NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF

UNCLAS SECTION 01 OF 06 NEW DELHI 003072 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, KFLU, IN SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF DECEMBER 1 TO DECEMBER 5, 2008 ¶1. (U) Below is a compilation of economic highlights from Embassy New Delhi for the week of December 1 to December 5, 2008, including the following: -- India's Fiscal Deficit Set to Worsen -- GOI Set to Announce a Fiscal Stimulus Package -- Mumbai Terror Attack Slows IT Business -- Macro Update -- Exports Drop 12 Percent for October, Imports Slow Down -- GOI May Liberalize Foreign Investment Rules -- Anti-Dumping Probe May Give Steel Producers More Protection -- Investment Pattern of Pension Funds -- Insurance Regulator Speaks to Industry -- Private Insurance Companies Prefer Safer G-Secs -- World Bank May Suspend $300 Million Loan to Nhai -- PM Supports Passage of India's Bayh-Dole Act -- Poultry Firms in South India Shut Out of Middle East India's Fiscal Deficit Set to Worsen -------------- ¶2. (SBU) The Finance Ministry is likely to miss the revenue and fiscal deficit targets in FY 2008-09 as budgeted under the Fiscal Responsibility and Budget Management (FRBM) Act. The government will seek stimulus spending to boost aggregate demand in the economy, to offset the slowdown. Under the FRBM Act, the GOI was expected to eliminate the revenue deficit and reduce the fiscal deficit to 3 per cent of GDP by March 2009. Former Finance Minister Chidambaram stated that the government needs one more year to achieve FRBM targets. The fiscal deficit as a percentage of GDP between April-September 2008 stood at 4.1 percent versus 3.8 percent for the same period last year. The revenue deficit was 3.1 percent during the same period versus 2.9 percent a year ago. In addition to effects from the global economic slowdown, the fiscal situation is likely to worsen this year as the arrears of the Sixth Pay Commission awards to central government employees are fully disbursed, along with further disbursements under the farm debt waiver scheme. ¶3. (SBU) Gross tax revenues slowed to 20.3 percent between April-October 2008 compared to the corresponding period of last year. Growth in direct taxes including corporate taxes and the securities transaction tax has slowed down during the period and may not recover in the rest of the year, given the weak economic environment and lower volumes of trading on the stock markets. Corporate earnings have also decelerated in the second quarter of FY 2008-09 and are likely to register poor growth in the third and fourth quarter. India's nominal GDP in the first half of the current fiscal year grew by 17.2 percent to $502 billion (Rs 25112 billion),as compared to 7.6 percent in real terms. GDP growth may moderate over the next two quarters, as several interest rate sensitive sectors (construction and autos) are experiencing a dampening of demand. GOI Set to Announce a Fiscal Stimulus Package -------------- ¶4. (SBU) To mitigate the global meltdown's impact on India and to revive sagging demand, an economic stimulus package is being finalized by a high-level committee headed by Prime Minister Manmohan Singh which also includes Commerce Minister Kamal Nath, Reserve Bank of India (RBI) Governor Subba Rao, and Planning Commission Deputy Chairman Montek Singh Ahluwalia. Media reports that the package to be announced soon will total around $15 billion (Rs 750 billion),including the use of foreign exchange reserves for funding infrastructure projects, lines of credit to banks, and greater flexibility for non-banking financial companies (NBFCs) to access foreign loans. The fiscal measures could also include cutting excise duties on commercial vehicles. RBI Governor Subba Rao is quoted as saying that the impact of global turmoil could turn out to be stronger than expected in India. ¶5. (SBU) The package will allow RBI to invest up to $10 billion of its foreign exchange reserves (out of a total of $246 billion as of November 21) in bonds issued by foreign subsidiaries of the Indian Infrastructure Finance Corporation Ltd (IIFCL). The subsidiary will NEW DELHI 00003072 002 OF 006 then bring these funds into India and the parent company will use the rupee resources generated to lend for infrastructure projects. The government believes that when IIFCL sells the dollars back to RBI, the central bank will utilize them to add to the supply of rupees in the system, thus easing liquidity. ¶6. (SBU) The RBI will be asked to extend a line of credit of $2 billion (Rs 100 billion) to the Small Industries Development Board of India (SIDBI) to lend to small scale units at 8 percent. The RBI would lend these funds at about 6 percent to SIDBI. A similar $2 billion (Rs 100 billion) line of credit will also be opened by RBI for the National Housing Bank (NHB). The NHB will lend to housing finance companies at 6-7 percent rate so that they can provide home loans to consumers at around 8.5-9 percent to revive demand for housing. NBFCs also will be allowed to access external commercial borrowings. Some NBFCs have existing credit lines with foreign lenders and could bring in additional financing, if allowed by RBI. ¶7. (SBU) A separate package of around $400 million (Rs 20 billion) for exporters will be announced, especially for labor-intensive sectors such as textiles, handloom, handicraft, leather, gems and jewellery and marine products - which have been hit due to a slowdown in the US and European markets. According to India's Export Promotional Council for Handicrafts, India's handicraft exports have declined by 30 percent during April-October 2008, compared to the corresponding period of last year. Over one million people are employed in the most affected handicraft clusters of Moradabad, Jaipur, Saharanpur, Jodhpur and Narsapur in Andhra Pradesh. About 40 percent of the exporters have closed down their factories. A total of 500,000 people have reportedly lost their jobs. Commerce Secretary G K Pillai has stated that 500,000 people could lose jobs in the textile sector in the next five months. Mumbai Terror Attack Slows IT Business -------------- ¶8. (SBU) Fallout from the terror attacks in Mumbai is hampering some high-tech business in South India. Several companies have told us that incoming business travelers from the United States have canceled trips, holding back plans for new business. An Infosys executive told Consulate General Chennai that his company was expecting to expand business with some recently restructured U.S. financial firms. These deals, however, require U.S. businesspeople to travel to India to discuss mergers of software systems and other projects. They have now postponed their travel, stretching decision and project cycles. An official at MindTree Consulting told us that his company expects the postponement of business travel by U.S. and European customers to impact negatively revenue flows for at least the next two quarters. Macro Update -------------- ¶9. (U) Forex reserves were down US$550mn to US$246bn for a week to November 21. This is for the first time since mid October that the reserves have fallen by less than $1bn/week. The recent appreciation of the Dollar against the Euro has reduced the dollar value of the reserves held in Euros, which has been partly responsible for the drop in reserves. Among possible mitigating factors for Rupee depreciation, 2 major banks (SBI & ICICI) have reported an influx of remittances. Exports in Oct 08 shrank 12.1% yoy, the first time since March 02 primarily due to depressed demand in key developed markets and unavailability of letters of credit. A stimulus package is being formulated by a committee headed by the prime minister to address specifically employment intensive export sectors. An estimated Rs 2,000 crore will be earmarked for exporters of labour-intensive products while Rs 15,000 crore is expected for the infrastructure sector. The proposed special package of approximately 0.3% of GDP will imply a further slippage in the deficit figures. While inflation as more widely measured by the WPI continues its downward path with the latest data at 8.40% (Nov 22),the CPI for industrial workers, that more directly impacts the voters wallet, NEW DELHI 00003072 003 OF 006 has now crossed double-digit levels to 10.45 % yoy in October, faster than 9.77 percent in September, on rising food prices. Exports Drop 12 Percent for October, Imports Slow Down -------------- -------------- ¶10. (U) Latest GOI data shows exports in October were 12 percent lower than in the same month of 2007. Exports were valued at $12.8 billion in October 2008 versus $14.6 billion for October 2007. For the first seven months of the fiscal year, exports saw growth of 23.7 percent over the same period in the previous year, totaling $108 billion compared to $87 billion the previous year. Government officials predicted that India will likely not meet the target of $200 billion in exports this fiscal year; a more likely result is $175 billion. ¶11. (U) Import growth slowed in October, recording 10.6 percent growth over October 2007, compared to 41 percent growth in the first six months of this fiscal year. Non-oil imports grew by 5.5 percent in October, again less than the 29 percent growth during the first half of this fiscal year. A slow-down in non-oil exports may reflect not only decreases in import-intensive products for re-export, such as a decrease in gems to be cut and polished for export, but also an overall demand decrease in the economy. GOI May Liberalize Foreign Investment Rules -------------- ¶12. (SBU) Media report that the Ministry of Commerce and Industry intends to do way with mandatory Cabinet Committee on Economic Affairs (CCEA) clearance for foreign investment proposals valued between $120 million (Rs 6 billion) to $200 million (Rs 10 billion). According to the current rules, foreign investors as well as domestic investors with foreign partners have to approach the Foreign Investment Promotion Board (FIPB) under the Finance Ministry for approval, not only for their initial investment plans, but also for any changes in ownership patterns, fresh equity infusions, and technology transfer pacts. At present, if a foreign investor invests up to $120 million in an existing venture, it needs only FIPB clearance. Any investments above this amount require both FIPB and CCEA approval; thus the proposed change would raise the ceiling on FIPB-only investment approvals to $200 million, with investments above that amount still requiring both CCEA and FIPB approval. The GOI is also considering a proposal to exclude foreign institutional investors' stake from the overall FDI ceiling, a decision on which could be taken soon. ¶13. (SBU) During FY 2007-08, India received FDI totaling $24.5 billion, up 56% from 2006-07. The service sectors (both financial and non-financial) attracted the highest amount of foreign investments last fiscal year. This was followed by computer hardware and software, housing and real estate, telecom and construction. This fiscal year, some commentators expect India to receive $25 billion in FDI, lower than the GOI target of $35 billion, due to the global financial crisis and, to a lesser extent, possible changes in risk perception from the Mumbai terrorist attacks. Between April-September 2008, FDI inflows totaled $17.2 billion. This represents 137 percent growth over April-September 2007 FDI inflows of $7.25 billion. Anti-Dumping Probe May Give Steel Producers More Protection -------------- -------------- ¶14. (SBU) The Directorate General of Anti-Dumping (DGAD) under the Ministry of Commerce has initiated anti-dumping investigations against imports of cold-rolled stainless steel products from China, Japan, South Korea, the EU, South Africa, Taiwan, Thailand and the US. Anti-dumping inquiries have also been initiated against imports of hot-rolled steel products from China, Indonesia, Iran, Japan, Kazakhstan, Malaysia, the Philippines, Romania, Russia, South Africa, Saudi Arabia, Korea, Thailand, Turkey and Ukraine. Leading domestic steel producers filed applications with the GOI requesting the anti-dumping investigations, asserting that the inflow of below-cost steel items were coming into India from overseas inventory that has piled up due to falling demand. In addition to NEW DELHI 00003072 004 OF 006 falling demand, the domestic steel industry is specifically facing the challenge of cheap imports from China, forcing manufacturers to reduce production. It takes about 45 days for investigations to be carried out and duties to be imposed. If dumping is established, the DGAD will impose anti-dumping duties (equivalent to the extent of dumping) with retroactive effect from the date of filing of the complaint by the leading producers. ¶15. (SBU) Minister of State for Steel Jitin Prasada has said that the government may impose a 14 percent countervailing duty (equivalent excise duty that the local industry pays as manufacturing tax) on structural steel products to make imports competitive. Meanwhile, steel producers are set to cut prices of hot rolled coils. The decision is a response to the withdrawal this month of a five percent export tax on flat products by China. During the week of December 5, the GOI moved to protect local industry by placing import restrictions on hot-rolled steel, seamless steel tubes and pipes, and wood and wood products used by specific sectors, which allows only actual users (autos, infrastructure and construction) to bring in these articles with GOI-issued import licenses. Investment Pattern of Pension Funds -------------- ¶16. (SBU) Media reports that the Pension Fund Regulatory and Development Authority (PRFDA),which will regulate the new pension scheme (NPS) beginning next fiscal year (April 1, 2009),will allow fund managers to invest only in stocks comprising the benchmark indices of the 30-share Sensex of the Bombay Stock Exchange and the National Stock Exchange's 50-stock Nifty. The regulator's justification for this rule is to protect small investors from market volatility from the global financial crisis and recent stock market turbulence. ¶17. (SBU) PFRDA has also set up an expert committee headed by HDFC Chairman Deepak Parekh to suggest investment options as well as a default option - i.e., the contribution allocation that will automatically apply if an investor does not make a specific choice. Investment allocation decisions by pension fund managers would be patterned on those followed by the Employees Provident Fund Organization: only 15 percent of the total money will be invested in equities; out of which 5 percent of the savings will go into equities while another 10% can go indirectly via equity-linked mutual funds. Next year, the GOI will allow provident fund trusts operated by private firms to invest in equities up to 15 percent directly or indirectly. Insurance Regulator Speaks to Industry -------------- ¶18. (SBU) Addressing a FICCI Conference organized this week on "Doubling the Insurance Penetration: Imperative for Uncertain Times", the Chairman of the Insurance Regulatory and Development Authority (IRDA),J Harinarayan, stated that India's insurance industry is expected to grow by 17 percent during FY 2008-09 if the economy grows at 7.6 percent, as it did between April-September ¶2008. He expects the terror insurance pool to grow significantly due to the recent terror attacks in India. The Chairman asked insurance firms to use the opportunity presented by the downturn to improve their treasury management performance and build a foundation for future growth, which would help increase insurance penetration in the country. Chairman Harinarayan expressed concern about the widening asset-liability mismatch in insurance companies' balance sheets. He opined that there are insufficient long term debt securities available in the market, which may impact certain kind of liabilities that would arise in the future. [Note: He seemed to be indicating that because insurance tends to focus on longer-term liabilities, the inability of insurance companies to invest in as many long-dated assets as is optimal for their business model imposed operating constraints and risk-management concerns. End note]. In addition, Harinarayan indicated that IRDA is looking at introducing mark-to market norms for the investment portfolio of NEW DELHI 00003072 005 OF 006 companies. Harinarayan said that IRDA will be taking up this issue with the Ministry of Finance at an appropriate time. ¶19. (SBU) The IRDA Chairman further said that, given what is happening in financial markets, he expects a wave of consolidation in the Indian insurance industry. In anticipation, IRDA is formulating draft guidelines on insurance mergers and acquisitions (M&A) in coordination with the Institute of Actuaries. The draft guidelines would be ready by March 2009 for stakeholder discussions with industry. Currently, India has not issued any insurance sector-specific M&A guidelines. Harinarayan also talked about rationalizing the insurance intermediary sector (i.e. distribution and insurance agents) and was in favor of allowing insurance companies to outsource some parts of their non-core business. Private Insurance Companies Prefer Safer G-Secs -------------- -- ¶20. (SBU) Media report that private life insurance companies including Max New York Life, MetLife, and Aviva have shifted their investment preferences from equity markets/corporate bonds to central government securities (g-secs) due to the global market volatility. Indian life insurers invest about $20 billion (Rs 1000 billion) annually in bonds and share markets as part of their premium collections. Now these private firms plan to raise their investments to 75 percent in g-secs from the mandated 50 percent. In addition, these firms are required to invest 15 percent of their total assets in infrastructure bonds. The rest of the assets could be invested in both equities and bonds with a limit of 15 percent in equities. Life insurance companies have unit-linked insurance plans (ULIP),the return of which is linked to the performance of the equity market and also standard/endowment products which provide fixed returns. IRDA prescribes investment guidelines for standard products but has no rules for ULIP products as investment under ULIPs are decided by the policyholder. World Bank May Suspend $300 Million Loan to Nhai -------------- -- ¶21. (U) Adding to the woes of the National Highways Authority of India (NHAI),World Bank has threatened to withdraw $300 million of the $620 million loan package for the $933 million Lucknow-Muzaffarpur National Highway Project (LMNHP). The bank has stated its displeasure at the tardy progress and inadequate safety measures followed in this highway development project. World Bank is especially concerned over the poor implementation of five road packages under the LMNHP which should have been open this month. There are also apprehensions about the large number of variations on work contracts awarded. These road stretches comprise almost 40% (in value) of the LMNHP that seeks to transform this 513 km national highway between Lucknow and Muzaffarpur (in Bihar) into a modern, four-lane road thus cutting travel time by 40%. PM Supports Passage of India's Bayh-Dole Act -------------- ¶22. (U) According to local media reports, Prime Minister Singh expressed support to pass an intellectual property (IP) law, entitled the "Protection and Utilization of Public Funded Intellectual Property Bill 2008," or the "Indian IP Bill" that would allow for transfer of IP from universities to the public. On December 3, the PM stated during a speech at the Indian Institute of Science (IISc) in Bangalore that he supports passage of legislation that would create mechanisms and incentives for the transfer of intellectual property by publicly funded research to beneficiaries. ¶23. (U) The bill, if passed, would be the Indian equivalent to the U.S. Bayh-Dole Act, which provides U.S. universities, small businesses, and non-profits the right to elect to pursue ownership and title of an invention instead of the government. The Indian version of the law would allow academic institutions to patent publicly funded research and would reward institutions and inventors NEW DELHI 00003072 006 OF 006 with a share of royalties or licensing fees from any resulting commercial products. While the U.S. version of the law provides rights specifically to institutions, the Indian version would provide the inventor with at least 30 percent of any royalties generated from licensing of an invention. ¶24. (U) The Indian IP Bill was approved by India's Union Cabinet in late October and submitted to Parliament, sparking controversy because the bill moved to parliamentary review without being publicly released. Opponents of the proposed law argue that it limits access to publicly-funded innovation, and that it gives scientists little say in the application and licensing of their invention. Poultry Firms in South India Shut Out of Middle East -------------- -------------- ¶25. (U) Another outbreak of avian influenza in northeastern India is already hurting South India's poultry farmers. The managing director at one major egg-producing company told Consulate General Chennai that the states in the Arabian Gulf, a key market, have banned imports of poultry meat and eggs from India. One exporter even had to pay to return to India a shipping container full of eggs rejected by Qatar. The domestic market -- the only one now available to India's producers -- is now awash in poultry products, reducing prices, and hurting producers' bottom line. ¶26. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi MULFORD