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
FEBRUARY 11 - FEBRUARY 15, 2008


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1. (U) Below is a compilation of Economic highlights from Embassy
New Delhi for the week of February 11-15, 2008.

FURTHER DE-RESERVATION OF
SMALL-SCALE INDUSTRY ITEMS
--------------


2. (U) Continuing its steady reform process to increase the
competitiveness of the Indian industry, the Indian Cabinet on
February 8 decided to further prune the list of items reserved for
small-scale production. It announced the "de-reservation" of 79
items, thus leaving only 35 items for exclusive production in the
small scale industry (SSI) sector. The remaining items include food
and allied products, wood and wood products, paper and paper
products, plastic products, organic chemicals, drugs and drug
intermediates, glass and ceramics, mechanical engineering excluding
transport equipment items, and electrical machines and appliances.


3. (U) The de-reservation policy of the GOI aims at increasing the
competitiveness of the Indian small scale industry and promoting job
creation opportunities. While quantitative restrictions were
removed in the 1990s, facilitating liberal imports, the continuation
of reservation prevented domestic large units from producing the
reserved items. This, in essence, has protected SSI units from
internal competition. Critics have also charged that the
reservations discourage small scale businesses from expanding, since
they would lose the targeted benefits. This has acted as a brake on
increasing economies of scale as well as on employment growth.
Despite the recommendations of the 1997 Abid Hussain Committee
Report for immediate complete de-reservation of items (more than 800
items at that time) reserved for small scale production, the GOI
decided to implement the recommendations in a phased manner. The
pace for de-reservation of the items accelerated from 2005 on,
however resulting in the removal of 579 items, a 94% reduction.

PEPSI AND COCA COLA
--------------


4. (U) Pepsi won a major legal battle in its fight to operate in
Kerala on February 11 when India's Supreme Court ruled in its favor
in a case concerning its industrial license. In 2003 the Communist
Party of India (Marxist)-controlled Pudussery panchayat (village
level government) canceled Pepsi's industrial license citing
overexploitation of groundwater by the company's Kerala bottling
plant. The February 11 Indian Supreme Court decision upheld an
earlier Kerala High Court order that quashed the panchayat's
cancellation of the license. The Supreme Court ruled that the local
governmental body had no jurisdiction to cancel Pepsi's industrial
license because it had been obtained in an area notified as an
"Integrated Industrial Township."


5. (SBU) Coca-Cola and Pepsi both located their Kerala bottling
plants in Palakkad district. Pepsi chose to locate itself in an
Integrated Industrial Township and Coca-Cola did not. Their
differing decisions have had a major impact. Coca-Cola's plant has
been shuttered since 2004; Pepsi's production has been unaffected by
the hostile panchayat order in large part because it is within the
notified industrial area. Coca-Cola has faced fiercer local
opposition because of allegations of improper waste disposal and
groundwater contamination from its plant. The successful anti-Coke
agitation has prompted local leftist groups to step up their
opposition to Pepsi as well. After the Kerala High Court quashed
the cancellation of Pepsi's license, leftist leaders suggested
amending the Industrial Township Area Development Act which provides
the basis for establishing notified industrial areas.


6. (SBU) COMMENT: Despite the left's demands, the government has
not taken any steps to amend the law. This reflects a growing
understanding in Kerala that rather than deterring potential
investors -- with acts such as amending away the benefits of setting
up in notified industrial areas -- the state actually needs to do a

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lot more to attract investment, especially in light of the proactive
investment policies of the neighboring South Indian states. END
COMMENT.

JAPAN PULLS OUT OF EASTERN DELHI
FREIGHT CORRIDOR
--------------


7. (U) An Indian Express article indicated that the Railway
Ministry is in a bind to fund the entire Delhi Freight Corridor
(DFC) after the Japanese government conveyed that a promised loan be
used only for the western route. Originally, the Ministry planned
to use an expected 160 billion INR (4 billion USD) loan from Japan
to develop links from Delhi to both Mumbai in the west (est. 4.1
billion USD) and Sonnagar in the east (est. 2.9 billion USD). Top
rail officials said the move was linked to Japanese business
interests in the Delhi-Mumbai Industrial Corridor (DMIC). The move
also comes amidst Japanese pressure to use electric rather than
diesel traction along the Western DFC. Senior officials of
Dedicated Freight Corridor Corporation of India Ltd said the loan
for the project was being "negotiated at the Railway ministry and
they were not in the loop."

DELHI MUMBAI INDUSTRIAL CORRIDOR
DEVELOPMENT CORPORATION (DMICDC)
ISSUES EXPRESSION OF INTEREST
--------------


8. (U) Abhaya K. Agarwal, DMICDC Director, issued a circular
inviting Expressions of Interest (EOI) applications for "1.
Preparation of detailed perspective plan for overall DMIC region. 2.
Preparation of development plans for various investment nodes with
pre feasibility study in DMIC region." The circular states that the
GOI envisages the development of the DMIC along the Delhi Mumbai
Dedicated Freight Corridor. An advertisement for the EOI ran in the
February 9, 2008, Economist.

AIR INDIA AND JET AIRWAYS
NEGOTIATING TO BUY 60 BOEINGS
--------------


9. (U) The Business standard reported that Boeing is in
negotiations with Air India and Jet Airways for 60 wide-bodied
aircraft valued at 15 billion USD for international routes. Both
airlines already have current deals with Boeing until 2011 and 2012
respectively. The two airlines are currently planning for growth
beyond 2011. The executive director of finance for Air India
indicated that the orders would be finalized in the next three
months while a Jet Airways executive director said a final decision
would be made, "...only after looking at the market situation."

COMMERCE MINISTER HEDGES
ON NEW WTO TEXT
--------------


10. (U) Addressing the press, Commerce Minister Nath welcomed
revised WTO draft texts on Agriculture and NAMA released in Geneva
on February 8th. Nath stressed that before a final view could be
given, the GOI would need to consult with other developing countries
and stakeholders. However, the Commerce Minister did share his
preliminary views. On agriculture, Nath stated that "significant
and effective reduction of trade distorting subsidies of the
developed countries is an issue on which there can be no
compromise," but was satisfied that the concept of two thirds
proportionality in tariff reductions between developed and
developing countries was back on the table. On NAMA, Nath said that
Indian industry would need more flexibilities and was surprised at
the removal of numbers on Para 8. The minister concluded on an
optimistic note, stating that the revised text can form the basis
for constructive engagement and negotiation in the coming weeks.


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GOI ISSUES TOKEN REFINED OIL PRODUCTS PRICE HIKE
--------------


11. (SBU) After deferring the issue for months, the Cabinet finally
raised petrol (gasoline) and diesel prices, but by a paltry 4% and
3% respectively - the first rise since February 2007(more septel).
According to a Citigroup economist, this price hike is much less
than what is required to raise prices to global levels. The price
hikes would have needed to be 8% for petrol and 22% for diesel to be
proportionate with international trends. Although politically
untouchable, prices would also need to be raised 95% and 300% for
liquefied petroleum gas (LPG) and kerosene respectively. Citigroup
expects the price hike to keep headline inflation trending higher
from the Jan 26th 4.11% mark but remaining at below 4.7% levels
until the end of the fiscal year.


12. (SBU) Because the price hike still does not match international
prices, the GOI is expected to issue oil bonds worth Rs 402 billion
(about USD 10 billion) to compensate government-owned oil companies
for their retail marketing losses versus the Rs 240 billion (USD 6
billion) originally expected. Citi projects that under-recoveries
from oil companies will total about Rs 718 billion (USD 18 billion)
for FY 2007-08, which ends March 31. As in the past three years,
these bonds will likely remain off balance sheet to maintain the
deficit target. Comment: The small price hike is the victim of a
weak political coalition entering an election year that has been
beset by the Left over this issue. Although token, the Left still
brayed about it and will be sure to try and make it an issue. The
agreement to any hike in this charged atmosphere reflects the strong
will of the Prime Minister and the Finance Minister, along with the
Minister of Petroleum and Natural Gas, to inject whatever minimal
price reforms and expenditure discipline they can. End comment.

UPDATE ON INDIA'S NEW PENSION SCHEME
--------------


13. (U) D. Swarup, Chairman of the interim Pension Fund Regulatory
and Development Authority (PFRDA),while addressing a workshop last
week, indicated that the New Pension Scheme (NPS) architecture
(which covers new government employees after 2004) would be in place
by the end of May 2008. The PFRDA has already appointed three
state-owned pension fund managers - the State Bank of India, the UTI
Asset Management Company and Life Insurance Corporation of India.
These pension fund managers are expected to start work shortly,
perhaps by March 31. The government has not allowed PFRDA to appoint
private firms or foreign firms as fund managers. But once the PFRDA
bill is passed in Parliament, and if FDI is permitted in the pension
sector, US firms could be allowed to be appointed as pension fund
managers. PFRDA is currently engaged in the process of registering
the NPS trust and appointing a custodian and a trustee bank.


14. (U) Until the PFRDA bill is passed in Parliament, the NPS will
offer only two investment choices - to invest employees' entire
contributions in government securities alone or adopt the investment
guidelines applicable to non-government provident funds. For
non-government provident funds, the current guidelines limit
investments in equities to 10% in private sector debt instruments
and/or in equity-linked schemes of mutual funds and 5% in shares of
companies that have an investment grade debt rating from at least
two credit rating agencies, while 85% must be placed in
publicly-owned fixed income instruments. Once the PFRDA Bill is
passed by Parliament, the regulator will provide more investment
choices such as investing up to 50% of the contributions in
equities.


15. (SBU) Swarup stated that he expects the PFRDA bill to be passed
in Parliament in the forthcoming budget session. Comment: Swarup has
not shown this optimism previously, but the bill has been stalled
since it was introduced in 2005 and there are low expectations of
major legislation being passed in the current environment. It would
be a welcome, assertive move by the ruling coalition if the bill

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were to get passed. End comment.

HYDERABAD'S NEW AIRPORT DRAWS
TEST FLIGHTS AND PROTESTS
--------------


16. (U) Kingfisher and Jet Airways made successful test flights to
Hyderabad's new airport in preparation for the facility's March 16
grand opening. Anticipating an opportunity to attract more airlines
to operate more routes from the new airport, the government of the
South India state of Andhra Pradesh (AP),has cut sales tax on
Aviation Turbine Fuel (ATF) from 35 to 4 percent. Several U.S.
carriers, reportedly including Continental, U.S. Airways, Delta, and
United, are in discussions with the airport about starting direct
flights to the United States. HMS Host, a U.S. food-court
management firm, will manage the airport's food-and-beverage areas.


17. (U) The new airport is not without controversy. Construction of
the expressway to the airport is far behind schedule. Several
contacts have told Consulate Chennai that they expect that it will
take up to two hours to get to the new airport from central
Hyderabad. Some of the current airport's employees are not happy
about the plans to close the facility when the new airport opens.
According to press reports, a group of disgruntled workers staged a
sit-in at the current airport, preventing the director from exiting
his office for several hours. The workers want the airport to
remain open to domestic air traffic, limiting the new airport to
international flights. The press also reports that a former Indian
Administrative Service officer has filed a public interest lawsuit
making the case for the city to have two functioning airports.

PARAMOUNT AIRWAYS EXPANDS
INTO WESTERN INDIA
--------------


18. (U) Paramount Airways, a regional airline operating in South
India, continues its expansion with the acquisition of two Embraer
aircraft, raising its fleet size to seven. A company executive told
Consulate Chennai that the expansion will allow increased flights on
popular routes like Chennai-Hyderabad, as well as expanded service
from Bangalore to Goa and Pune, as well as better connections among
several cities in the states of Tamil Nadu and Kerala.

BIG BAZAAR EXPANDS OPERATIONS
IN SOUTH INDIA
--------------


19. (U) National retailer Big Bazaar's South India operations should
bring in revenues of USD 250 million in 2008, and the company plans
to expand in the region. The company began its South India
operations in 2005 with two stores in Bangalore and two in Andhra
Pradesh and has seen its annual revenues in the region increase 400
percent since then. The region now accounts for nearly a quarter of
the retail chain's income. A top Big Bazaar official told Consulate
Chennai that the chain currently operates 23 outlets in South India
and plans to add seven more this fiscal year. Big Bazaar generally
avoids placing its outlets in the largest metropolitan cities,
preferring to operate in the so-called "Tier 2" cities of Andhra
Pradesh, Kerala and Tamil Nadu, a strategy that it tends to follow
throughout India.

TATAS AND BOEING AGREE
ON DEFENSE JOINT VENTURE
--------------


20. (U) Boeing and Tata Industries announced a plan to form a joint
venture company that will initially include more than 500 million
USD of defense related component work. The company is to be
established by June 2008. Jim Albaugh, president and CEO of Boeing
Integrated Defense Systems said of the joint venture, "It represents
another step in our commitment to India," and that it will make,

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"Boeing products more globally competitive." Ratan Tata, Chairman
of Tata Industries, stated, "This joint venture between Tata and
Boeing is an important part of our strategy to build capabilities in
defense and aerospace."


21. (U) According to the Hindustan Times, but not announced by the
companies, the Tatas will control a majority stake in the joint
venture but the total financial investment is still undisclosed.
Press releases from Boeing and Tata reveal that in the first phase,
Boeing will issue contracts to the new company for work on the
F/A-18 Super Hornet, CH-47 Chinook, and P-8 Maritime Patrol
Aircraft. The established manufacturing capabilities would then be
used as a competitive advantage in future programs such as the
Medium Multi-Role Combat Aircraft competition. Aside from
manufacturing, the two companies also envisage a research and
development center for advanced manufacturing technologies. In
related news, last week Boeing also announced that Tata Group would
supply components to its 787 Dreamliner program.

AIR INDIA ROUTES
TO U.S. TAKING OFF
--------------


22. (U) The Indian Express is reporting that Air India will be
increasing direct flights to the U.S. The airline just launched a
non-stop flight from Delhi to New York last week. Future plans are
underway to add Bangalore-San Francisco and stops in Texas and
Washington. According to an Air India official the Bangalore-San
Francisco route will be important in "connecting the two silicon
valleys." For Air India, US-India routes have become the largest
revenue earner. Air India and other Indian airlines are looking to
grab more of this market, which is predominately serviced by
European, Gulf, and Southeast Asian carriers.

INDUSTRY REMAINS ENGAGED
ON COMPETITION LAW
--------------


23. (U) On February 15, FICCI President Khorakiwala welcomed the
Prime Minister to the 80th annual general meeting and made some
important remarks about the industry group's engagement on economic
reforms. Of note, Khorakiwala pointed out how the new merger and
acquisition (M&A) provisions of the competition law are problematic.
He criticized the legislation for making it too cumbersome for
Indian and US companies to conduct M&A activities. Post's lobbying
on this issue on behalf of the USG is having an impact, as the issue
continues to be raised by industry groups at the highest levels in
the GOI.

NEW SEBI CHAIRMAN
--------------


24. (SBU) The Finance Ministry has nominated Chandrasekhar Bhaskar
Bhave, Chairman of the National Securities Depository Limited
(NDSL),as the sixth Chairman of the Securities and Exchange Board
of India (SEBI),replacing Damodaran who completes his three-year
term this week. Bhave has been involved with the capital markets for
many years. He was Senior Executive Director of SEBI under the
first Chairman, G.V. Ramakrishna, credited with formulating many
initial regulations, as well as conceptualizing the National Stock
Exchange. He quit the civil service in the mid-1990s to take up an
assignment with the NDSL. There, he revolutionized the capital
market by getting market players to accept the new system of
dematerialized shares and debentures. NSDL got into a legal battle
with SEBI in April 2006 when SEBI uncovered a massive scam involving
the cornering of share allotments in IPO's for small investors. It
took an intervention from the Securities Appellate Tribunal to
settle the matter in NDSL's favor.


25. (SBU) As chairman of SEBI, Bhave is expected to bring to the
table his experience in the capital markets and expertise in

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building a stronger securities market infrastructure. He is
expected to focus on improving the processes of investigation and
enforcement and take stronger measres to create better investor
education and institution building. KV Kamath, Chairman of ICICI,
told Congenoff that Bhave is a very good choice; a practical and
pragmatic person with regulatory experience. Kamath noted, thogh,
that his first choice would have been Damodaran who he thought had
been outstanding. Press reports that Bhave's appointment has made
some brokers and fund managers nervous since he commands respect in
the financial sector for both his integrity and professional
competence. Bhave is expected to join as chairman of SEBI on
February 17.


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

WHITE