NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS AUGUST 27-31, 2007

UNCLAS SECTION 01 OF 03 NEW DELHI 003983 SIPDIS SENSITIVE SIPDIS USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD DEPT OF ENERGY FOR A/S KHARBERT, TCUTLER, CZAMUDA, RLUHAR DEPT PASS TO USTR DHARTWICK/CLILIENFELD/AADLER DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA ABAUKOL TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN STATE FOR SCA/INS AND EB/TRA JEFFREY HORWITZ AND TOM ENGLE E.O. 12958: N/A TAGS: EAGR EFIN EINV ETRD ENRG SENV IN SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS AUGUST 27-31, 2007 NEW DELHI 00003983 001.2 OF 003 ¶1. (U) Below is a compilation of Economic highlights from Embassy New Delhi for the week of August 27-31, 2007. FINANCE MINISTRY FINDING WAYS AROUND FDI CAP -------------- ¶2. (U) Local press reported this week that the Ministry of Finance (MoF) has approved a request by India's largest private bank, ICICI, to create a holding company for its insurance division to spin off as a new company. Since existing caps on insurance require 74 percent local ownership, ICICI will still hold a large share of the new insurance company. However, foreign institutional investors own roughly 70 percent of ICICI. Thus, ICICI's equity in the new company, combined with the sector-permitted 26 percent foreign equity, essentially means total foreign equity in the new insurance company can exceed the 26 percent cap. An example of "opportunistic reform," the holding company model supported by the MoF provides an alternative to the Left-stalled legislative changes needed to raise the FDI cap in the insurance sector. The MoF not only approved ICICI's request and persuaded the Foreign Investment Promotion Board (FIBP) to approve it, but sought out the Law Ministry's approval as well, to overcome hesitations from the central bank, the RBI, on the request. The RBI, as of August 31, was still concerned about the holding company model, and had issued a "discussion paper" for public comment on the issue. Other financial service companies will be watching developments closely, as others are considering a similar step, including India's largest public sector bank, the State Bank of India. US PRIVATE EQUITY CONTINUES TO FLOW INTO INFRASTRUCTURE -------------- ¶3. (SBU) Blackstone announced on August 29 that it would buy a 14.5 percent stake in India's third largest construction firm, Nagarjuna Construction for $150 million. Blackstone's move highlights the rising trend of private equity flows coming into India, and more recently, finding attractive equity opportunities in the infrastructure sector, a theme echoed by the Planning Commission and local private equity analysts. (Note: Private equity into India, $3.8 billion in the first half of the year, is the largest in Asia this year, exceeding China. Some estimate it may reach $10 billion by yearend. End note.) PARLIAMENT PASSES SBI (AMENDMENT) BILL, 20074 -------------- ¶4. (U) Parliament passed The State Bank of India (SBI) (Amendment) Bill, which legalizes the recent transfer of the central bank, the RBI's, 59.73% equity stake in India's largest state-owned bank, State Bank of India (SBI) to the central government for Rs.355 billion ($9 billion),which took place this summer by ordinance. The new law strengthens the banking system by separating the ownership and regulatory functions of the RBI The bill will now be sent to President Patil for her approval, which is expected. ¶5. (SBU) The new legislation is only a modest portion of an earlier bill that the Ministry of Finance chose to break down, in order to help facilitate passage. The sister legislation proposes that SBI be allowed to dilute the government's equity further to 51% from 59.73%, by opening the shares to private, including foreign, investors. This has been blocked by the Left parties, resisting the dilution of government control. The related legislation was endorsed on August 30 by the Parliament's Standing Committee on Finance, where controversial bills are sent for consensus building. Members of Left Parties gave a dissent note to the Standing Committee's decision. They raised objections on allowing SBI to raise resources from the market as they opine this would limit SBI's ability to carry out its social obligations and reduce its competitiveness compared to private banks. They perceive - rightly - that reducing government equity to 51% from 59.73% is a move towards privatization of the bank. (Left parties may vote against the bill NEW DELHI 00003983 002.2 OF 003 when the"Finance Minister re-introduces it in Parliament for a vote. PHARMA PATENT ISSUES AMPLIFIED -------------- ¶6. (U) On August 27, Swiss pharmaceutical giant Novartis announced that it will move hundreds of millions of planned investment dollars from India to China, citing insufficient protection in India for intellectual property. This announcement stems from Novartis's recent legal disappointment in Chennai, where the High Court upheld the rejection of Novartis's patent application for its leukemia drug Glivec. ¶7. (U) Then on August 28, the Kolkata patent office rejected Eli Lilly's patent application for Forteo, a drug used to treat osteoporosis, on grounds of incremental innovation, prior knowledge, and failure to demonstrate improved efficacy. Forteo is the only biotechnology-based osteoporosis drug available in India, and Eli Lilly had already released the product, anticipating approval of their patent request. INDIA LEADS THE WAY IN IMPROVING REGIONAL CONNECTIVITY -------------- ¶8. (U) Following up on the April 2007 SAARC Summit's commitment to having better regional connectivity, India (current chair of SAARC) hosted the first-ever SAARC transport ministers conference in New Delhi from August 29-31. This is a significant meeting where member states were likely to make concrete proposals on improving physical connectivity in South Asia, with India leading the way to promote regional transport agreements. The deliberations concluded today; Embassy will follow-up with GOI for a full readout of the meeting and report. According to today's Times of India, ministers were to discuss a roadmap for regional connectivity including 10 ports, two inland waterways running 2,757 km, and 16 airports. India is also expected to announce two inter-regional road corridors along the Nepal-India and Bangladesh circuit, rail corridor, and aviation corridors connecting New Delhi with two other SAARC countries, according to media reports. India prepared a draft of the SAARC Regional Motor Vehicle Agreement (RMVA) recommending a common transport policy for all member states and ways to remove infrastructure barriers to facilitate movement of goods. If ratified, the RMVA will permit truck movement across borders and reduce cases of unloading and re-loading into another vehicle. ¶9. (U) Prior to the ministerial meetings, SAARC representatives at the Secretary and Joint Secretary levels discussed recommendations from the SAARC Regional Multi-Modal Transport Study to integrate critical transport and transit links. These proposals can help boost trade in South Asia, which fares among the lowest in intra-regional trade. According to the study, the region has a 4 million-km-long road network which is only 10 percent of the potential road links that could be established in South Asia. COAL BENEFICIATION KEY FOR POWER DEVELOPMENT AND ENVIRONMENT -------------- ¶10. (SBU) Department of Energy, State/OES, and Econoff attended a Coal Beneficiation conference in the "coal capital" of Ranchi, Jharkhand August 22-24 under the auspices of the US-India Energy Dialogue's Coal Working Group and the Asia Pacific Partnership (APP-6) Coal Task Force. Although coal fired power accounts for 54% of India's electricity generating capacity and about 68% of its actual electricity production, coal washing, preparation, and beneficiation has be neglected with most boilers built to handle the poorer quality high ask coal. Only in the last year has the Coal Ministry recognized the importance and proclaimed responsibility for beneficiating its coal. We have identified a series of bureaucratic, legal, regulatory, and incentive obstacles to realizing the substantial economic and huge environmental benefits of coal beneficiation. NEW DELHI 00003983 003.2 OF 003 ¶11. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi WHITE