NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF

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SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF
DECEMBER 8 TO DECEMBER 12, 2008


1. (U) Below is a compilation of economic highlights from Embassy
New Delhi for the week of December 8 to December 12, 2008, including
the following:

-- Macro Update
-- Speculation on New Finance Minister
-- World Bank to Address Infrastructure and Poverty
-- India's Infrastructure Registers Sluggish Growth
-- GOI Allows Fertilizer Companies to Issue Fertilizer Bonds
-- India to Go Slow on Bilateral Trade Plans with Pakistan
-- Renault Scales Down Chennai Facility
-- Tamil Nadu Changing Policies on Electricity Sales

Macro Update
--------------


2. (U) Economic outlook for India deteriorates with World Bank &
Morgan Stanley further downgrading India's growth forecasts (5.8%
for 2009 & 5.3% for FY09 respectively). A blend of monetary and
fiscal measures were announced, like policy rate cuts (1% reduction
in Repo and Reverse Repo rates),excise duty cuts (across the board
4% excise duty cut barring petroleum products) and increased
government outlays (USD 4 bn),to combat the decelerating growth
momentum. The fiscal package drew a mixed response from industry
with some sectors like construction and real estate expecting a
bigger boost. In addition, the government permitted IIFCL to raise
tax free bonds to the tune of USD 2 bn, to facilitate financial
closure for infrastructure projects under the PPP route. The
government is also taking steps to ensure that the already budgeted
expenditure of USD 60 bn is actually spent over the next four months
of the current fiscal year. The recent fiscal stimulus package of
approximately 0.6% of GDP will imply a further slippage in the
deficit figures. Inflation rate fell further to a seven month low of
8% (Nov 29) mainly on account of easing food prices.

Speculation on New Finance Minister
--------------


3. (SBU) Press reported this week on possible replacements for
Chidambaram, who became Home Minister following the November 26
Mumbai terrorist attack, as Minister of Finance. Names being
considered include former Karnataka Chief Minister SM Krishna, Union
Commerce and Industry Minister Kamal Nath, Rajya Sabha Member and
Former Reserve Bank of India Governor C Rangarajan, and Deputy
Chairman of the Planning Commission, Montek Singh Ahulwalia. Some
Econoff contacts suggest that the most likely of the four is
Rangarajan because the Ministry needs someone well-versed in finance
to manage the daily flow of issues and decision-making, especially
during the ongoing financial and economic slowdown. The other most
likely possibility is that no one is named before national
elections, in which case Montek Ahluwalia will de facto run MOF,
reporting directly to the Prime Minister as he does now in the
Planning Commission.


4. (SBU) SM Krishna, (76 years old) may be favored because of his
political credentials. Krishna, a lawyer by profession has held
many prestigious positions such as former Governor of Maharashtra
and former Chief Minister of Karnataka. Krishna resigned as Governor
of Maharashtra on March 5, 2008 in order to return to active
politics in Karnataka. Kamal Nath, (62 years old) Union Commerce
and Industry Minister, appointed since May 2004 has earlier served
in various ministerial capacities including as Union Minister of
State for the Environment and Forests and Textiles. Nath has
witnessed major trade policy initiatives as Minister of Commerce and
Industry. (Comment: One contact theorized that Nath may be
generally discredited in Congress party circles for having promised
a definitive win in his home state of Madhya Pradesh, which did not
happen. End comment.) Dr. C. Rangarajan (76 years old),who
recently became a Rajya Sabha Member, is a leading economist who has
played a key role as a policy maker. He has held several important
positions including as Chairman of Prime Minister Manmohan Singh's
Economic Advisory Council, Governor of Reserve Bank of India and
Governor of Andhra Pradesh. Rangarajan may be Prime Minister Singh's

NEW DELHI 00003138 002 OF 004


choice because of his vast technocratic experience. Montek Singh
Ahluwalia (65 years old) has been the Deputy Chairman of the
Planning Commission since June 2004 and is considered a close
economic advisor to the Prime Minister. He is not a member of
Parliament could hold the office for six months without being a
member of either house. He was Finance Secretary in Manmohan
Singh's team in the Finance Ministry, which initiated economic
reforms in the early 1990s.

World Bank to Address Infrastructure and Poverty
-------------- ---


5. (U) The Wnrld Bank on December 11 released India's Country
Strategy for the years 2009-12, anticipating total lending of $14
billion over the next three years, of which $9.6 billion will be
from the International Bank for Reconstruction and Development
(IBRD) and $4.4 billion from the concessional International
Development Association (IDA). The strategy aims to fast-track the
development of much-needed infrastructure and to support the seven
poorest states (Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh,
Orissa, Rajasthan, and Uttar Pradesh) in achieving higher standards
of living for their people. World Bank's Economic Adviser Giovanna
Prennushi argues that in order to sustain India's rapid growth, it
needs to include the 300 million people who live below the poverty
line. India's vast infrastructure deficits also need to be
addressed as no Indian city provides water 24 hours a day and only
half the population has access to safe drinking water. About 40
percent of India's 600,000 villages are not connected to a road.
India was the largest IDA and second largest IBRD borrower from the
Bank in 2008.

India's Infrastructure Registers Sluggish Growth
-------------- ---


6. (SBU) India's infrastructure sector, with a combined weight of
26.7 percent in the index of industrial production (IIP),slowed to
3.4 percent growth in October 2008 versus 4.8 percent in the
previous month and 4.6 percent in October 2007. The core sector has
been posting weak growth throughout the fiscal year. Cumulative
core sector growth for April-October 2008 was just 3.9 percent as
compared to 6.6 percent registered during the corresponding period
of last year. The steel sector was the worst hit, registering a
negative growth of 0.5 percent against 5.2 percent in October 2007,
due to a slowdown in demand and a sharp downturn in steel prices.
Electricity production remained flat at 4.4 percent. However, coal
output was up by 10.9 percent in October 2008 vis-`-vis 8.9 percent
in the previous year. Output of petroleum products nearly doubled
to 5 percent from 2.7 percent. Cement output grew by a healthy 6.2
percent in October 2008, with cement inventories at wholesalers
increasing.


7. (SBU) This week, in order to make more funds available to the
infrastructure sector, the government approved the issuance of tax
free bonds totaling $2 billion (Rs 100 billion) by the state-owned
India Infrastructure Finance Company (IIFCL). The IIFCL will raise
the funds through a combination of private placement and public
issue. The coupon rate for the proposed bonds will be 7.5 percent.
IIFCL will lend the funds to banks for refinancing infrastructure
projects, particularly in the road and ports sector, at 8.5 percent.
IIFCL will also lend directly through consortium-lending sources.
The government is expected to invite bids for over 50 highway
projects worth $10 billion (Rs 500 billion).

GOI Allows Fertilizer Companies to Issue Fertilizer Bonds
-------------- --------------


8. (SBU) The Finance Ministry on December 10 gave permission to 23
government-owned fertilizer companies to issue special bonds worth
$2 billion (Rs 100 billion) as compensation towards the fertilizer
subsidy during FY 2008-09. The largest subsidy ($596 million) is
being given to Indian Farmers Fertilizer Co-operative Ltd followed
by Coromandal Fertilizers Ltd ($230 million) and Indian Potash Ltd
($219 million) to help these firms meet their working capital

NEW DELHI 00003138 003 OF 004


requirements. The 14-year bonds are being issued at the coupon rate
of 7 percent. These bonds will not be eligible as statutory
requirements of banks for investment in government securities.
However, the investment by the provident funds, gratuity funds and
superannuation funds in the bonds will be treated as an eligible
investment. Banks will be allowed to sell these bonds to the
Reserve Bank of India whenever they want, thus ensuring liquidity of
these bonds. The government received approval for reimbursing
fertilizer companies for the cost of the controlled fertilizer
prices for $7.8 billion (Rs 389 billion) by way of cash outgo and
$2.8 billion (Rs 140 billion) through bonds in the supplemental
budget passed in October. With global crude prices now coming down,
the fertilizer subsidy may also be lower. Analysts point out that
the fertilizer companies wanted to receive the subsidy in cash
rather than through bonds, because they had to sell them at a 15
percent discount last fiscal year.

India to Go Slow on Bilateral Trade Plans with Pakistan
-------------- --------------


9. (U) Last month's Mumbai terror attack will likely affect nascent
trade openings between the two countries going forward. Minister of
State for Commerce Jairam Ramesh has reportedly said that in the
aftermath of the attacks, no new initiatives will be started and
India will have to revisit trade plans with Pakistan. India and
Pakistan, in September 2008, took steps to promote bilateral trade
despite the traditional sensitivities involved between the two
countries. India's trade plan included removing Pakistan from the
list of countries from where foreign direct investment was not
allowed due to security reasons; opening two branches of commercial
banks of India and Pakistan on a reciprocal basis; permitting trade
in several hundred items compared with the current 13 across the
Attari-Wagah border and the Khokrapar-Munabao border; and opening
the Skardu-Kargil route in Jammu and Kashmir for commerce. The
Indian government has also dropped a plan to launch a website
containing specific details of procedures to be followed by
Pakistani exporters aiming to trade with India.


10. (U) Immediately after the Mumbai attacks, India abandoned plans
to set up border posts to facilitate movement of goods and people to
and from Pakistan, Bangladesh, Nepal and Myanmar. However, India
will continue to allow trade across the Line of Control in Jammu and
Kashmir, which is restricted to 21 items including fresh and dry
fruits, spices, honey, leather slippers, walnut-wood furniture, wall
hangings, embroidery items, tamarind, green gram, carpets, shawls,
black mushrooms, pillows and pillow covers, medicinal plants, rice,
blankets, rugs, woolen garments, saffron and kadam, a vegetable.


11. (U) Bilateral legal trade between India and Pakistan increased
to $2.3 billion in 2007-08 (0.5 percent of India's total trade
turnover) from $345 million in 2003-04. According to some trade
observers, suspension of trade ties has more of an impact for
Pakistan than for India, given Pakistan's minimal share in India's
trade.

Renault Scales Down Chennai Facility
--------------


12. (SBU) Carmaker Renault-Nissan announced on December 9 a scaling
down of its plans to manufacture automobiles in Chennai. The
company is currently building a plant -- due to open in 2009 -- that
was originally supposed to produce up to 500,000 cars per year. A
company spokesman told Consulate General Chennai that the plant will
now operate only one line and produce only two types of sub-compact
cars developed for the Indian market, which should be available to
consumers in 2010. He said that Renault-Nissan had dropped plans to
produce a larger sedan at the facility because a key supplier
withdrew from an agreement to provide critical components for the
project. A journalist from a leading business daily told us,
however, that Renault-Nissan dropped its sedan plans because larger
cars are selling extremely poorly in India.

Tamil Nadu Changing Policies on Electricity Sales

NEW DELHI 00003138 004 OF 004


-------------- --------------


13. (SBU) Still reeling from electricity shortfalls, the state of
Tamil Nadu continues to shift policy on sales of power by private
producers to encourage greater use of as-yet untapped sources of
electricity generation. The Tamil Nadu Electricity Regulatory
Commission (TNERC) has hitherto required that private producers of
electricity (i.e., producers other than the Tamil Nadu Electricity
Board, TNEB) pay a "cross-subsidy surcharge" to TNEB. The purpose
of this fee was ostensibly to help TNEB compensate for potential
lost revenues required to achieve its "social goals," which include
below-cost power to most individual consumers and free power to
farmers. (Consulate General Chennai hears frequent complaints from
companies that farmers tend to sell this electricity rather than use
it to irrigate crops.) The actual effect was to discourage
potential private producers from generating electricity for sale to
power-starved industries.


14. (U) The TNERC will now allow the TNEB to drop the surcharge
requirement. This move, championed by the Confederation of Indian
Industry (CII) and other business groups, should increase the
incentive for private producers to sell power. CII argued that many
companies in the state have installed back-up generators that could
be used to generate electricity for sale to other companies,
particularly in the current economic climate, when many
manufacturers are seeing orders for their products plummet. The
chairman of a Coimbatore-based textile company told us that his
facility has installed back-up generation capacity of 2 MW. His
textile facility is operating below capacity and he has long wanted
to sell electricity to nearby companies to generate additional
revenue, but the required surcharge made it unprofitable. He told
us, however, that he should now be able to do so profitably.


15. (SBU) Comment: Environmentally conscious observers may cringe
at the prospect of hordes of private producers generating
electricity inefficiently with relatively small diesel- and heavy
fuel oil-powered generators, but the shortfall in electricity in the
state is so acute that such concerns receive scant attention by
policy makers. End Comment.


16. (U) Visit New Delhi's Classified Website:
http://www.state.sgov/p/sa/newdelhi

MULFORD