NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF

UNCLAS SECTION 01 OF 04 NEW DELHI 002735 SIPDIS SENSITIVE STATE FOR SCA/INS AND EEB USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD DEPT OF ENERGY FOR A/S KHARBERT, TCUTLER, CZAMUDA, RLUHAR DEPT PASS TO USTR CLILIENFELD/AADLER/CHINCKLEY DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN USDA PASS FAS/OCRA/RADLER/BEAN/CARVER/RIKER EEB/CIP DAS GROSS, FSAEED, MSELINGER E.O. 12958: N/A TAGS: EAGR EAIR ECON ECPS EFIN EINV ENRG EPET ETRD BEXP KIPR, KWMN, PHUM, SENV, ASEC, IN SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF OCTOBER 13 TO OCTOBER 17, 2008 ¶1. (U) Below is a compilation of economic highlights from Embassy New Delhi for the week of October 13 to October 17, 2008, including the following: -- Chidambaram Still Eager for Reforms as Parliament Opens -- Industrial Production Index Drops, Other Data Positive -- Eastern India Feeling Pinch From Illiquidity -- Industry Chamber Protest Power Cuts in Tamil Nadu -- India and Burma Agree to Further Liberalize Trade -- Jewelry Exporters Concerned Over Holiday Sales -- Kingfisher-Jet Airways Deal Subject To Review Chidambaram Still Eager for Reforms as Parliament Opens -------------- -------------- ¶2. (SBU) With the special session of Parliament opening today, the Ministry of Finance has submitted for consideration and vote two key financial sector reform bills, but it is unclear whether the UPA government will take action on them or not. The Banking Amendment Bill, which would raise foreign shareholders' voting rights to be commensurate with their equity holdings in banks, and the Pension Fund Regulatory and Development Authority (PFRDA) Bill, which essentially opens the pension system to India's vast unorganized sector, are considered "money bills" where votes count as votes of confidence on the government. The UPA's slim majority, with new partners after the July confidence vote, makes a successful vote highly uncertain without BJP support. ¶3. (SBU) A key bill listed for introduction is an insurance amendment bill which would raise the FDI cap in insurance companies from 26% to 49%. No one expects the bill to get passed in this session, as very few bills come to a vote in the same session in which they are introduced. Thus, the government faces less risk in introducing the insurance legislation, and could point to it as a successful step in reform. The bill still requires Cabinet passage, which was delayed yesterday, ostensibly because of Finance Minister Chidambaram's absence, as he focused on new liquidity measures for the country's financial markets. There is still time for the Cabinet to pass the proposed bill and introduce it in Parliament, if Cabinet members are not dissuaded by the recent bailouts of global insurance companies, AIG and Fortis, both of which have joint ventures in India. ¶4. (SBU) The government has also listed for introduction an amended version of the Prevention of Money Laundering Act (PMLA),which is supposed to include new provisions reflecting guidelines from the Financial Action Task Force (FATF),where India is eager to move from observer to full member status. Also listed for consideration and vote is an amended Companies Bill Act replaces a prior submitted bill. Press reports indicate that many of the requirements spelled out in the earlier bill were removed to streamline the process. Industrial Production Index Drops, Other Data Positive -------------- -------------- ¶5. (U) The Industrial Index of Production (IIP) showed an unexpectedly large drop in industrial activity for the month of August compared to August 2007, down to just 1.3% growth. The index indicated that most of the drop was caused by negative growth in intermediate goods. Capital goods growth also slowed to just 2.3%, although that slowdown is partially explained by the high growth of 30.8% it is being compared to in August 2007. The surprise drop has raised critics' concerns about the reliability and accuracy of the index. The government is in the process of updating the IIP, as many consider it outdated and unreliable. ¶6. (U) Critics note that the IIP base is 1993-94, contains only 400 items, and neither the basket nor the inter-basket weight distribution have been changed in the last 15 years. Obsolete items like black and white televisions and typewriters are in the IIP, while goods in the IT and telecom sector are missing, as well as consumer items like DVDs and microwaves. Many analysts thus point to other data that indicate still-steady growth across much of the NEW DELHI 00002735 002 OF 004 industrial sector. These indicators include exports up 35% in April-August, a similar increase in corporate tax revenues, a 30% rise in listed manufacturing companies' sales year on year in June 2008 and a 28% increase in the revenues of capital goods firms. Eastern India Feeling Pinch From Illiquidity -------------- ¶7. (SBU) In Eastern India, contacts report that India's liquidity crunch during the last few weeks has led their infrastructure project financing to virtually stop. Power companies like the National Thermal Power Corporation (which has a unit in Farakka in West Bengal) and the private sector CESC Limited (which supplies power to Kolkata) both had plans for equipment import for upgrade and capacity expansion. Both are finding it difficult to borrow money from the banks to finance these plans. In Kolkata's real estate sector, companies that are leveraged are finding it difficult to raise the balance finance. The owner of a leading real estate company told post that since his company is not leveraged (which means they finance their projects with internal funds) he has not had any significant impact and has no liquidity problem. However, he did not rule out the possibility of a general downturn in the real estate sector and his company may not be immune to it. The real estate market in Eastern Indian is expecting people to postpone their decision to buy homes in the short term as they find it more difficult to access home loans from banks. The same logic holds for sectors like automobiles, consumer durables (refrigerators, washing machines) that depend on finance-based sales. A senior financial journalist told post that in Eastern India, "recession has already set in" for these sectors and will spread to the telecommunication sector in the coming months. ¶8. (SBU) Kolkata has a growing IT sector, although still a modest percentage of the national industry, and post contacts report a sense of anxiety in many of these companies. IT companies operating in financial and accounting space are witnessing a slowdown in projects. The IT segment is likely to get hit because these expenditures come out of the corporate budget. Companies like Cognizant are reluctant to talk about the adverse impact and point to the 36 percent year-on-year growth in business. But other contacts report that most IT companies in Kolkata and other Tier 2 cities in West Bengal have either slowed down hiring or reduced/eliminated "bench strength" which can go up to 25 percent of the number of employees. A contact told post that the real impact of the U.S. financial sector crisis will be felt in India in the first quarter of 2009 when bills receivable come up for payment. IT companies in Kolkata are apprehensive that their U.S.-based clients may reschedule payments which will mean slow down in turnover growth and strain on the cash flow. Post contacts also reported that IT companies in Kolkata may also benefit as U.S. clients shift their IT projects to destinations that offer lower costs. Industry Chamber Protests Power Cuts In Tamil Nadu -------------- -------------- ¶9. (U) Tamil Nadu Small and Tiny Industries Association (TANSTIA) called for a one-day work stoppage on October 22 to protest power cuts and high diesel prices. TANSTIA President Gandhi Kumar told Consulate General Chennai that many of his organization's members have been unable to meet production deadlines ahead of the busy Deepavali (Diwali) holiday season because of power cuts of up to 11 hours per day in cities outside Chennai. He said that even though many of his members had back-up generators, they are often unable to secure adequate supplies of diesel to run them, either because the price is too high or because required quantities are not available. Particularly hard hit, he said, are those in the textile and leather industries, who generally have high demand for their products for this holiday season. ¶10. (U) A former South India Mills Association official told us that power outages in Coimbatore, the center of the state's textile industry, ranged between 10 and 18 hours a day. He said that Chennai-based production units were faring much better than those in NEW DELHI 00002735 003 OF 004 Coimbatore and Madurai because the power cuts in Chennai were not as severe as elsewhere in the state. He said that he expected TANSTIA's call for work stoppage to evoke a strong response, particularly outside Chennai. ¶11. (SBU) Other industry associations have distanced themselves from TANSTIA's proposed work stoppage. Representatives of the Federation of Indian Chambers of Commerce and Industry (FICCI) and Confederation of Indian Industry (CII) have told us that a dialogue with Tamil Nadu power authorities on how best to proceed was the best way forward. A FICCI official said that state politics may be driving the strike call, noting that TANSTIA's head is known to be a supporter of the opposition AIADMK party. India and Burma Agree to Further Liberalize Trade -------------- --- ¶12. (U) On his third visit to Burma this year, Indian Minister of State for Commerce Jairam Ramesh on October 15, signed an agreement with the Burmese Minister for Commerce Brig Gen Tin Naing to loosen highly restrictive border trade and open an additional border trading point in the Indian state of Mizoram. India shares a 1600-km long border with Burma, which currently has only three border posts allowing only very limited trade in certain goods. Both countries have now agreed to expand the list of tradable items to 40 from the current 22, with a view to move soon towards normalized trade at these border posts. In addition, India has offered to extend trade preferences (covering 94 percent of tariff lines) to Burma under its duty-free Tariff Preference scheme for least developed countries. The Commerce Ministers also reviewed bilateral cooperation in the field of gas/petroleum, power, information technology, telecommunication, and agriculture and agreed to implement a new arrangement for trade finance for which the Union Bank of India has signed an agreement with the Foreign Trade Bank of Burma. ¶13. (U) The two countries had earlier signed agreements for a $60 million line of credit from India to Burma for power transmission to be executed by the Power Grid Corporation of India and for another $60 million line of credit for a 111 MW hydro electric power project to be executed by Bharat Heavy Electricals Ltd. Both Indian companies are parastatals. India is also implementing the Rs.5.4 billion Kaladan multi-modal transport and transit project to be completed in 2012. ¶14. (U) Burma enjoys a substantial trade surplus with India. India's exports to Burma in 2007-08 were USD 185 million and imports were USD 810 million (mostly pulses, such as lentils),with total two-way trade touching USD one billion. India imports mustard seeds, pulses and beans, fresh vegetables, fruits and soybean from Burma, and supplies clothes, shoes, medicines, woolens and engineering goods to Burma. Burma is expected to benefit from the Indo-ASEAN FTA to be signed by India and ASEAN in Bangkok on December 18th, 2008. Burma is also a member of BIMSTEC (Bay of Bengal Multi-sectoral Economic Cooperation) Agreement involving Bhutan, Bangladesh, Nepal, India, Sri Lanka, Burma and Thailand, whose summit will be held in New Delhi in mid-November. Jewelry Exporters Concerned Over Holiday Sales -------------- ¶15. (SBU) On October 17, Econoff met with K.K. Duggal, Regional Director of The Gem and Jewellery Export Promotion Council, which is sponsored by the Ministry of Commerce, to discuss current developments in the jewelry industry and specifically the impact of the Tom Lantos Block Burmese JADE Act of 2008. The JADE Act amends previous Burma sanctions by imposing import restrictions on "Burmese covered articles," which consists of jadeite and rubies mined or extracted from Burma and articles of jewelry containing such jadeite and rubies. The effective date of implementation of the JADE act is September 27, 2008; however, a 30-day grace period was granted to the trade community, expiring on October 26, 2008. NEW DELHI 00002735 004 OF 004 ¶16. (SBU) Duggal stated that jewelry exporters are very concerned about the impact of the financial crisis on retail sales of jewelry in the United States, particularly headed into the holiday season. Although wholesale orders were placed before the crisis and 2008 was a relatively good year, Duggal mentioned that exporters are worried that if jewelry does not "move off the shelves" during the holiday season in 2008, then 2009 will bring a significant drop in demand from retail outlets and not be as prosperous. ¶17. (SBU) Duggal expected that the impact of the JADE Act on the Indian jewelry trade would be negligible since India no longer imports rubies directly from Burma and the majority of rubies exported are mined in India. When asked about the new requirement for importer certification, Duggal remained unconcerned. (Comment: Duggal's dismissiveness suggests that ruby importers may face complications once the 30-day grace period ends, since India imports 20% of their rubies and they will still need the proper certification to prove the rubies are not from Burma. End comment.) ¶18. (SBU) Duggal also mentioned that the July 2007 removal of the Generalized System of Preferences (GSP) duty-free exemption for Indian gold jewelry has been difficult on exporters and argued that Indian gold jewelry, which is now subject to a 5.5 percent duty, should not have to compete with Chinese gold jewelry. Kingfisher-Jet Airways Deal Subject To Review -------------- - ¶19. (U) According to media sources, the Jet and Kingfisher alliance is being scrutinized by the Monopolies and Restrictive Trade Practices Commission for the possibly anti-competitive nature of certain provisions of the agreement. The deal will eventually attract the scrutiny of the Competition Commission of India (CCI), as it would directly impact competition in routes where both airlines have significant presence. The arrangement gives the company the combined control of over 60% of the domestic civil aviation industry. Unfortunately, CCI currently lacks teeth as it does not have a chairman or voted members and its powers have not been notified. Once CCI gets its enforcement and adjudication powers, which could happen soon as the government is selecting the chairman and members, it is expected to closely look into the legal aspects of the agreement to make sure that the alliance does not adversely affect consumers and competition in markets. ¶20. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi White