TAMIL NADU: ECONOMIC GROWTH, BUT IRRITANTS REMAIN

UNCLAS SECTION 01 OF 02 CHENNAI 002554

SIPDIS

SENSITIVE

SIPDIS

DEPT PASS USTR FOR BHATIA, HARTWICK

E.O. 12958: N/A
TAGS: PGOV ETRD ECON EINV ENRG IN
SUBJECT: TAMIL NADU: ECONOMIC GROWTH, BUT IRRITANTS REMAIN



1. (SBU) SUMMARY: The growing FDI inflow into Tamil Nadu,
particularly in the manufacturing sector, the support the state
receives from the Center due to the synergic political arrangement
between the DMK and the Congress parties, the bipartisan support for
economic development available in the state, the comfortable energy
situation -- all form part of the picture Tamil Nadu officials
presented to visiting Embassy New Delhi Economic Minister Counselor
John Davison. Some businesspeople, particularly the US power
producers, however, were less bullish: they pointed to the lingering
disputes with the state Electricity Board and the need for new
projects to step up generation capacity. Davison also leveraged
meetings with influential contacts to raise Mission concerns such as
the recent GOI disqualification of Motorola from the BSNL tender,
cable broadcasting industry concerns, and other issues. END
SUMMARY.

UPBEAT OFFICIALS, BULLISH INVESTORS


2. (SBU) Tamil Nadu Chief Secretary Tripathy appeared pleased with
the attention the state is receiving these days: two days prior to
his November 6 meeting with Davison, Prime Minister Singh and
Congress President Sonia Gandhi were in the Chennai suburbs to
inaugurate a Flextronics facility, visit the new Nokia plant and lay
the foundation for a $10 million Automotive Research Center.
Tripathy pointed to the new investments that have come in recent
months -- Motorola, Dell, Hyundai (expansion) -- and the many more
in the pipeline. "After an MOU is signed, we make sure that work
begins within a month", he said. According to the Chief Secretary,
infrastructure development is uppermost in the state
administration's mind, including ways to develop the Tamil Nadu
ports. While the state has sufficient power generation as of now,
the government is planning to generate new projects with Australian
or Indonesian coal.

BUT SILENT ON POWER DISPUTES


3. (SBU) According to Tripathy, problems such as the continuing
inflow of Sri Lankan refugees (SEPTEL),the perennial river water
disputes with neighboring states and the funding shortfall for
infrastructure development are not very serious issues. While
conceding that fund shortage does hit the much-needed but less
visible projects such as storm water drains, other major sectors
such as roads, ports and power, he stated, have no resource crunch.
Tripathy did not comment on the "legacy issue" of American power
companies' disputes with the state Electricity Board. Davison raised
the issue of possible U.S. wheat imports which could greatly benefit
millers and the increasing customer base in Tamil Nadu. Tripathy
indicated this is an area where Tamil Nadu leadership wants to be
helpful.

TALENT POOL RESULT OF YEARS OF INVESTMENT IN EDUCATION


4. (SBU) In a separate meeting, key officials such as state IT
Secretary Chandramouli and the Managing Director of Tamil Nadu

SIPDIS
Industrial Development Corporation (TIDCO) Ramasundaram described
factors that helped the state emerge as a preferred investment
destination in software development services, consumer electronics,
automobiles and textiles. According to the officials, years of
public investment and bipartisan support for education has ensured
the availability of a large productive talent pool. Pioneering
programs such as noon-time meals and affirmative action (reservation
of seats) for backward castes significantly enhanced both enrollment
in schools and literacy rates. They added the already power-surplus
state proposes to add another 4000 megawatts to meet anticipated
future demand. Industry-specific Special Economic Zones will also be
established. To avoid problems of land acquisition, land purchases
are to be kept at market rates.

POWER COMPANIES PRESENT WOES


5. (SBU) Representatives of two U.S. power companies that have
unsettled disputes with the Tamil Nadu Electricity Board (TNEB) on
power pricing and capital costs, however, presented a less
encouraging picture. ST-CMS sent notice to TNEB informing them of
their decision to seek arbitration to finalize capital costs. They,
however, also mentioned that they intend to talk to the state
government to try and come to an understanding on the issue. CMS
would also welcome DUSTR Bhatia's raising their case with Tamil Nadu
leadership when he visits Chennai at the end of November.
Meanwhile, Covanta Energy has gone to court to block retroactive
excise tax levies totaling 24 million dollars; early rulings in
their favor have given them some hope that their arguments will
prevail. Covanta has appealed to the Ministry of Finance to waive

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the imposition of excise duties on furnace oil used for generating
power. The appeal is pending before the Union Finance Minister.


6. (U) Coincidentally, on November 8 post received from the state
government a written reply to a July representation on the power
issues. We will report that response septel, along with a more
detailed update on the IPP issues.

7.(SBU) The power companies' reps believe that the state will face a
power crisis in the next couple of years as there are no big
projects under construction that will supply power exclusively to
the state. According to the companies, the 4000 megawatts that Tamil
Nadu officials tout will take two years to commission and in the
meantime the state is likely to scramble for power as demand is
growing exponentially, exceeding capacity.

"MOTOROLA SHOULD HAVE AVOIDED GOING TO COURT"


8. (SBU) With Kalanithi Maran, the Managing Director of Sun (TV)
Network and brother of Union Telecom Minister Dayanidhi Maran,
Davison raised the issues of cable broadcasting rates and of
Motorola's recent disqualification from BSNL's bidding process.
Maran commented that it was unwise on the part of Motorola to have
gone to court as it will antagonize "the entire bureaucracy." He
believes that the court is unlikely to reverse the decision and that
even if it does, the issue would go for appeals and prolong
indefinitely. Maran said that, instead, Motorola should have talked
with the Ministry. He also indicated there could be an additional
complicating factor behind the disqualification, promising to
provide further details. Maran further stated that an out-of-court
settlement might still be possible, but again gave no indication
what such a settlement might look like.


9. (SBU) Very well informed on Center-State politics, Maran
commented that the Congress-DMK relations within the UPA remain very
good at the top level. He pointed out that the DMK is an
indispensable ally of the Congress-led UPA government and that it
enjoys the support of the Congress in the state. He also
acknowledged that the DMK government can survive even without the
support of the Congress party as long as the other sections of its
Tamil Nadu alliance are retained. Maran said the state leadership
of the Congress party does not matter; they are divided and always
bickering.

CENTER AND STATE WORKING TOGETHER


10. (SBU) COMMENT: The Center-State coordination, facilitated by the
DMK's role in the state and Union governments, is striking. In fact
it is more than a party activity: Union IT Minister Dayanidhi Maran,
both Chief Minister Karunanidhi's confidante and grand-nephew, uses
his position and influence to direct investments to his home state.
Tamil Nadu, nonetheless, could progress even further if it would
address its legacy issues and prevent a potential backlash as well
as attract investment into its power and infrastructure sectors. END
COMMENT.


11. (U) Econ Minister Counselor John Davison cleared this message.
HOPPER