NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF

UNCLAS SECTION 01 OF 05 NEW DELHI 000644 SIPDIS SENSITIVE SIPDIS USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD DEPT OF ENERGY FOR A/S KHARBERT, TCUTLER, CZAMUDA, RLUHAR DEPT PASS TO USTR CLILIENFELD/AADLER DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA ABAUKOL TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN STATE FOR SCA/INS AND EB/TRA JEFFREY HORWITZ AND TOM ENGLE USDA PASS FAS/OCRA/RADLER/BEAN/CARVER/RIKER E.O. 12958: N/A TAGS: EAGR EFIN EINV EPET ETRD SENV IN SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF FEBRUARY 25 - FEBRUARY 29, 2008 NEW DELHI 00000644 001.2 OF 005 ¶1. (U) Below is a compilation of Economic highlights from Embassy New Delhi for the week of February 25-29, 2008. ANOTHER BUDGET THAT PROMISES MUCH, BUT FUNDS LITTLE, POPULISM -------------- ¶2. (SBU) Finance Minister Chidambaram presented to Parliament on February 29 the UPA's highly anticipated last budget before national elections scheduled by May 2009. Chidambaram met expectations to present a budget that was heavily populist in theme and tilted towards poor farmers, meant to boost the coalition's flagging political fortunes. However, the Finance Minister revealed the lawyer in him by crafting enough fine print in allocations and performance requirements that the proposed budget stays well within mandated deficit reduction targets. Chidambaram targeted a reasonable 13% rise in revenues and just a 6% increase in expenditures (on the expectation that expensive subsidies will be kept offbudget),leaving room for overspending. For the fiscal year just ending, the government exceeded planned expenditures by just 5%. ¶3. (SBU) The major give-away that was announced was a debt waiver program for farmers, that could cost as much as $15 billion. The devil, however, is in the details: after his speech, Chidambaram explained to reporters that he would fund the debt write off - which only applies to government-owned banks - by providing additional liquidity over three years to the affected banks. Not only does he spread the price tag over three years, but "adding liquidity" could mean simply lowering the cash reserves that banks are required to keep with the central bank. As expected, the National Rural Employment Guarantee Program was doubled to cover the entire 600 districts of the country; however, funding was only increased by one-third; weak disbursement mechanisms have constrained payouts under this system. Peak industrial tariffs are to remain at 10%, stalling the target of reaching ASEAN levels. Few changes were made to the direct tax structures. Post will report in detail on the budget septel. ECONOMIC SURVEY SKETCHES REFORM WISHLIST -------------- ¶4. (SBU) The Ministry of Finance released its annual Economic Survey on February 28, mapping India's economic performance for FY2007-08, which ends March 31. Much of the economic data simply repeats the figures released by the Central Statistical Organization (CSO) last month, including an expected GDP growth rate of 8.7% for FY2007-08. More interesting was the list of economic reforms that the Ministry of Finance supports, including, inter alia, significant increases in foreign direct investment (FDI) in retail and insurance ,privatizations in the energy field, and free entry of foreign universities, currently denied by the Left. Finance Minister Chidambaram made no mention of FDI increases in his Budget Speech on February 29 and Post does not expect any notable investment liberalization requiring legislative approval while the Left still supports the UPA Coalition. However, the Economic Survey's reform list did read like a statement of intention, should the Left's support no longer be needed - or tolerated. BIOTECH BRINJAL FIELD TRIALS DRAW PROTESTS -------------- ¶5. (U) Mahyco, an Indian seed company in which Monsanto holds a 30 percent stake, began field trials in the South India state of Tamil Nadu of genetically modified "brinjal" (eggplant, in American parlance) in partnership with Tamil Nadu Agricultural University (TNAU). Some activist groups protested against the trials, alleging non-compliance with bio-safety protocols and invoking a litany of familiar (and scientifically unfounded) claims against biotech NEW DELHI 00000644 002.2 OF 005 products. Mahyco's CEO, Dr. Mahendra Sharma, said that the protests were organized by the "Organic Farmers Collective," a group based in the Tamil Nadu town of Erode. Sharma told us that Mahyco and TNAU applied for and received the necessary clearances from both the Department of Biotechnology and Genetic Engineering Approval Committee and that the field trials were following all required guidelines. This is not the first time that activists have attempted to disrupt biotech crop trials in the state. TAMIL NADU ANNOUNCES INDUSTRIAL POLICY FOR SMALL INDUSTRY -------------- ¶6. (U) Tamil Nadu officials announced on February 23 a new Policy on Micro, Small, and Medium industries. The new policy seeks to encourage the growth of small business by relaxing certain building regulations; providing grants for setting up privately owned, dedicated industrial estates for small industry; and providing some capital subsidies. Tamil Nadu's Industries Secretary told Consulate Chennai that the policy is designed to create a large number of jobs by focusing on the labor-intensive small industry sector, which tends to rely on the state's large supply of cheap, unskilled and semi-skilled labor for production rather than more expensive capital machinery. MUMBAI HIGH COURT TO DECIDE CASE ON ENTRY OF FOREIGN LAW FIRMS IN INDIA -------------- ¶7. (U) Foreign law firms are entering final arguments before the Mumbai High Court in a decade-old case challenging the entry of foreign law firms into India. In 1995, Lawyers Collective, a public interest legal services provider, filed a petition opposing the legal practice, in India, of three foreign law firms, two from the US and one from the UK, after the Reserve Bank of India (RBI) gave the three firms licenses to open practices, which would function as liaison offices in India. ¶8. (U) Last year, the Ministry of Law and Justice looked at liberalizing the legal services sector and held talks with the Indian legal industry, during which the Ministry issued an affidavit stating that the practice of law in India is synonymous with only practicing Indian laws and regulations. The Society of Indian Law Firms, the Bar Council of India and the British Indian lawyers association (BILA),oppose the entry of foreign firms in India. There is worry that a court decision in favor of foreign firms would allow the entry of more foreign law firms in India, although additional steps, including legislative amendments, would be required before foreign law firms were allowed to practice in India. BHARTI AIRTEL PARTNERS WITH INTERNATIONAL COMPANIES FOR NEW UNDERSEA CABLE -------------- ¶9. (U) Indian telecom giant Bharti Airtel has announced it is partnering with five companies to build a $300 million high-bandwidth undersea fiber-optic cable that will connect Asia and the United States. Bharti will work with Malaysia-based Global Transit Ltd, Google, Japan's KDDI Corporation, and Singapore's SingTel and Pacnet to set up the undersea cable by 2010 in order to sustain significant growth in data and internet traffic. The undersea cable, Unity, is being built to meet the heightened broadband demand as a result of more services being offered through the internet and will offer alternative routes to ensure higher levels of resiliency and redundancy. The undersea cable will connect Chikura (located off of Tokyo) to Los Angles and other west coast points in the US. The need for more cables was underscored recently when several cables serving India were damaged. NEW DELHI 00000644 003.2 OF 005 TENSION BETWEEN FCI AND STC OVER FAILED QUALITY TESTS OF IMPORTED WHEAT -------------- ¶10. (SBU) Adding to the political storm brewing over the GOI's decision to import 2.3 million tons of wheat at a much higher cost than originally stated by the State Trading Corporation (STC),the Food Corporation of India (FCI) is now asserting that STC bought poor quality wheat stocks. The FCI has claimed the imports were "inferior," "failed quality tests", and "would not give a healthy picture among the general public at large" since the wheat is directly or indirectly given to the consumer. The FCI has taken their claim against STC to the Food Ministry and is threatening to withhold payment. Based on the test results, FCI is also looking into recovering losses due to the inferior quality of the imported wheat as a result of STC's failed monitoring. According to its laboratory tests, FCI claims that 920,000 tons of the 1.5 million tons received were of poor quality and exceeds "contractual limits." The "contractual limits," for damaged grains and foreign matter is 7 percent and the four samples showed damage of 10 percent to 11 percent. The wheat in question was most likely Russia or Ukrainian, which is poor quality. ¶11. (U) FCI General Manager Kohli wrote in a letter to STC, "...the imported wheat stocks unloaded from ships are beyond contractual limits." Furthermore, in the letter Kohli contends that test results show STC hired surveyors did a poor job at the load port. The tested samples were taken from the 1.5 million tons of imported wheat stocks and of the 1.5 million tons, one million tons has already been distributed nationwide and through the public distribution system. Strongly opposing FCI's claims, STC has stated that according to their tests, the wheat met PFA standards before being shipped, and STC is not accountable for FCI testing done after the wheat was received by them. STC contends that they only handle pre-cleared cargo. Additionally, food secretary Nanda Kumar stated that under contention is not the quality of the imported wheat, but the appearance of it. CAN SMALL STORES AND LARGE, ORGANIZED RETAIL CO-EXIST? -------------- ¶12. (U) Indian press has described a new report by the International Food Policy Research Institute (IFPRI) that contends that India's "mom and pop" stores will continue to grow, but at rate of just 2-5 percent, despite the emergence of large, organized retail in India, which is expected to grow at a rate of 20-40 percent. According to the report, it could be one or two decades before small stores begin to lose business due to the presence of large retailers, during which time India will have the opportunity to create a plan for transitioning small retail owners into the big retail sector by either co-opting them or helping them find other jobs. ¶13. (SBU) The study will reportedly become a part of the Indian Council for Research on International Economic Relations (ICRIER) study on the impact of organized retail on small stores in India, a government-commissioned study that has not yet been made public. Additionally, the IFPRI report asserts that farmers and consumers will benefit early on from a modern retail sector and small stores will only be negatively affected when the share of organized retail in food approaches 25-30 percent and it is currently at 1 percent, but is growing at a rate of 30 percent. In contrast to the IFPRI report, parts of the ICRIER study that have been leaked claim that half of small retailers surveyed report decreases in sales and more than half of all retailers expressed that competition from organized retailers is the reason for their lower sales. LALU'S POPULIST RAILWAY BUDGET 2008-09 NEW DELHI 00000644 004.2 OF 005 -------------- ¶14. (SBU) Railway Minister Lalu Prasad in his fifth consecutive railway budget speech presented to parliament on February 25 announced a number of populist measures keeping an eye on general elections due to be held in 2009. With a track record of having served as railway minister since 2004 without raising fares, Lalu announced token cuts in fares across all classes of passengers, including air conditioned classes to take on competition from low cost airlines. Minor concessions were awarded to aged women, disabled, AID patients and girl children. In addition, a 5% cut in freight rates on petrol and diesel was proposed. The railway budget also announced a number of forward looking measures for the average passenger including enhanced e-ticketing options, TV and internet on trains, raised platforms, better information on tickets and train running status through electronic display boards, modular toilets, stress on cleanliness, escalators and multi-level parking facility at selected stations. He also announced 53 new trains - including 10 new "Garib Raths" (poor man's chariots),with the maximum number of trains going to Bihar, his state constituency and also a special train between Delhi-Pune for the Commonwealth Youth Games. ¶15. (SBU) The railway budget has mapped a massive investment blueprint plan of $18.8 billion over the next seven years for creating new capacities on high freight traffic routes. Other measures announced were a 1,000-MW power plant in collaboration with NTPC at Bihar, a new rail coach factory in Kerala, a new wagon reconstruction unit in Bihar and stainless coaches for all trains by ¶2010. Lalu's budget focus was on public-private partnership (PPP) projects for expansion of the network, modernization and upgradation of the technology, providing world class facilities at metro stations, setting up new rolling stock facilities and construction of multi-modal logistics parks over the next five years. Out of the $62.6 billion investment over the next five years, Lalu hopes to attract $25 billion through PPPs. Newspaper reports that the existing players may face competition from foreign players such as General Electric, Alstom and Bombardier. ¶16. (SBU) Greater efficiency attributed to low incremental cost and a strategy to increase traffic volume has helped Indian Railways to generate an expected cash surplus of $6.3 billion for FY 2007-08 and the operating ratio (a broad efficiency indicator of the amount spent for earning every rupee) has improved to 76%, one of the best in the world. The Sixth Pay Commission report (to be released soon by GOI) would entail an additional $1.3 billion for railway staff salaries and this would result in marginally lower cash surplus and higher operating ratio of 81.4% next year. The Railways has about 1.4 million employees and an equal number of pensioners. NEW DELHI DEFERS SEZ DENOTIFICATION IN GOA -------------- ¶17. (U) The Commerce Ministry halted development of 23 SEZs in Goa on February 25, following a request from the state government. Three of these SEZs had been notified -- received final approval and clearance -- and begun development, including an Indian pharmaceutical company that had already spent more than 200 million rupees (roughly USD5 million) in a 400 acre pharmaceutical zone in Keri. Commerce Secretary G.K. Pillai, who heads the Board of Approvals (BoA) for SEZs, said New Delhi was initiating talks with Goa's government to denotify the SEZs, but declined to comment on whether these developers will be compensated. Indian press on Thursday noted that denotification would still leave Goa's government liable for compensation to the developers. ¶18. (SBU) Former Goa MLA Mathany Saldhana, who has led state protests of the SEZs, said that the Commerce Ministry's move is a first step in saving the state from the loss of its "cultural heritage" and vowed not to rest until the three notified SEZs were also withdrawn. There is no provision in the 2005 SEZ Act for NEW DELHI 00000644 005.2 OF 005 denotification of a project; however, Commerce Minister Kamal Nath in January said that the Act could be reviewed and the issue was referred to the Law Ministry. The SEZ Act currently allows the government to issue policy directions to the BoA. Indian press on Thursday reported that a century-old General Clauses Act, which covers all notifications passed by the center, might be sufficient to allow the Center to de-notify the SEZs. This could allow New Delhi to avoid Parliament or a presidential ordinance to amend the SEZ Act. Comment: The central government has deferred a final decision on the de-notifications, probably hoping to dissuade the Goan government from proceeding or to maximize the compensation to the notified companies. How much the Center allows Goa to get away with rescinding SEZ decisions will set a precedent for other states and send a signal to potential investors. End comment. ¶19. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi MULFORD