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

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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.

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ECONOMIST CONFERENCE: GOI ROLLS OUT RED CARPET
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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
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

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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."

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AVIATION UPDATE
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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.

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GOLDMAN-SACHS RAMPING UP
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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

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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.

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OCC VISIT
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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