NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF

UNCLAS SECTION 01 OF 04 NEW DELHI 000982 SIPDIS SIPDIS SENSITIVE 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 MARCH 31 - April 3, 2008 REF: New Delhi 902 NEW DELHI 00000982 001.2 OF 004 ¶1. (U) Below is a compilation of Economic highlights from Embassy New Delhi for the week of March 31-April 3, 2008, including the following items: --MCDONALD'S OPENS ITS FIRST OUTLET IN CHENNAI --WIPRO RAMPS UP CHENNAI OPERATIONS --GOA TO HAVE LARGEST OFFSHORE CASINO --PLANNING COMMISSION'S FOCUS ON FINANCIAL SECTOR --BUREAUCRATIC CHANGES AT THE MINISTRY OF FINANCE --FOREIGN BORROWING BOOSTS EXTERNAL DEBT --INFRASTRUCTURE FIRMS SHOW INTEREST IN AP REGIONAL AIRPORTS -- SURGE IN INFLATION PUTS GOVT ON WAR FOOTING MCDONALD'S OPENS ITS FIRST OUTLET IN CHENNAI -------------- ¶2. (U) Chennai's first McDonald's opened on April 2, and Chennai Consulate officers cut the opening ribbon and consumed the restaurant's first french fries and Maharaja Macs. The outlet, located in a food court in an information technology park near the American International School, can serve more than 1200 meals per day. The head of McDonald's India Corporate Affairs and Franchise Relations relations office told Consulate Chennai that the company plans to ramp up rapidly the number of outlets in the city, and promised that Chennai's second McDonald's would open in approximately six months. That facility, he said, would be a stand-alone restaurant, in contrast to the current outlet, which stands along side a KFC, Subway, and a few local restaurants. McDonald's plans to supply its Chennai outlet through its central warehousing facility in Bangalore until the there are enough outlets in Chennai to justify a Chennai warehouse. McDonald's could start sourcing some of its supplies in the area if demand from the restaurants was enough to make this viable. ¶3. (U) In a good example of corporate social responsibility and a clever PR move, the new McDonald's auctioned off it first vegetarian burger, gaining Rs. 400,000 for charity. The winning bid came from Saravana Bhavan, a Chennai-based chain of popular South Indian vegetarian restaurants. Saravana Bhavan has followed the McDonald's model by opening branches to feed dosa and idli-hungry Indian expats in the Gulf countries, Canada and the U.S. WIPRO RAMPS UP CHENNAI OPERATIONS -------------- ¶4. (U) Bangalore-based IT giant WIPRO announced on March 28 plans to expand its Chennai operations. The company acquired a total of 170 acres of land at two locations in the city, which should be able to accommodate 35,000 employees. A top WIPRO official told Consulate Chennai that WIPRO had enjoyed 40 to 50 percent growth in the domestic market with the telecom, financial, retail and petroleum sectors being the main drivers. The domestic market, he continued, contributes 18 percent of the company's revenues. Some of the largest business deals that his business unit secured during the past month were from domestic firms, he added. GOA TO HAVE LARGEST OFFSHORE CASINO -------------- ¶5. (U) Press reported that Highstreet Cruises and Entertainment Pvt. Ltd. is getting set to launch Casino Royale on Goa's Mandovi River in May, avoiding India's ban on gambling by being located offshore. Casino Royale will be located on a ship which will feature rooms and suites to accommodate guests. Jaydev Mody, Highstreet Cruises director, stated that the casino will be all-inclusive with slot machines, restaurants, entertainment areas and live music. In the next seven to eight months, Goa plans to construct four other offshore casinos as the state government tries to lure Indian gamblers back to India from Nepal where casinos have been legalized. NEW DELHI 00000982 002.2 OF 004 Goa's economy is highly dependent on tourism and the state government is hoping that granting five offshore casino licenses will further boost tourism. Currently, Goa has one offshore casino, Casino Goa. Bharatiya Janata Party (BJP)'s government decision to permit casinos to operate in Goa when gambling is illegal in all other states in India has prompted criticism from the Congress Party. (Note: The Congress Party was the first to allow gambling in Goa, when in 1992, it amended the Goa Public Gambling Act to allow slot machines in five-star hotels. Later, table games were permitted offshore, during the tenure of Congress chief minister Pratapsingh Rane. The BJP opposed these developments at the time. Nevertheless, after coming to power in Goa, BJP chief minister, Manohar Parrikar granted a license for Casino Goa to commence operations. End Note.) PLANNING COMMISSION'S FOCUS ON FINANCIAL SECTOR -------------- ¶6. (SBU) Press reports provided highlights on April 3 of a new Planning Commission report on the services sector, which recommends financial sector liberalization supportive of the government's commitment towards reforms. Most of the measures have already been debated for the past four years by the UPA government but have not been implemented due to the Left party's opposition. Some of the key recommendations suggested by the Planning Commission panel for the banking sector include abolition of bank branch licensing, a gradual reduction in the statutory liquidity ratio requirement for banks from the current 25% and phasing out of directed priority sector lending by banks. Consolidation in the banking sector, particularly in mid-sized public sector banks, is emphasized to "leverage the synergistic benefits" and to avoid duplication of investments in technology and other infrastructure. The panel asks the government to reduce its equity in public sector banks to 33% from the current 51% so that banks can raise capital. ¶7. (SBU) The panel also recommends that foreign investors be permitted to hold 49% equity in domestic insurance firms, up from the current 26%. Pension and provident funds should be allowed to diversify their investment portfolios from the current excessive share of government securities to various categories of corporate debt, securitized paper and equity investments. On asset management, the panel recommends that the regulations governing venture capital and private equity funds need to be rationalized to help institutional investors like banks, insurance companies and pension funds to invest in this segment. For financial markets, the report recommends that the debt capital market and securitization market should be developed through affordable and uniform levels of stamp duty and listing of securitization paper. Comment: Like the recent reform suggestions in the Ministry of Finance (MOF)'s Economic Survey, many of these changes are supported by the MoF and Prime Minister Singh, but have been stymied by the Left. Also like the Economic Survey, the new report's recommendations indicate the direction the UPA's reformers would like to go, if allowed. End comment. BUREAUCRATIC CHANGES AT THE MINISTRY OF FINANCE -------------- ¶8. (SBU) Effective April 1, Ms. Sushma Nath has been appointed the new Expenditure Secretary at the Ministry of Finance, succeeding Sanjiv Mishra. Nath, 57, is an Indian Administrative Services officer of the 1974 batch from the Madhya Pradesh cadre. Prior to that, she held the prestigious post of Secretary of the Sixth Pay Commission, which recently submitted its recommendations for salary hikes for the central government employees. Nath is expected to draw on her first-hand knowledge of the Sixth Pay Commission survey results to implement the recommendations in her new position. She has held many senior assignments in her cadre state of Madhya Pradesh. At the central level, Nath worked in a number of important NEW DELHI 00000982 003.2 OF 004 positions including as Additional Secretary in the Ministry of Agriculture and Joint Secretary at the Ministry of Consumer Affairs, Food and Public Distribution and at the Department of Disinvestment, Ministry of Finance. Ms Nath holds graduate degrees in law and in chemistry and physics. ¶9. (SBU) On April 1, Vivek Mehrotra took over as the new Secretary of the Department of Disinvestment of the Ministry of Finance, relieving Finance Secretary Subba Rao of the additional charge he had held since P.V. Bhide was appointed as the revenue secretary last year. Mehrotra, 57 years old, is an Indian Administrative Services officer of the 1974 batch from the Haryana cadre. Prior to this position, Mehrotra was working as Special Secretary and Financial Adviser at the Ministry of Home Affairs. He has served in many key positions in his cadre state such as Finance Secretary and Principal Secretary (Fisheries). Mehrotra has worked as Additional Secretary at the Ministry of Finance, Ministry of Consumer Affairs, SIPDIS Food and Public Distribution and the Ministry of Home Affairs. He holds postgradate degrees in economics and political science. Filling the position adds to the government's signals that it intends to start the disinvestment process in public sector companies (reftel). FOREIGN BORROWING BOOSTS EXTERNAL DEBT -------------- ¶10. (SBU) A recent Ministry of Finance's report on India's external debt indicates that the country's outstanding external debt rose to $201.4 billion at end December 2007 compared with $169.7 at end March 2007. The rise in external debt was mainly due to corporate borrowings (through external commercial borrowings or ECBs), short-term debt and rupee appreciation. However, India's foreign exchange reserves at the end of 2007 provided a cover of 137% to the total debt, totaling $275 billion (as of March, reserves had risen to roughly $300 billion). Long-term debt accounted for 82.6% of the foreign debt during April-December 2007. The share of government debt in total external debt at end December 2007 stood at just $53 billion, while private debt was $148.5 billion. The report says that the GOI continues to follow a cautious policy to maintain its external debt within reasonable limits with a focus on raising sovereign loans at concessional rates with longer maturities, pre-paying high cost loans, regulating foreign borrowings, rationalizing NRI interest rates on deposits, monitoring short-term debt and encouraging non-debt creating capital flows. SEBI contacts told Econoff in January that the RBI was averse to raising the cap on foreign debt in India's private and public debt markets in order to prevent higher debt levels. The government also maintains a yearly cap on ECBs. INFRASTRUCTURE FIRMS SHOW INTEREST IN AP REGIONAL AIRPORTS -------------- ¶11. (U) In response to a state government tender to develop eight regional airports in the state of Andhra Pradesh, as many as 37 infrastructure firms have put in bids. The regional airports in Andhra would help further economic growth within the state and meet growing demand for quick transportation. India currently has 80 fully functional airports equipped to handle commercial, charter, and defense flights. Of these, 24 major airports together account for 94 percent of total air traffic, with remaining traffic shared by smaller or regional airports. Each of the planned regional airports will have a 2500 meter runway to accommodate small aircraft and will require an investment of around one billion rupees ($25 million) each. Industry estimates it could take two years from date of award to completion of a project. Companies that have shown interest in developing the airports include the UK-based Caparo Group Ltd, GMR Infrastructure Ltd, Lanco Infratech Ltd, IVRCL Infrastructures and Projects Ltd, Maytas Infra Ltd, Mukesh Ambani-promoted Reliance Industries Ltd, Anil Ambani-led Reliance NEW DELHI 00000982 004.2 OF 004 Airport Developers Pvt. Ltd, Unitech Ltd and Hindustan Construction Co. Ltd. Project awards are anticipated in September 2008. SURGE IN INFLATION PUTS GOVT ON WAR FOOTING -------------- ¶12. (SBU) As a follow up to reftel on government anti-inflation measures, the government convened a meeting of the Cabinet Committee on Prices March 31 at the Prime Minister's residence, even as more inflation data (for the week of March 15) showed wholesale prices jumping to a 13-month high, politically dangerous level of 6.68%. The RBI said the main impetus was a spurt in global prices for food, fuel, and metals (Post will examine, septel, the combination of factors behind the price rise and the outlook for the next few months). As he announced new measures, Finance Minister Chidambaram told press that the government would employ all available measures - fiscal, monetary, and supply-side - to control prices. ¶13. (U) The new decisions included the total elimination of import duties on unprocessed edible oils and maize, reduction to 7.5% import duty on processed cooking oils, and an export ban on non-basmati rice and pulses. Other actions the government has taken recently include previous reductions to the import duty on refined edible oil, banning the export of wheat and edible oils, and a suspension of refunds on exports of steel, cement, chrome and manganese ore. In addition, the government is looking to administrative measures to curb inflation. The government has asked states to limit privately held stocks of commodities, under the very anti-market Essential Commodities Act. The government has also asked steel producers to lower or at least maintain prices and is threatening an export duty. Press also reported that the government was planning to allow the January ordinance establishing the Forward Market Commission's autonomy to lapse. Cement producers have also been targeted; press reports indicate that cement exports may be banned. In the meantime, the government is importing cement from Pakistan to augment domestic supply. ¶14. (SBU) In the weeks ahead, all eyes will be on the central bank, the Reserve Bank of India, as it readies its annual monetary policy statement at the end of April. Market observers are speculating that the RBI may raise interest rates or the cash reserve ratio (CRR) or a combination of both, to take money out of the system. However, some are arguing that the higher interest rates are not worth the adverse impact on growth, given that 1) there is a timelag between higher rates and lower inflation and 2) inflationary pressures currently stem from supply-side constraints, and are not demand-driven. While global commodity prices are not expected to fall in the near term, some food prices in India are likely to go down in April, as harvests start hitting the markets. Indian futures prices of edible oils were down at the end of the week, anticipating the duty cut impact. ¶15. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi WHITE