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 25 - FEBRUARY 29, 2008

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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

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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.


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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

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


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

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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