well. In Delhi, we have requested
meetings for you with the Prime Minister, the Civil Aviation
Minister, the Minister for Shipping and Road Transport and
Highways, and the Prime Minister's chief economic advisor,
the Deputy Chairman of the Planning Commission. In
Bangalore, you will get a flavor of the face of a new,
emerging India, eager to integrate with the global economy
and confident about its ability to compete because of its
technical and scientific prowess.


5. (U) During your visit, you are scheduled to sign several
agreements, which together will signal a new era in
bilateral transportation cooperation:

-- Open Skies Agreement: The agreement was finalized in
January after your meeting with the Indian Civil Aviation
Minister. It is the only full Open Skies agreement that
India has signed with any air services partner. It promises
to benefit consumers and economies of both countries through
cheaper flights, more choices, and faster services.

-- FAA Memorandum of Agreement: This agreement will allow
FAA to engage in technical cooperation with Indian civil
aviation authorities, and help broaden the US-India aviation
relationship in air traffic management and control, safety,
and airport systems.

-- Memorandum of Cooperation in Transportation Science and
Technology: This MOC will signal the intention of both
countries to undertake cooperation and collaboration in
areas such as intermodal operations, transportation safety,
intelligent transportation systems, rapid transit, and
infrastructure financing.

-- Memorandum of Cooperation in Maritime Science and
Technology: This MOC will signal the intention of both
countries to undertake cooperation and collaboration in
areas such as shipping and intermodal operations, port
management, and maritime safety and security.

-- Aviation Cooperation Program (ACP) Launch: This is a
unique public-private partnership designed to support
cooperative activities in the area of training and technical
assistance on aviation safety and efficiency.

The Economic Dialogue
--------------


6. (SBU) During its 10 months in power, the UPA government
has moved on several economic issues of importance to us: it
has finalized an Open Skies policy with us; it has
strengthened its IPR regime; it has taken steps to resolve
our bilateral irritants such as pressing state governments
to settle disputes with American power producers, it has
raised foreign direct investment limits in several sectors;
and it has lowered tariff rates in sectors of importance to
our industry. Another highly symbolic FDI legacy issue, the
Dabhol dispute, which was complicated by the Enron collapse,
is moving closer to resolution. We hope Boeing will soon be
awarded a $8.5 billion contract for sale of commercial
aircraft to Air India. The principal tool we have used to
strengthen the economic relationship is the US-India
Economic Dialogue (ED). Last October, following the Prime
Minister's visit to New York, we agreed that the ED, which
had yielded uneven results, needed to be revitalized. The
leadership of the ED has been elevated so that key issues
can be lifted to the White House/Prime Minister's Office
level. The five existing tracks of the ED -- Finance,
Environment, Trade, Energy, and Commerce -- will remain
because they are useful. Secretary Rice raised the profile
of the Energy track, which may now be elevated to a stand-
alone US-India Energy Dialogue. A new CEO's forum will be
added to advise policy makers on what is required to remove
structural impediments to greater trade and investment ties.

Economic Challenges
--------------


7. (SBU) The UPA government has developed an economic reform
strategy that promotes private and foreign investment while
seeking to deliver a greater share of the benefits of reform
to India's rural and urban poor through various
infrastructure, agriculture, education, and employment
initiatives. It has pursued a line-of-least-resistance
strategy with coalition partners, sacrificing to the leftist
opposition overt privatization and labor market reform while
moving rapidly forward with liberalization of the aviation,
manufacturing, food processing, and IT sectors. The
economic challenges the GOI must address are daunting. The
chronic fiscal deficit headlines the macro-economic trouble
spots. The combined federal-state deficit this year is
expected to be $54 billion, about 10 percent of GDP. It is
among the highest in the world. Interest payments on
government debt consume nearly half the revenue received
from taxes. Despite India's importance as an emerging
market and its formidable scientific and technological
accomplishments, poverty and illiteracy remain high, and HIV
poses a threat.

Infrastructure
--------------


8. (SBU) Your visit will be an opportunity to highlight
one of India's biggest goals -- the development of a world
class physical infrastructure -- and to demonstrate our
support for the country's efforts. Indian airports, road,
railways, and ports are wholly inadequate to sustain the
country's competitiveness in the global market place and
threaten to thwart the country's aspirations of becoming a
global economic and political power. Business, both
domestic and foreign, consistently rates deficient
infrastructure as its greatest obstacle. Successive
governments have recognized this but failed due to
inadequate political leadership. Ambitious plans have been
drawn up in the past, but they have languished due to
failure to mobilize the resources, lack of clarity of
purpose, and poor implementation. Nor is the problem just
one of lack of funds. There is enough private sector
liquidity and interest to fund many large projects that are
needed. The problem has been a culture that intrinsically
believes that it is the responsibility of government to
plan, build, and operate these projects. Capital markets
are not sophisticated enough to channel the liquidity to
fund large projects. India lacks a culture of private
project finance. Nor is there a regulatory structure to
ensure private investors of transparent and fair
competition.


9. (SBU) There are signs that the UPA government has
learned the lessons of the past and will do things
differently. Prime Minster Manmohan Singh has made
infrastructure one of his government's top priorities, and
announced the goal of attracting $150 billion in foreign
direct investment to the sector. A government run by
economists appears to understand the vital role of the
private sector in infrastructure development but needs help
in creating appropriate incentives. Singh's government has
signaled its intention to build public-private partnerships
in developing these projects. It is an open question
whether India will be able to break from the habits of the
past and address what everyone in the society believes is a
pressing need. Merrill Lynch estimated last year that the
country has a good chance of spending $76 billion on
infrastructure project under construction or in the pipeline
within the next 3 years. One stark characteristic of this
spending is the almost complete absence of American
involvement. Your visit could induce American companies to
take a second look at what may in the next decade be the
sector of greatest commercial opportunity in India.

Civil Aviation
--------------


10. (SBU) The civil aviation sector is experiencing a
period of profound restructuring, reform, and
liberalization. The success of India's telecom sector has
encouraged the GOI to identify civil aviation as the second
sector of the economy to be opened up and deregulated.
Civil aviation is a sector where reform and liberalization
hold the least amount of political opposition and offer good
prospects for meaningful benefits. A focus on this sector
fits seamlessly with the high priority that the GOI and the
Prime Minister, in particular, have placed on infrastructure
development. In some ways radical reform of this sector was
inevitable because the sector was close to collapse. In a
stinging report, a government appointed aviation committee
found the Indian civil aviation sector to be in crisis due
to neglect, lack of investment and modernization, and growth
in air traffic. The UPA government has begun to use the
committee report as a road map for the sector and begun
implementing its recommendation. It has within the last six
months liberalized air services agreements, rolled out plans
for privatization of airports, allowed private airlines to
fly overseas, and is drawing up plans to establish an
independent economic regulator.


11. (U) As a result of these reforms, the Indian civil
aviation sector is experiencing robust growth, both on
internal and external routes. Domestic traffic grew by 27
percent last year, and is expected to grow at a similar clip
in the years ahead. The Civil Aviation Minister told us
that he expects domestic traffic to double within in the
next 3 years. To underscore his point he noted, with
perhaps only a hint of exaggeration, that on domestic routes
"every seat of every flight of every carrier to every city
at every time is fully booked for months." The four
existing domestic carriers are being joined by at least six
other new entrants, many of them low cost carriers.
International traffic is growing at a similar pace.
Established regional and European carriers such as Singapore
Airlines, Emirates, Gulf, Thai, British, Lufthansa are fast
expanding their services to India, sometimes to new and
unlikely destinations such as Amritsar and Trinuchapali.
Low cost regional carriers such as Air Asia and Tiger
Airways are initiating service from South East Asia.
Meanwhile India carriers are increasing their international
flights as fast they can acquire or lease aircraft. Such
growth is causing prices to tumble as choice and route
selection increases. The growth in air traffic is
particularly strong in the south where economic resurgence
is creating a burgeoning demand for international air travel
-- particularly to US cities. The US Consulate in Chennai
issues enough visas each day to fill two or three 747s, and
waitlists for flights to US destinations continue to grow.


12. (SBU) This growth comes with many challenges.
Observers estimate that Indian airlines will purchase $25
billion worth of aircraft in the next 20 years. Acquiring
these aircraft is in some ways the easy part. The challenge
for Indian civil aviation officials is to develop the
physical and software infrastructure to service this surge
in traffic. The Indian civil aviation infrastructure is
unable to service even the existing traffic, let alone the
projected growth. Even today, there are not enough
overnight parking places in the major metropolitan airports,
and many airplanes have to overnight at smaller cities.
Metro airports are chaotic during rush hour with frequent
aircraft delays and long lines for ticketing, baggage check-
in, baggage pick-up, security screening. GOI officials have
expressed strong concerns about the effect of such growth on
safety and air traffic management. There are ominous
shortages of pilots and other trained staff. The EU has in
place a $32 million dollar program to help support the
upgrade of India's civil aviation sector. It has seconded
experts to sit and work fulltime at the Indian civil
aviation authority. Civil aviation authorities have
frequently drawn our attention to us about the absence of
American involvement. Your visit will and the agreements
you sign -- the Open Skies agreement, the FAA Memorandum of
Agreement and the Aviation Cooperation program -- will show
our support for the sector and help neutralize some of the
advantage that the EU has earned through many years of
collaboration with the Indian civil aviation authority.

Aircraft procurements
--------------


13. (SBU) For the past several years, state-owned Air India
and Indian Airlines have been in discussions with Boeing and
Airbus for aircraft acquisitions which could total $12
billion. In competitively bid tenders, Airbus won a $2.1
billion dollar order to provide single aisle aircraft to
India Airlines while Boeing won a $1 billion order to supply
18 B737-800 airplanes to Air India. Air India is in the
process of determining the winner of its $8.5 billion tender
for procuring 50 double aisle long haul aircraft of the A-
340/A-330/B-777/B-7E7 class. Boeing has run an aggressive
sales campaign which has positioned it well. You should
signal our strong support for Boeing for this sale. The
GOI's plan is to replenish the fleets of these two carriers
to prevent this further slippage due to years of neglect and
drift by the government. It hopes fleet expansion will help
restore the carriers' financial strength and raise their
value on the markets. The GOI then would likely float an
IPO on the bourses before gradually privatizing them
completely.

Conclusion
--------------


14. (U) In sum, you will come to India at a time when the
President's goal of establishing a key strategic
relationship is becoming reality. The new initiatives you
announce during this visit will move us forward in building
new habits of collaboration with one of the world's rising
giants. My team looks forward to welcoming you to India and
ensuring a successful visit.