NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF

UNCLAS SECTION 01 OF 04 NEW DELHI 002924 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 EMIN ENRG EPET ETRD BEXP, KIPR, KWMN, PHUM, SENV, ASEC, IN SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF NOVEMBER 10 TO NOVEMBER 14, 2008 ¶1. (U) Below is a compilation of economic highlights from Embassy New Delhi for the week of November 10 to November 14, 2008, including the following: -- PM Singh Comments on His Plans for G-20 Summit -- Inflation Rate Drops to Single Digits -- Private Carriers Protest Their Exclusion Under GOI New Ground Handling Policy -- GOI Reviewing Trade Policy with Pakistan -- Indian Exports Fall Following Lower Global Demand and Poor Export Financing -- India Confident of Meeting Target of 100 Percent Sanitation Access in Rural Areas -- Tamil Nadu Allows Market Access for European Spirits -- International Mining and Machinery Exhibition (IMME 08) -- BIMSTEC Calls for Early Conclusion of Free Trade Agreement PM Singh Comments on His Plans for G-20 Summit -------------- - ¶2. (U) Prior to his departure for the G-20 Summit in Washington, D.C., local media quoted Prime Minister Singh as stating "I will put forward our views on the need for greater inclusivity in the international financial system, the need to ensure that the growth prospects of the developing countries do not suffer, and the need to avoid protectionist tendencies." Singh also reiterated that the fundamentals of the Indian economy were strong and that India has potential to contribute to global economic growth; however, such contributions are limited by the lack of international support that provides effective governance. Media reports suggested that the PM would like world leaders to discuss the need for a global monitoring authority to promote global supervision and cooperation. ¶3. (U) Local media also quoted an unnamed official from the PM's office, who stated that Singh will take a "holistic and political view" and that Planning Commission Deputy Chairman Montek Singh Ahluwalia, as the Indian 'sherpa' for the G-20 Summit, will consult with the PM on the 'larger economic impact' of the decisions resulting from the gathering. Inflation Rate Drops to Single Digits -------------- - ¶4. (U) India's inflation rate unexpectedly lowered to 9.98% at the end of the first week of November, the first time the Wholesale Price Index (WPI) dropped to single digits since hitting 12.8% in August. According to local media, the downward shift was a sharper correction than expected; the rate was anticipated to fall below 10% around the turn of the year. ¶5. (U) COMMENT: With economic indicators suggesting that growth is decelerating, the only factor that has prevented the Reserve Bank of India (RBI) from cutting policy rates has been high inflation, meaning the downward shift will provide RBI the maneuverability to further cut rates in order to encourage growth. The decline in inflation rates may also have a positive impact on upcoming state and national elections. END COMMENT. Private Carriers Protest Their Exclusion Under GOI New Ground Handling Policy -------------- ¶6. (U) Effective January 1, the GOI will implement a new civil aviation requirement that, with the exception of the state-carriers Air India and Indian Airlines, prohibits all other carriers from providing ground-handling services. Besides the state carriers, The Cabinet Committee on Security will permit only the Airports Authority of India and an independent agency selected through a global bidding process (in which private sector airlines can also participate) to provide these services. When implemented, the new rules will force the private carriers who currently provide their own ground handling services to lay off their ground handling staff. The largest private carrier, Jet Airways, employs 4,000 ground handling staff, while IndiGo, Spice Jet and Go Air together employ NEW DELHI 00002924 002 OF 004 an additional 2,000 staff. 29 per cent of the 28,000 personnel employed by private carriers are involved in ground handling. Private carriers are opposed to the new policy which they argue would lead to a cost escalation and affect service quality. In response, the government is reportedly discussing with the carriers a compromise formula under which front-end ground-handling (customer interaction) will be done by the airlines and back-end work would be done as required under the new rules. According to an Ernst & Young report the Indian ground handling market is estimated to be worth US$ 625 million. GOI Reviewing Trade Policy with Pakistan -------------- ¶7. (U) Inspired by the rising business interest among the Indian and the Pak traders, the Government of India (GOI) is, reportedly, reviewing its trade policy with Pakistan to push economic ties despite an impasse over Kashmir and other pending issues. Media reports that the Indian commerce ministry is currently consulting stakeholders to enhance trade with Pakistan by changing the entire approach. Some proposals that are being considered include trading with Pakistan through a unilateral, negative trading list as opposed to a positive list approach. However, the task is perceived to be daunting as a few sections of the Indian establishment still tend to attach political sensitivities to trade liberalization with Pakistan. Lack of reciprocity from Pakistan - mainly on the issue of according MFN (Most favored Nation) status to India - is often cited as the major deterrent to a more liberal trade policy from the Indian side. ¶8. (U) Indo-Pak bilateral trade, at $2.12 billion, is restricted and dominated by a positive list maintained by Pakistan and non-tariff barriers imposed by India. However, trade still finds its way, and items other than the ones on the positive list, are traded in third countries such as Dubai. Pakistani president Asif Ali Zardari has expressed interest in pushing economic cooperation with India through announcing a new trade policy in August 2008, expanding its positive list of exportable items to India. However, the notification of these items is still awaited. Similarly, the Wagah-Attari road and the Khokrapar-Munabao railway line to all permissible trade items was to open to push bilateral trade, which has yet to take place. According to Dr. Taneja, a senior researcher at the Indian Council for Research on International Economic Relations (ICRIER),the political factors that were trying to guide trade have taken a backseat and the private sector in both countries is very active despite the fact that Pakistan hasn't given India MFN because of the promising profits. Dr. Taneja also mentioned lack of implementation of stated intent and policies from the Pakistani government. Indian Exports Fall Following Lower Global Demand and Poor Export Financing -------------- -------------- ¶9. (U) According to the Government of India (GOI) preliminary monthly trade data, exports have declined 15 per cent to $12 billion in October 2008 compared to $14 billion in October 2007. Exports from all areas other than oil, accounting for over 80 percent of India's total exports, registered a decline; industries like gems and jewelry and handicrafts are the hardest hit. The downward trend, witnessed for the first time since 2003, points to increasingly difficult times for Indian exports, given the ongoing global dip in demand following the financial crisis in its major destination markets (the US accounts for 13 percent of Indian exports and the EU 22 percent). Government sources expect the trend to continue in the coming months, suggesting that the export growth target of 23 percent to $200 billion for Indian fiscal year (IFY) 2008-09 is unlikely to be achieved. India's average export growth rate for first six months of the current fiscal year (April-September) stood at an impressive 31 percent, which has now dropped to 21.5 percent after the October figures. The slowdown in exports has occurred despite the 20-percent depreciation of the rupee against the US dollar over the last year, suggesting that NEW DELHI 00002924 003 OF 004 scarce and expensive export financing is also a major negative factor. According to trade analysts, traders are finding it difficult to access liquidity both at the buyers' end and at the sellers' end. ¶10. (U) In a recent press conference, GOI officials stated that despite recent steps taken by the Reserve Bank of India (RBI),such as further reductions in both the cash reserve ratio (cash that banks must deposit with the RBI) and statutory liquidity ratio (the amount banks must invest in government securities),small exporters are still finding it difficult to obtain financing. Concerned over the possibility of significant job losses in labor-intensive export sectors, the GOI is considering as yet unidentified additional measures to help exporters. India Confident of Meeting Target of 100 Percent Sanitation Access in Rural Areas -------------- ¶11. (U) India's rural development ministry recently told the media that India expects to build 112,300 toilets every day to ensure 100 percent sanitation access in the country by 2012. However, a Water-Aid India (a local arm of an international organization specializing in drinking water and sanitation) representative has estimated completion of these sanitary facilities by 2015. The Government of India's (GOI) sanitation goals are the latest supplement to its "Total Sanitation Campaign" (TSC) which was initiated in 2004 to eradicate the "open toilet" system in the country by 2010. The cost of building toilets under this campaign is shared by the federal government, state governments and the beneficiaries. According to the Ministry of Health and Family Welfare, poor sanitation and resultant diseases cause an annual loss of 180 million man-days and an economic loss of Rs.12 billion in India. According to a UNICEF/WHO (United Nations Children's Fund/World Health Organization) joint study on the country's progress on sanitation goals, India has more than 500 million people who use the "open toilet" system. Tamil Nadu Allows Market Access for European Spirits -------------- -------------- ¶12. (SBU) The South India state of Tamil Nadu quietly began allowing more European brands of spirits into the market on November 10, as the state-owned alcohol monopoly Tamil Nadu State Marketing Corporation (TASMAC) started selling products owned by London-based Diageo. TASMAC's marketing director told Consulate General Chennai that a recent Government of India (GOI) directive mandated this change, prompting TASMAC to offer spirits including Johnnie Walker Black Label, Johnnie Walker Red Label, Smirnoff vodka, and Gordon's dry gin at all of its stores. (Our own inspection of a TASMAC outlet on November 11, however, found that the only one of these items actually available was Gordon's, but the TASMAC managing director said that the other varieti%s should hit the shelves starting November 17.) ¶13. (SBU) The timing of Tamil Nadu's action is probably not accidental. A contact at Chennai's British Deputy High Commission told us that it expected a team from the European Commission to arrive in India next week to monitor GOI compliance with recent World Trade Organization (WTO) rulings against India's trade practices regarding spirits. ¶14. (SBU) The TASMAC marketing director also told us the organization's next scheduled internal review (in February) will likely result in another expansion of available brands. He added that "a few US brands" might be included on that list. International Mining and Machinery Exhibition (IMME 08) -------------- -------------- ¶15. (U) The Confederation of Indian Industry (CII) organized the 9th International Mining and Machinery Exhibition (IMME'08) in Kolkata from November 5 - 8. Over 300 exhibitors from 15 countries NEW DELHI 00002924 004 OF 004 exhibited - a 25 percent increase from the last show held two years ago. Six new-to-market American firms exhibited in addition to the established American manufacturers. In discussions with exhibitors and participants, PolEconOff found that China and India remain attractive mining markets despite the global slowdown; however, the credit crunch is negatively impacting firms' investment plans. Equipment financing is viewed as a profitable and growing market segment. One U.S. firm told PolEconOff that it would like to import and sell re-conditioned machinery in India; but is hindered by Indian restrictions on importing used machinery. BIMSTEC Calls for Early Conclusion of Free Trade Agreement -------------- - ¶16. (U) According to local media sources, the second summit of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) culminated with a call for an early conclusion of a free trade agreement (FTA) to stimulate economic activity among the seven memer countries, which includes India, Sri Lanka, Bhutan, Bangladesh, Thailand, Myanmar and Nepal. ¶17. (U) The summit also agreed on a pact to combat terrorism and finalized agreements on promoting exchange in three areas, weather, culture and energy. As part of the implementation of these objectives, the group of nations decided to set up a weather and climate center in India, a cultural industries center in Bhutan, and an energy center in India. According to media sources, Prime Minister Singh offered to extend information sharing from its Tsunami Warning Center to other member countries and discussed pooling resources to set up a food bank that could be drawn from by BIMSTEC countries in need. The summit also agreed to focus on enhancing rail, road and shipping links to promote greater contact through exchange, business and tourism. ¶18. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi MULFORD