NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS

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SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS


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1. (U) Below is a compilation of Economic highlights from Embassy
New Delhi for the week of June 18-22, 2007.

FIRST ROUND ON INDIA/EC FTA TALKS
TO BEGIN NEXT WEEK
--------------


2. (SBU) European Commission Trade Counselor Bermejo told us that
the first round of negotiations for an Indian/EC FTA will begin next
week in Brussels, following a two-month delay at the GOI's request.
All negotiation rounds are expected to be comprehensive, and the EC
has informed India that they will not allow negotiators from any
specific sector pleading absences (this is apparently a favorite
negotiating tactic used by the GOI when they wish to avoid making
concessions in politically sensitive sectors). The Indians have
imposed a two year timetable for the negotiations that should end
theoretically in November 2008, in advance of the 2009 national
elections. The ECN has not accepted this timetable. Also from the
European side, apparently both Gordon Brown and Angela Merkel
tentatively plan visits to India in the late September/October time
frame (separate visits),according to their embassies.

INDIA TO HOST IRAN AND PAKISTAN
AT JUNE END TO DISCUSS PIPELINE
--------------


3. (SBU) India from June 27-29 will play host to Iranian and
Pakistani delegations hoping to finalize a framework agreement on a
proposed $7.4 billion pipeline to bring gas from Iran to India
through Pakistan, The Economic Times reported June 20. Bilateral
meetings between India and Pakistan are to take place June 27.
Trilateral meetings are planned for June 28 and 29 in New Delhi.
Indian Petroleum Minister Murli Deora expects a second
ministerial-level meeting to ink a framework by mid-July. According
to June 18 press reports, Deora said the pipeline project will
launch "very soon" and noted that the GOI discussed the project with
Pakistani PM Aziz during his recent visit to India. He said the GOI
is in talks about pricing and logistics, adding that major issues
have been sorted out already while pending issues like
transportation fees and alignment will be worked out soon. The
proposed pipeline would carry around 60 million cubic meters of gas
per day from Iranian gas fields, split equally between Pakistan and
India. [Comment: Econ does not expect the pipeline will be agreed
to or built any time soon. However, we believe there is a
possibility that some sort of very preliminary and prefatory
framework understanding could be reached this summer. Any such
"agreement" would be in part an exercise undertaken for different
political reasons by each partner. End comment.] In an interview
with the newspaper Mint on June 18, Planning Commission member Kirit
Parikh forecasted that the pipeline will not happen in the immediate
future as "people are changing the rules of the game all the time."
Pakistan is demanding a transit fee for the pipeline portion running
through its area that India deems too high, Parikh said. With
Pakistan demanding more than $1 per mBtu for transit, Parikh said it
would be better to pay $2 more per mBtu to get LNG directly from
Iran instead of investing in a pipeline.

INDIA JOINS GLOBAL ANTI-MONEY
LAUNDERING CLUB
--------------


4. (U) This week's press reports highlighted India's Financial
Intelligence Unit's (FIU) achievement as the newest member of the
Egmont Group, an international body which facilitates and enhances
exchange of information with counterpart FIUs and FINCENs.
Admission to the Egmont Group, which was conferred at the group's
May plenary session, is seen as a major step forward for India in
joining the international community to fight against terrorism
financing. While Egmont membership is an important consideration
for joining the Financial Action Task Force (FATF),India must adopt

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several mandated recommendations, including passing specific
legislation criminalizing money laundering and countering financial
terrorism, to move beyond its current observer status in FATF.
India's Admission into the Egmont Group was reported by several
domestic and international newspapers, including the Economic Times,
Daily India, and Malaysia Sun.

ANTI-MONEY LAUNDERING SEMINAR
FOR INDIAN BANKS
--------------


5. (U) USAID and Financial Services Volunteer Corps (FSVC)
sponsored a seminar on June 21, 2007 titled "Detecting, Monitoring,
and Reporting Suspicious Activity within an Anti-Money Laundering
(AML) Framework." Presentations by Rosalind Lazar of Citigroup and
Thomas Burnside of JP Morgan outlined how banks can create, develop,
and implement an AML framework. About 12 representatives from
various Indian banks and government agencies, including RBI and
Financial Intelligence Unit (FIU),participated in the seminar and
asked presenters to focus on how to use risk models involving
businesses with high cash deposits (such as transport operators) and
high net worth individuals.


6. (U) Bank representatives expressed concerns about
competitiveness with non-AML compliant banks which are not forced to
ask invasive questions to their customers. Presenters emphasized
that Know Your Customer (KYC) policies and employee accountability
require querying new and existing customers about fund source and
business - which are critical to the success of any AML program. JP
Morgan Senior Vice President explained that despite the concerns and
initial loss of a few customers, the real profit for banks is with
customers who want to grow internationally. Today, banks should be
familiar with the global banking economy. Indian banks also need to
consider reputation risk as a major incentive for investing in an
AML program since loss of reputation is ultimately the real price
for not complying.


7. (U) Many Indian banks, particularly public banks, are still in
the initial stages of implementing AML programs and would benefit
from a technical seminar to address challenges in monitoring and
reporting suspicious activity. Some participants explained the
difficulty of asking intrusive questions to customers. Most
importantly, the seminar stressed that a successful AML program
requires buy-in from all the stakeholders in a bank, including front
line personnel, management, marketing department, and especially,
the customers.

SHARP RISE IN REMITTANCES
TO INDIA
--------------


8. (U) A study by the Migration Policy Institute estimates that of
the $268 billion (World Bank figure) worldwide remittances in 2006,
India accounts for nearly 10 percent. RBI has reported that Indian
migrants transferred $24.1 billion to India in fiscal year 2005-06.
India continues to be the leading recipient of remittances in the
world with World Bank estimates putting India in the lead at $23.5
billion, followed by China at $22.4 billion and Mexico at $21.7
billion. Compared to RBI figures from 1990-91, when remittances
were $2.1 billion, India's dominant position in remittance receipts
is relatively new. In 2005-06, remittances constituted 3.10 percent
of India's GDP - a sharp rise from 0.7 percent in 1990-91.
Moreover, in the same year, remittances were higher than the $23.6
billion in revenues from India's software exports, which had
increased 33 percent that year. The impact of remittances is more
pronounced in parts of the country due to higher volumes of
emigration. The southern state of Kerala sends many emigrants to
the Gulf countries and remittances represent 22 percent of the
state's domestic product.


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9. (U) The study outlines the main factors for the growth in
remittances - including the diminishing role of unofficial channels,
shifting emigration patterns to high-skilled technology jobs,
greater competition in the money transfer market, and the strength
of the Indian economy. First, the incentives to employ informal
networks like hawalas to transfer funds have diminished with the
government establishing a market-based exchange rate and increased
international monitoring of such networks after the September 11
attacks. Second, many Indian IT workers have migrated to the US,
mostly through H-1B worker visas, and more Indian professional
workers are going abroad. This new class of highly-skilled workers
has greater purchasing power and more saving potential than
lower-skilled workers. RBI estimates that 44% of the remittances
come from North America while 24% come from the Gulf Countries.
Most significantly, the Indian government has demonstrated its
ability to attract non-resident Indian (NRI) capital through NRI
deposit accounts and successive bond issues. The report recommends
the government and banking community look for strategic ways to
offer higher rates of return on remittance receipts allocated
towards specific assets or microfinance operations.

INDIA SIGNS FLIGHT SCHOOL DEALS
AT THE PARIS AIR SHOW
--------------


10. (U) India signed two MOUs on June 19, 2007 at the Paris Air
Show to forge a partnership with Montreal-based Canadian Aviation
Electronics (CAE) to enhance the capacity of GOI's existing flight
school, Indira Gandhi Rashtriya Uran Akademi (IGRUA),and proposed
National Flying Training Institute (NFTI). CAE will now become the
managing partner of IGRUA and the majority stakeholder in NFTI.


11. (U) The NFTI will be a joint venture between CAE and the
Airport Authorities of India with 51 and 49 percent of the equity,
respectively. The Institute will provide fixed and rotary wing
training for pilots using the Airline Transport Pilot License (ATPL)
program which leads to the Multi-crew Pilot License (MPL) program.
NFTI will be based in Gondia (in western Maharashtra),an electoral
constituency of Civil Aviation Minister Praful Patel. The institute
will operate new aircraft using CAE's course material and training
equipment. The total projected investment for NFTI is expected to
be about $25 million. Once it is fully operational, NFTI is
estimated to produce approximately 200 pilots a year.


12. (U) CAE will also manage IGRUA's existing flight school
activities, including maintenance of aircraft, flying operations,
air traffic control, runway maintenance, navigation aids, and fire
fighting facilities. IGRUA is located in Rae Bareli (district in
Uttar Pradesh),an electoral constituency of ruling Congress Party
President Sonia Gandhi. The CAE-IGRUA MOU is expected to increase
from an initial 40 cadet pilots to 110 cadet pilots per year and
finally to 200 cadet pilots annually. While India currently has
about 2,500 active pilots, an estimated 5,000 pilots will be
required over the next 5 years to cater to the exponential growth in
domestic air traffic. For example, the Air Passengers Association
of India estimates that the annual air traffic growth rate in India
has been around 26 percent over the past two years, causing the
airline industry to order approximately 400 new aircraft for
delivery by 2010.

INDIA CREATING MORE NEW JOBS
THAN ANY OTHER BRIC COUNTRY
--------------


13. (U) OECD's Economic Outlook 2007 reports that India is creating
more jobs than any other BRIC (Brazil, Russia, India and China)
country, generating 11.3 million net new jobs annually between 2000
to 2005 in contrast to China's 7 million, Brazil's 2.7 million, and
Russia's 0.7 million. India alone accounted for half of the jobs
generated by BRIC countries. Despite the good news, the report also

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cites concerns, such as the low level of employment elasticity to
economic growth at 0.3 percent which indicates that fewer jobs are
created as GDP rises. Also, the report says that India has among
the lowest employment to population ratios with 50.5 percent as
compared to at least 66 percent in the other BRIC countries. Rural
unemployment continues to be a challenge in the BRIC countries,
particularly India where there are an estimated 130 million surplus
workers.


14. (U) Visit New Delhi's Classified Website:
http://www.state.sgov/p/sa/newdelhi

Mulford