ECON HIGHLIGHTS FROM NEW DELHI(March 12-16, 2007)

UNCLAS SECTION 01 OF 03 NEW DELHI 001292 SIPDIS SENSITIVE BUT UNCLASSIFIED SIPDIS DEPT PASS USTR DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA - ABAUKOL TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN USDOC FOR 4530/ITA/MAC/OSA/LDROKER/ASTERN E.O. 12958: N/A TAGS: EAGR EFIN ECON ETRD ENRG PREL PGOV PREL IN SUBJECT: ECON HIGHLIGHTS FROM NEW DELHI(March 12-16, 2007) ¶1. (U) Below is a compilation of Economic highlights from Embassy New Delhi for the week of March 12-16, 2006. -------------- - ECONOMIST CONFERENCE: GOI ROLLS OUT RED CARPET -------------- - ¶2. (U) Prime Minister Singh addressed the Economist Round Table on March 13 and highlighted three drivers of India's growth that lead to the "air of justified optimism" about India's economy these days. These drivers are 1) the significant increase in India's savings and investment rates to 32% and 34% of GDP respectively - barometers of sustained growth; 2) India's demographic dividend, if employment friendly policies are in place; and 3) a broad national consensus on economic policies, demonstrated by the past 16 years of policy stability. Singh singled out a few key reforms for sustained and broadened growth: financial deepening; creation of a long-term debt market to finance infrastructure; more efficient labor markets; and improving the quality of governance and of public service delivery. On this last point, he stressed, it is not possible for India to simply spend its way to prosperity [through higher government expenditures]. ¶3. (U) At the same conference the following day, in addition to positive comments about India's economy, Finance Minister Chidambaram identified five areas of agricultural reform that are needed: a) redirecting the fertilizer subsidy to the farmer instead of the producer; b) promotion of contract farming; c) creation of a better link between the farmer and market; i.e. supply chains that deliver a higher price to the farmer and a lower price to the consumer through increased efficiency; d) better power supply in the villages, by moving to a 2-feeder system that gives the farmer 8 hours of electricity and the villagers 24 hours; and e) doubling production in new seeds to increase productivity in grains and pulses. ¶4. (U) Commerce Minister Kamal Nath highlighted manufacturing as a driver of 'inclusive growth' in India going forward. While touching on a number of topics including IPR, India's FTAs, and the Doha Round, Nath spent most of his time discussing how to include workers �A;from the agrarian sector- as well as future workers from India's demographic bulge- in India's growth story. In an acknowledgement of the country's two-tiered economic system, Nath reminded the audience that 300 million Indians still earned less than $1 a day. With the manufacturing sector presently comprising only 17% of GDP, Nath described a goal of taking that share to 25% in the next decade. To accomplish this, the current 12% growth rate in manufacturing would have to be increased to 15-17%. "Unless growth touches the life of the vast majority of Indians, the government will be shown the door," Nath said, pointing out that urban-centric growth was not enough. Citing autos and auto components as areas that were witnessing huge investment, he largely sidestepped specifics on infrastructure and FDI constraints and referred to port facilities investment where there was "no delay" as an example of positive movement. ¶5. (U) In response to questions on the Doha Round, Nath was positive, stating that "we want to ensure a successful result in the next few months." However, agriculture remained difficult because for many countries, this was their sole concern, asserting that "55 countries are concerned just with bananas, coconuts, and cotton." Interestingly, Nath singled out Japanese rice tariffs as an example of where granting exceptions to general trade rules would present difficulties in the Doha negotiations. "You can't create a NEW DELHI 00001292 002 OF 003 carve-out, for example, for Japan with 900-1000% tariffs on rice" and expect other countries to agree. ¶6. (U) The FM also mentioned reforming consumer subsidies for cooking gas and kerosene by redirecting the subsidy to poor consumers rather than the producer. Interestingly, when asked about help for the manufacturing sector, Chidambaram replied, "if it ain't broke, don't fix it." Lastly, in an uncharacteristically impassioned comment, Chidambaram argued that the government's higher revenues must be largely allocated to more spending on the rural areas, rather than on infrastructure. Further, he said he was going to note to Parliament the following day that, in the first three years of UPA rule, it had spent more on basic rural needs than the last six years of the opposition's rule - clearly a defensive move in light of recent state elections that have raised the volume on criticisms of government policies for the "common man." -------------- AVIATION UPDATE -------------- ¶7. (U) An FAA team comprising of John J. Hickey, Director Aircraft Certification Service, FAA South Asia Sr. Rep Randall Fiertz and three other officials engaged senior executives of India's Directorate General of Civil Aviation (DGCA) on March 12-13 in New Delhi to draw a roadmap for reaching a Bilateral Aviation Safety Agreement (BASA) with India and to put in place 'Implementation Procedures' to certify the airworthiness of aviation equipment, products and aircraft. ¶8. (U) The significance of the progress made during these talks is highlighted by the fact that this is the first time since 1991, when India indicated its interest in negotiating a BASA with United States, that a mutually satisfactory agreement was reached on a highly contentious aviation safety matter. During the intense negotiations, the breakthrough came when the India's DGCA leadership accepted the long-standing FAA position that it would take 3-5 years for shadow certification for an Indian registered aircraft under FAR 23 design code and 5-7 years for one under FAR 25 design code. The Indian side also agreed to change the sequence of shadow product certification project by starting with a product which is in the initial stage of process of certification rather then a product which has already been certified by India's DGCA. ¶9. (U) FAA and DGCA are developing a work plan that will include specific steps to achieve a BASA. The two sides agreed to strive to reach consensus on the plan so that an announcement could be made at the forthcoming April 23-25 US-India Aviation Cooperation Summit in New Delhi. -------------- GOLDMAN-SACHS RAMPING UP -------------- ¶10. (SBU) Econoff met on March 8 with the head of Goldman Sachs' new Global Infrastructure Fund, Joshua Feldman. The fund was started just 18 months ago and has an available investment fund of $6.5 billion; of which only $1.5 billion has been committed so far, mainly in the US and UK. Goldman Sachs is looking to invest now in China and India, for which it has already appointed a country head, to be based in Mumbai. Goldman Sachs is interested in projects across the sector, including ports, roads, and power, and is open to different types of participation, from joint venture to sole concessionaire. Feldman also said Goldman Sachs' expectation was NEW DELHI 00001292 003 OF 003 that not every project would go well, but that overall, the opportunities and the returns would justify the anticipated difficulties - a healthy approach to big projects in India. -------------- OCC VISIT -------------- ¶11. (U) Visitors from the Office of the Comptroller of the Currency (OCC) and Econoff met with Ministry of Finance Joint Secretary (Capital Markets) Dr. K.P. Krishnan and Joint Secretary (Banking) Amitabh Verma in separate meetings on March 12. Krishnan, often a thoughtful interlocutor, responded to a question about what keeps him up at night, by saying that he was concerned that Indian policymakers have not properly realized the reduced impact of monetary policy in India's increasingly open financial markets. Specifically, he pointed to the difficulty any central bank faces in trying to both control inflation and currency appreciation when there is an increase in dollar inflows, since stemming currency appreciation through the purchase of dollars releases more local currency into the economy, pushing up inflation. Verma was not as reflective, mainly just reiterating the RBI's 2009 Roadmap for allowing more foreign presence in the banking system. He claimed that a number of new foreign bank branch licenses had just been issued, including for Barclays and Standard Chartered, and that India was planning to enable more bank presence in rural areas, including by foreign banks. Verma went further to say he had heard foreign banks were interested in rural branches. (Note: our contacts in Mumbai indicate that only 12 foreign branch licenses were issued in 2006, none of which went to US companies. Last year, the RBI rebuffed Citibank's offer to establish non-metro branches and we have not yet seen any new signals from the RBI on approving foreign rural branch licenses. End note.) Mumbai will report septel. ¶12. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi Pyatt