NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR OCTOBER 8-12,

UNCLAS SECTION 01 OF 03 NEW DELHI 004590 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: EFIN EINV EPET ETRD EAGR SENV IN SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR OCTOBER 8-12, 2007 NEW DELHI 00004590 001.2 OF 003 ¶1. (U) Below is a compilation of Economic highlights from Embassy New Delhi for the week of October 8-12, 2007. -------------- ADB DISCUSSES INFRASTRUCTURE FINANCING NEEDS -------------- ¶2. (SBU) Econoff met October 12 with Ajay Sagar, Head, Private Sector and Financial Services Group, Asian Development Bank (ADB) India, and Arun Duggal, private equity consultant, to discuss India's infrastructure financing needs. Saggar and Duggal estimated that the combined debt component of the government's $490 billion pricetag for infrastructure through 2012 and roughly $100 billion needed for low and middle income housing, was roughly $400 billion. Out of that, domestic financial institutions only held about $125 billion that could be made available as domestic long term rupee debt funds. That left a gap of roughly $275 billion in rupee-denominated long-term debt, they calculated. ¶3. (SBU) Sagar stated that the Ministry of Finance's Secretary for Financial Affairs, Vinod Rai, and the Joint Secretary for Infrastructure, Arvind Mayaram, has asked ADB to address part of this gap through the provision of currency swaps. In this, ADB would provide the government of India a basket of rupees in exchange for dollars at an agreed upon exchange rate. The swap would be repaid only after 20 years, and at the exchange rate determined at the beginning of the swap. This places the cost of currency value change (likely rupee appreciation) on the ADB, rather than the central bank or local borrowers. Sagar also claimed that Indian infrastructure companies (like Larsen & Toubro and NTPC),potential American investors in Indian infrastructure (like GE and Exxon-Mobil),and US financial service companies not yet in India (like PMI and MBIA),have also told ADB of their preference for currency swaps to enable their entry or expansion in India's infrastructure sector, since the swap removes the cost and or risk of currency change. ¶4. (SBU) Duggal and Sagar made one final point about the need for long term rupee-based financing options. India's central bank, the Reserve Bank of India (RBI),is beginning to incur heavy financial costs associated with trying to neutralize the impact of surging dollar inflows. The RBI itself estimates it spent $16 billion in sterilizing capital inflows last fiscal year, roughly 40 percent of its operating budget. The RBI sterilizes through the issuance of government bonds, which soak up the extra rupees injected into the domestic money supply when foreign capital enters the country. In the past year, the government has quadrupled the ceiling on one of the principle bonds it issues for sterilization - the market stabilization scheme or MSS - to roughly $50 billion. MSS bonds add to the fiscal deficit, imperiling the deficit reduction targets the government has set. ¶5. (SBU) Sagar said that Standard and Poor's told him that it is watching the MSS levels as a key determinant of India's rating, which S&P raised to investment grade last year because of success in fiscal deficit reduction. Thus, India's investment grade rating is at risk as it attempts to rely on sterilization and lacks other options for substituting the inflow of dollars, such as currency swaps. -------------- DESPITE PROTESTS, CORPORATE RETAILERS MARCH ON -------------- ¶6. (U) Even though the largest protests yet against organized retail occurred in Mumbai on October 10 (septel),all of the major players appear essentially unfazed, and new corporates continue to join the fray. Reliance Retail, Pantaloon, Subhiksha, and Spencer's have all decided to continue with their roll-outs, and the Business Standard reports that the companies together have current plans to NEW DELHI 00004590 002.2 OF 003 open 2,500 stores across India. The Aditya Birla Group is making its first foray into north India as well, opening two stores in Delhi on October 12. Pantaloon boss Kishore Biyani, discussing his company's intention to invest USD 1 billion in retail outlets by 2010, said that the key issue for protesters is fresh produce, not organized retail, per se. Thus, Biyani does not see any cause to slow development of Pantaloon's stores, for which produce accounts for only 2 percent of total sales. ¶7. (SBU) In a conversation with Emboff, a Reliance representative acknowledged that produce was a central issue in retail protests. Although produce is their leading money-maker and offers the highest return per square foot, Reliance Fresh outlets will reduce the space dedicated to fruits and vegetables to help stem unrest. (Comment: Reliance is currently the top seller of U.S. apples in India, so this is bad news from our perspective. End Comment.) ¶8. (U) Nonetheless, Reliance has resumed its roll-out in Orissa in the face of further protests, though several news reports last week indicated that the company planned to withdraw from the state. Reliance also revealed that it will set up a subsidiary to handle the company's human-resources function, as Reliance plans to grow its 17,000-strong workforce to half a million by 2011. Beyond its grocery venture, Reliance Retail secured the first exclusive distribution deal that Apple Inc. has ever made with a foreign company, according to the Economic Times. ¶9. (U) As familiar players dug in, new entrants into Indian retail continued to emerge. Dutch retailer Spar closed a deal with the Landmark Group to set up a chain of big-box stores (note: presumably in a similar deal to Bharti-Wal Mart, where the foreign retailer provides backend wholesale support. End note). In addition, the Economic Times reported Wednesday that DLF Retail is nearing a deal with Armani to sell and market the brand in India. DLF, which is foremost a real-estate concern, has an increasing number of suitors in retail, as the scarcity and rising cost of retail space in India makes DLF's land-bank of over 13,000 acres all the more attractive. ¶10. (U) Two ministers from the GOI voiced careful opinions about retail this week, in the midst of political turmoil that observes are speculating could lead to mid-term elections. Minister of State for Food Processing Industries Subodh Kant Sahai asked organized retailers to involve commission agents in their supply chains to reduce displacement. Minister of Commerce and Industry Kamal Nath said that he believes retail legislation is a subject for the states, not the central government. Regarding FDI, Nath said that the annual review of the GOI's FDI policy will yield no liberalization in the retail sector. -------------- GOI TAKES GOOD STEPS ON INTELLECTUAL PROPERTY; GSK TAKES ONE FOR THE TEAM -------------- ¶11. (U) The central government on Monday authorized the Madras High Court to exclude S. Chandrasekaran from the Intellectual Property Appellate Board that will review the rejection of Novartis' patent application for its leukemia drug Glivec. Novartis had moved to have Chandrasekaran removed because he was Controller General of Patents in Chennai when the original application was rejected. The Madras High Court has not yet announced whether it will remove Chandrasekaran from the Board. ¶12. (U) According to the Business Standard, the GOI is also considering tighter export restrictions for pharmaceuticals, including close scrutiny of the exporters themselves and limitation of outgoing pharmaceuticals to ports that have on-site facilities for drug testing. The daily indicated that this move comes in response to the European Commission's having declared India the leading supplier of counterfeit drugs to the EU. ¶13. (U) GlaxoSmithKline, meanwhile, announced that it has withdrawn NEW DELHI 00004590 003.2 OF 003 its patent application for its antiretroviral combination drug Trizivir, saying that the move was in the public interest and part of a routine review of the company's patent applications. -------------- TENDER FOR LARGE POWER FACILITY IN ANDHRA PRADESH -------------- ¶14. (U) The Indian Government's Power Finance Corporation plans to stop accepting bids by October 25 for a 4000-megawatt power plant at Krishnapatnam in southern Andhra Pradesh. The facility plans to use imported coal and will have a dedicated port. There are no reports of U.S. companies placing bids on the USD 6 billion project, but the size of the project may present opportunities for American companies to participate as sub-contractors, given the range of construction and management services necessary for implementation. The chairman of Tamil Nadu's Electricity Board told Consulate Chennai that the project will help ease power shortfalls in both Andhra Pradesh and northern Tamil Nadu. -------------- CHENNAI TOPS EMERGING OUTSOURCING HUBS LIST -------------- ¶15. (U) Cyber Media's Global Services Magazine and investment advisory Tholons recently published its "Top 50 Emerging Outsourcing Cities" study, which ranked Chennai as the best location for outsourcing operations. Hyderabad was rated as the second-best location with Pune ranked third. The report cautions, however, that the rapidly rising wages and office space costs in India's big cities threaten to allow the country's smaller cities, which have more affordable cost structures, to dethrone the current leading locations. -------------- SOUTH INDIAN RICE EXPORTERS HIT BY EXPORT BAN -------------- ¶16. (SBU) A shortfall in the procurement of rice for the public distribution system has prompted the Indian government to ban the export of non-basmathi rice, damaging South India's rice exporters, who usually export these varieties to western and south-east Asia. The president of the Federation of Rice Mill Owners and Paddy-Rice Dealers Associations told Consulate Chennai that his members had already procured approximately 100,000 tons for export, and that government fears of a shortfall were misplaced. He added that the government's actions threatened not only his members' pocketbooks, but also their credibility as dependable business partners with their foreign customers. ¶17. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi. MULFORD