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 15 TO DECEMBER 19, 2008


1. (U) Below is a compilation of economic highlights from Embassy
New Delhi for the week of December 15 to December 19, 2008,
including the following:

-- GOI Banking on Infrastructure Projects to Revive Faltering
Economy
-- Telecom Regulator Seeks Clarity on 3G Policy
-- Bail-out Package for Air India Likely in January
-- Inflation Hits a 9-month Low
-- NHAI Again Falls Short of Project Deadlines
-- Parliament Passes the Unorganized Sector Bill
-- World Bank to Further Assist Infrastructure Sector
-- States Ask for Money to Cover VAT Revenue Losses
-- Retail Sector Slows Down Expansion Plans

GOI Banking on Infrastructure Projects
to Revive Faltering Economy
--------------


2. (U) At an infrastructure roundtable on December 19 organized by
the Confederation of Indian Industry (CII),several industry
analysts discussed and debated the impact and possible solutions to
the liquidity crisis in the infrastructure sector. The panelists
agreed that the GOI is relying on the infrastructure sector to
revive and kick start the economy. The Planning Commission has set
a target of investing $500 billion in the infrastructure sector
during the Eleventh Plan. Of the planned total investment
requirement, the government is planning to raise 30 percent (or $150
billion) of the funds in the private sector. At present, India
currently invests 5 percent of GDP in infrastructure and aims to
increase this to 9 percent by the end of the Eleventh plan period
(2012). In comparison, China is currently investing 15 percent of
its GDP in infrastructure projects. Project developers and
promoters cite the current liquidity crunch, higher interest rates,
and delayed rollout of infrastructure projects by the GOI as
important factors leading to the slowdown in this sector.


3. (U) According to representatives from the financial institutions,
the liquidity crunch has only extended to promoters who so far have
been unable to garner adequate equity. However, debt financing for
infrastructure projects, albeit at higher interest rates, is
available. Both Chairman Kohli of India Infrastructure Finance
Company and Chairman Chakrabarty of Punjab National Bank shared the
view that interest rates are bound to come down as a response to the
fiscal stimulus measures which have been announced by the GOI.
Also, the decision to put in place refinancing schemes as well as
the subordinate debt scheme will likely ease the liquidity crunch.
According to Kohli, an additional $100 million will be in place for
financing infrastructure projects by April 2009. Yet, he commented
that the problems of identifying and bringing forth bankable
projects will remain. Kohli pointed out this will be further
exacerbated if adequate and urgent measures are not taken in the
infrastructure sector like increasing efficiency in implementing
on-going projects, providing non-fiscal incentives (such as faster
project clearances and more efficient land acquisition procedures),
and a single window approach for monitoring and facilitating
projects.

Telecom Regulator Seeks Clarity on 3G Policy
--------------


4. (U) Telecom Regulator Trai has requested that the communications
ministry address several controversial issues prior to going ahead
with the 3G auctions, particularly how the government plans to issue
licenses to new companies that enter India via the 3G route. Trai
has requested clarification on whether or not companies entering via
the 3G route will have to pay an entry fee for a license and if 2G
spectrum would be allotted to companies entering under successful 3G
bids. Trai's questions to the ministry closely coincide with USG
requests for clarification on the same policy.

Bail-out Package for Air India Likely in January
-------------- --

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5. (U) According to local media sources, a draft Cabinet note
proposing a bailout for the National Aviation Company of India
(NACIL),which operates Air India, has been submitted by the civil
aviation ministry. The bailout package would be approximately USD
500 million to be put into effect in January. The government
assistance would help Air India cope with high losses and the
fibancial burden of fluctuating jet fuel prices. The additional
costs of jet fuel prices from April to October were approximately
USD 500 million. The civil aviation sector has been one of the most
affected by the financial slowdown: the accumulated losses for the
sector this fiscal year may reach USD 1.7 billion, with Air India
accounting for almost half of this total. Air India currently owes
about USD 150 million to the Airport Authority of India.

Inflation Hits a 9-month Low
--------------


6. (U) The annual inflation rate, as measured by the WPI, dropped to
6.84% for the week ending on December 6 (from 8% the week prior),
primarily due to a fall in fuel prices. The declining inflation
rate has again sparked hope in the private sector that the RBI will
consider cutting interest rates again soon. Along with the drop in
fuel prices, prices of food products have also decreased for the
second straight week. This drop, analysts report, may provide the
government with room for more aggressive monetary policies without
inflationary consequences.

NHAI Again Falls Short of Project Deadlines
--------------


7. (U) Continuing its poor record of meeting project deadlines, the
National Highway Authority of India (NHAI) once again failed to meet
its October 2008 target date for completion of projects first
launched in 2004. NHAI did not finish any of the 47 projects in the
second phase of the North-South-East-West (NSEW) corridor.
According to media reports, less than 50 percent of the work has
been completed on 23 projects. The NSEW corridor is part of the
government's flagship National Highway Development Program (NHDP),
aimed at approximately 32,939 of four-lane highways across India.


8. (U) Also, 83 other projects which were launched in May 2004 and
are scheduled to be completed by 2010 are behind schedule.
According to press reports quoting a senior NHAI official, the
organization has been giving a free run to its contractors for the
past four years. The official added that there is a "total lack of
supervision and the authority has not made any effort to remedy the
situation." However, the same report also quotes another official
from the Ministry of Road Transport and Highway (MORTH) who asserted
that the NHAI has sent show-cause notices to a dozen non-performing
contractors who have not even completed 50 percent of the work.


9. (U) Highway development in India is expected to absorb USD 60
billion in investments over the next five years and has been
identified as a key sector for sustained economic growth by the
government. That said, problems with land acquisition, escalation
of input costs, lack of cooperation by some state Governments, and
interference by MORTH in day to day functioning of NHAI operations
are causing significant delays in the commissioning of these
projects.

Parliament Passes the Unorganized Sector Bill
--------------


10. (U) The long pending Unorganized Workers' Social Security Bill,
2008 was passed by both houses of Parliament, after rejecting
amendments by the Left Parties that would have created a national
welfare fund and extended health and insurance schemes for the
workers. The legislation will provide social security and job
protection to 375 million workers in the informal sector (including
agriculture and construction sector) in the next five years. It
will enable about 94 percent of workers below the poverty line in
the informal sector to receive health, life, and group accident

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insurance, as well as pension benefits. Labor Minister Oscar
Fernandes indicated that the national and state governments will
establish social security advisory boards to recommend suitable
welfare measures for different sections of unorganized sector
workers. Certain health insurance and old age pension schemes for
those below the poverty line have already been implemented.
Fernandes described the legislation as the "first step in 60 years"
to address the difficulties of the poor. The Communist Party of
India (Marxist) who had supported the bill previously complained
that the legislation fails to cover 90 percent of the workforce in
the unorganized sector because most of them do not fall below the
poverty line under the legislation. The bill now goes to President
Patil for final review and signature.

World Bank to Further Assist Infrastructure Sector
-------------- --------------


11. (SBU) The World Bank plans to provide an additional sum of USD 3
billion for investment in India's infrastructure sector. The Bank
has stipulated this additional amount is part of the total financing
of $14 billion proposed for India's Country Strategy for fiscal
years 2009-2011. This additional amount will be channeled through
the India Infrastructure Finance Company Limited (IIFCL) to help
finance public-private partnerships in the infrastructure sector;
fund Small Industries Development Bank of India so that it provides
credit to small and medium firms; and provide money to the power
grid to expand the transmission network. Some amount may be kept
aside for recapitalization of some loss-making government-owned
banks and for the National Housing Bank.

States Ask for Money to Cover VAT Revenue Losses
-------------- ---


12. (SBU) Indian states are demanding an additional assistance of
USD 4.3 billion (Rs 200 billion) from the Central government because
of a sharp decline in state revenue. Value-added tax (VAT) revenues
have declined in sectors such as real estate, iron and steel, cement
and petrochemicals. Asim Dasgupta, Chairman of the Empowered
Committee of State Finance Ministers on VAT, has proposed that this
money be distributed to the states as per the formula laid under VAT
rules and each state's need. (Note: the 2008-09 budget had allocated
$700 million (Rs 3292 crore) as compensation to states facing losses
due to VAT implementation. End note.) The assistance would be spent
on infrastructure, rural housing, and the social sector to stimulate
the economy. The Empowered Committee has also asked the national
government to allow states to borrow more under the special
additional market borrowing window.

Retail Sector Slows Down Expansion Plans
--------------


13. (U) The economic slowdown, combined with over-optimistic
projections, may stunt the growth of organized retail this year.
The Retailers Association of India stated this week that organized
retailers will register approximately 15 percent growth in sales
this year compared with 35 percent annual growth experienced in each
of the past three years. Retail companies are adjusting their
initial plans for expansion due to the slowdown: Reliance Retail,
which set out to open 3,000 outlets of its grocery store Reliance
Fresh in addition to hundreds of other formats by 2011, is well
below this target. The retailer opened 800 outlets, but plans to
shut or restructure 200 stores that are not profitable. Shuhiksha
Trading Services, India's largest discount retailer that also
planned to open hundreds of outlets across the country, has closed
several stores amidst accusations that the company had not paid
staff or vendors for months. Indiabulls Retail Services Ltd. has
closed four out of nine hypermarkets and has lost approximately 90
percent of its stock value. HyperCity Retail Pvt. Ltd. has
dissolved plans to open 250 outlets and 6Ten of REI Agro Ltd. has
closed several dozen stores and cut employees.


14. (U) While several retail firms are reconsidering their growth
and expansion plans, Bharti Retail Pvt. Ld is continuing to follow

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its strategy for a slow roll-out of 30 stores (varying from grocery
stores to supermarkets to hypermarkets) in New Delhi by the end of

2009. Working with Wal-Mart Stores as their technical adviser and
joint venture partner, Bharti Retail also plans to open 15
cash-and-carry stores that will supply retailers rather than
household consumers. The Future Group's Pantaloon Retail Ltd. also
appears to be doing well despite the economic slowdown and
reportedly expects 30 percent growth in sales and at least 40
percent growth in net profit over the next two years.


15. (U) COMMENT: Organized retail sector growth, which has been
expected to be the next big growth sector in the Indian economy as
middle class consumer spending increases, has taken a hit from
rising inflation over the past several months and the financial
slowdown, or at least the perception of one. Analysts report that
the crisis has affected consumer sentiment and predict discretionary
spending to grow at only 4.5 percent this fiscal year, compared to
14-15 percent a year for the past four years. As consumers spend
less and retail outlets remain unprofitable, organized retailers
will likely revise their business plans. END COMMENT.


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


17. (U) This is the last weekly ECON Office highlights for 2008.
Happy Holidays and a prosperous new year!

MULFORD