NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF

UNCLAS SECTION 01 OF 05 NEW DELHI 005148 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 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 SENV IN SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF NOVEMBER 26-30, 2007 NEW DELHI 00005148 001.2 OF 005 ¶1. (U) Below is a compilation of Economic highlights from Embassy New Delhi for the week of November 26-30, 2007. GOI ANNOUNCES ITS TAX REFORM AGENDA -------------- ¶2. (U) At a November 29 seminar on Indirect Tax Reforms, Dr. Parthasarthi Shome, Advisor to the Finance Minister, discussed the GOI's short term tax reform agenda. Earlier this week, the GOI Working Group announced its recommendations, which were accepted by the Empowered Committee on Tax Reforms on November 28, 2007. The announcement assumes significance in view of the agreement among the federal and state governments to roll out a combined Goods and Services Tax (GST) beginning in April 2010 to ensure that producers are not taxed twice on the same product. In 2004, Finance Minister Chidambaram proposed the introduction of a GST and appointed a panel to discuss the idea with states and produce a blueprint. States are expected to submit their views to Chidambaram by December 20, followed by Center-State deliberations on GST rates. Subsequently, industry input will be invited for consideration. ¶3. (U) The GOI reps at the seminar explained that the GST system will allow states and the Center to have separate tax rates for goods and services, and input tax credit will be available in both cases along the same lines as on Value Added Tax (VAT). With the introduction of a unified GST, excise tax and service tax will cease to exist and a much simpler tax regime is expected. While GST will be applicable to locally manufactured products and services, it will be applied via countervailing duties (presently equivalent to the excise tax) in the case of imported products. Shome emphatically pointed out that the GST regime will remove all cascading taxes and, therefore, reduce compliance costs. He also claimed that the GST would be taxpayer friendly in terms of decision making and productivity. Implementation of GST may require a Constitutional amendment at the central level and also at the state legislative level. ¶4. (U) Industry welcomed the roadmap to a GST regime, but put forward its demands for tax exemptions and tax holidays in specific sectors. The GOI reps pointed out their mandate for broadening the tax base and lowering rates, and hinted that tax exemptions do not help to improve industry competitiveness and that the tax exemptions eventually become economically unviable. Shome also announced that the GOI is working on inter-state tax issues. JET AND AMERICAN - CODE SHARE PARTNERS -------------- ¶5. (U) On November 20, Jet Airways and American Airlines announced a code-sharing agreement for some flights out of New York. The proposal is subject to regulatory approvals and if cleared, will become effective from Jan 16, 2008. Jet Airways will place it 9W flight designator code on certain American Airlines' domestic flights out of New York's JFK Airport. In turn, American Airlines will place its AA designator code on Jet Airways flights to some cities in India. This codesharing agreement between the two airlines follows Jet's introduction of daily flights on Boeing 777-300ER services from Delhi to New York JFK via Brussels as of Oct. 28, less than three months after it began serving Newark from Mumbai via Brussels on August 5. Jet also introduced service to Toronto via Brussels from Chennai on September 5. The airline also has plans to expand its network in North America, with plans to service San Francisco from Mumbai in February 2008 eastbound via Shanghai (and has all the requisite government approvals but still needs requisite slots at Shanghai airport). Jet also intends to serve Chicago and Washington, D.C. via Brussels, with Chicago being the first destination it will launch after San Francisco. GOI SCRAPS EUROCOPTER DEAL, TO REBID FOR 197 HELICOPTERS NEW DELHI 00005148 002.2 OF 005 -------------- ¶6. (SBU) Industry contacts have confirmed this week's press reports that India will seek new bids for the proposed USD 600 million purchase of 197 light observation helicopters after the USG and Bell Helicopters protested the selection of a Eurocopter aircraft. The GOI first floated the requirement for Army helicopters to replace 1970s-era Chetak and Cheetah helicopters in 2004, then added requirements for offsets in 2005. In March 2007, Indian Defense Ministry officials picked the Eurocopter helicopter, after disqualifying Bell for technical reasons. After Bell Helicopter officials launched a complaint to ministry officials that the selection process had not been transparent, the matter was referred to an internal committee. The GOI's investigation revealed that Eurocopter has fielded a civilian version of its helicopter for certain test trials, which is in violation of selection rules. The investigation also involves a private company which acted as a go-between for the deal and the Defense Ministry is seeking an explanation from the European company about its links with Global Vectra Helicorp and Vectra Aviation Private, Ltd. ¶7. (SBU) After an internal investigation into the allegations, the Defense Ministry sent a detailed report to the Central Vigilance Commission (CVC),which has now held that sufficient grounds exist for scrapping the deal. In mid-November, the internal committee recommended the purchase be rebid. Defense Ministry sources said the Army has been asked to cancel Eurocopter's selection and redraw the requirements to allow for a new global tender to be floated. The Indian Army, which first asked for replacements for its aging fleet in 1999, may have to wait at least three more years while a fresh round of selection trials are carried out. INDIA RATIFIES CAPE TOWN CONVENTION -------------- ¶8. (U) On November 26, the GOI Cabinet approved the Cape Town Convention, an international treaty to facilitate asset-based financing and leasing of large commercial aircraft and aircraft engines. The move will help reduce the cost of acquiring new aircraft for Indian carriers, with an estimated savings of USD 200 million in aircraft acquisition costs in the short term and over $1 billion in the long term, according to GOI officials. In simple terms, the Cape Town Convention ensures a greater comfort level for arcraft makers or lessors in repossession of aircraft in the event of a default. US Export-Import Bank Chairman Lambright urged GOI officials to expeditiously ratifiythe Convention during his visit to New Delhi on November 1-2. Now that India is a signatory to the convention, it is eligible for a cost savings or EXIM discount of one-third of the fee on future commercial aircraft purchases. SEZ POLICY UPDATE: GOI ANNOUNCES NEW PACKAGE TO PROTECT AGRICULTURAL LANDS -------------- ¶9. (U) On October 31, in the backdrop of violent protests over land acquisition of farming land in West Bengal and a few other states, the GOI notified the National Rehabilitation and Resettlement Policy 2007, which will also apply to SEZs. The new policy discourages acquisition of agricultural land for non-farming purposes and provides for establishment of a commission to look into resettlement issues. The policy clearly outlines the types of acquirable land, including waste land, degraded land, or un-irrigated land. The Indian cabinet has reportedly cleared amendments to the Land Acquisition Act of 1894 to "strike a balance between the need for land for development activities, and protecting the interests of farmers and landowners". In order to implement the policy, the GOI will have to amend its Land Acquisition Act, which is expected to be introduced in the next session of Parliament. ¶10. (U) The GOI also plans to set up a committee to review and monitor the progress of implementation of rehabilitation and NEW DELHI 00005148 003.2 OF 005 resettlement schemes across the country. The new policy is expected to address political concerns in states (to some extent) but more specifically targeted towards West Bengal where the local population has been protesting the acquisition of farm land for a SEZ proposal by Indonesia's Salem Group. MOVING AHEAD WITH DEDICATED FREIGHT CORRIDOR PROJECT -------------- ¶11. (U) On November 27, the Cabinet Committee on Economic Affairs gave in principle approval to the Dedicated Multi-Modal High Axle Load Freight Corridor (DFC) Project on the Eastern Corridor and the Western Corridor, with an estimated total cost of USD 7 billion. The entire corridor will utilize a Computerized Train Control System. The Eastern Corridor will connect Ludhiana in Punjab and Sonnagar in West Bengal while the Western Corridor will connect Jawaharlal Nehru Port near Mumbai to Tughlakabad/Dadri near Delhi. The Eastern Corridor is expected to most benefit coal companies, steel plans, and thermal power stations while the Western Corridor will provide a huge boost to exporters, importers, port companies/developers, shipping lines and container operators. The DFC project will provide much needed rail infrastructure for growth of the Indian economy and also generate indirect employment during construction of the corridors. The project has a timeline of 5 years. US-BASED AMSTED RAIL INVESTS IN INDIA -------------- ¶12. (U) Chicago-based Amsted Rail, the world's largest producer of rail cast wheels, is joining hands with JP Morgan One Equity Partners and Hyderabad's Patil Rail Infrastructure (PRIL) to set up a cast wheel manufacturing unit in India. This is first such JV company to approach the railway ministry, at a time when India is experiencing unprecedented growth in the rail sector (including various metro rail projects, replacement of existing tracks, port connectivity projects, and proposed freight corridors). According to media report sources, the proposed greenfield facility will be owned by a separate company, in which Amsted will hold a 30% stake and JP Morgan OEP will have 25%. The remaining 45% stake will be owned by Patil Rail. JP Morgan OEP holds 40% stake in Patil Rail. ¶13. (U) The new manufacturing facilities are being set up to cater to the growing requirements of rail wheels for the freight wagons by Indian Railways. Currently, wheels are supplied by Rail Wheel Factory, which can manufacture 120,000 wheels per year. An additional 70,000 wheels are produced by the Durgapur steel plant of SAIL and the balance is imported from companies, including Amsted. Indian Railways requires close to 300,000 wheels a year, which is expected to grow 20% annually to meet additional demands. ¶14. (U) The Indian Railways has already invited bids for a 100,000 wheels a year plant at Chhapra, Bihar. Larsen & Toubro and Tata Projects submitted bids and the result is forthcoming. With the investment for the project likely to be above USD 253 million, Indian companies will have to hire technology from outside. STREAMLINING FOREIGN PILOT CONVERSION -------------- ¶15. (U) With India facing an acute pilot shortage and airlines unable to fully utilize their aircraft fleet or deferring acquisition, the Director General of Civil Aviation (DGCA) has taken a forward leaning step to address this problem. The government has simplified the process of converting a professional pilot's license issued abroad to an Indian one. Now, those holding a foreign pilot's license will be able to convert this into an Indian pilot license in six days. This announcement is a great relief to the more than 800 pilots who are holding a foreign pilot license issued by an ICAO contracting country. Moreover, thousands of Indian NEW DELHI 00005148 004.2 OF 005 students have gone abroad to complete flight school training, sensing a lurking job opportunity arising out of acute pilot shortage in the country. ¶16. (U) Civil Aviation Minister Praful Patel recently told Parliament that the "exponential growth in Indian civil aviation industry" is "manifested in shortage of pilots." "With the present growth...it has been estimated that in the next five years, 5,000 additional pilots would be required for scheduled operations, and 1,000 for non-scheduled and private operations," . INDIA-EU BUSINESS SUMMIT -------------- ¶17. (U) On the heels of a visit to the PRC to raise EU-China trade imbalances, EU Trade Commissioner Peter Mandelson kicked off the EU-India Summit in Delhi on November 29. At a bilateral business summit preceding the government-to-government summit discussions to take place November 30, Mandelson discussed prospects for the ongoing EU-India trade talks. He stated that the EU and India want an 'ambitious' agreement in place in 2008. During the Summit, where EC President Barroso will meet with PM Singh, the two sides are expected to announce a timetable for future negotiating rounds. Other items on the agenda include boosting two-way investment flows and IPR protection. Mandelson cited the industrial goods sector as a key area in the discussions, noting that India - as a large consumer of intermediate goods - stands to benefit from reducing tariffs on imported parts and components. Some sharp elbows were on display, however, as Commerce Minister Nath pushed back after Mandelson raised non-tariff barriers and classified India as an 'emerging economy'. Accustomed to shooting off the cuff, Nath replied that if India is an emerging economy, "the EU is a submerging economy." [Comment: Most informed observers note that the timetable for completion of the EU-India trade agreement in 2008 is not realistic given the slow progress since talks were launched earlier this year]. TAMIL NADU EXPECTS POWER OUTAGES THIS SUMMER -------------- ¶18. (SBU) Tamil Nadu's Minister of Electricity told a press conference on November 26 the state will likely experience an electricity shortfall this summer of up to 1300 megawatts. Blaming rapid industrial expansion for the expected deficit, he said that the state will manage the situation through a combination of planned outages and continued attempts to secure additional power from India's national grid. A senior Tamil Nadu official told Consulate Chennai that two other factors were the state of Kerala's decision to sell some of its hydro power to other states and the less-than-expected output from Tamil Nadu's nuclear power plants. He emphasized, however, that these outages were a short-term problem that would be resolved by late summer, when Tamil Nadu will have additional capacity installed. ¶19. (SBU) Local companies are making plans to deal with the situation and keep their operations running. Ford and Visteon have special arrangements with the Tamil Nadu government that should allow them to operate unimpeded (neither has enough back-up generation capacity to operate fully should the grid go down). They worry, however, that some of their suppliers may face problems. Tamil Nadu's reputation as one of India's most effectively administered states may be called into question if these planned outages cause major disruptions to the economy or are seen to presage longer-term problems stemming from inadequate investment in the state's infrastructure. INFORMATION TECHNOLOGY MAJORS SLOW HIRING -------------- ¶20. (SBU) Responding to fears of cutbacks in U.S.!corporate spending NEW DELHI 00005148 005.2 OF 005 on information technology, at least some of India's infotech majors have slowed the (admittedly breakneck) pace at which they are hiring new employees. An Infosys executive told Consulate Chennai that the company cut its growth in recruitments by half over the past year, even though it is still building new training facilities. A Cognizant executive told us that his company had adopted a "cautious approach" to hiring, emphasizing that the company was paying close attention to "market changes." ENJOY YOUR BEER WHILE IT'S CHEAP -------------- ¶21. (SBU) Beer manufacturers in South India are worried. With barley harvests in Canada, Europe and Australia falling, Indian barley exports have picked up, with some fifty thousand tons exported this year. This exodus of local barley has left some Indian brewers worried that there won't be enough barley for their brews. One executive from a major Indian brewer told Consulate Chennai, perhaps exaggerating for effect, that export of Indian barley must be banned. He added that the current high price of barley in India meant that beer prices would almost certainly rise this summer. SOUTH INDIA GETS MORE RETAIL -------------- ¶22. (U) South India welcomed yet another retail chain this week, with the MORE brand of Aditya Birla Retail opening retail outlets in Coimbatore (Tamil Nadu) and Warangal (Andhra Pradesh). Previously, MORE stores operated only in northern India. Aditya Birla Retail acquired the Trinetra's 225 stores, mostly in the South, in January. Aditya Birla is now rebranding these outlets, and it expects to convert half of the Trinetra stores by the end of the year. ¶23. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi MULFORD