SHALOM AND NAMASTE: ISRAEL AND INDIA'S BURGEONING BUSINESS

UNCLAS SECTION 01 OF 04 MUMBAI 000294

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EIND EINV EAGR ETRD PTER PREL IS IN
SUBJECT: SHALOM AND NAMASTE: ISRAEL AND INDIA'S BURGEONING BUSINESS
PARTNERSHIP

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1. (U) Summary. Following more than forty years of diplomatic
estrangement, the last fifteen years has witnessed India and
Israel embarking on a new, multidimensional strategic
partnership. The two states have expanded cooperation in a
number of key areas, with counterterrorism and the sale of
sophisticated weapons technology becoming two cornerstones of
the relationship. While many have noted the burgeoning
Indo-Israeli security alliance, observers have generally
overlooked rapidly expanding commercial ties. In the years
since India first established full diplomatic relations with
Israel in 1992, bilateral trade of goods and services between
the two nations has swelled by nearly twenty percent annually,
with total trade estimates approaching USD 5 billion for 2009.
Cooperation and trade in the fields of IT, infrastructure,
chemicals, machinery, textiles and especially agriculture have
helped drive the relationship forward at a breakneck pace in
recent years. Aided by a number of key trade and business
agreements, India is now Israel's second largest trading partner
in the developing world and its sixth largest globally for
non-military goods and services. Nevertheless, given the
domestic and international political sensitivities to a closer
relationship with Israel, India is likely to keep these ties low
key. End Summary.

An Estranged Past; A Growing Partnership

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2. (U) India and Israel share similar attributes: a British
colonial past, hostile neighbors and robust democratic political
systems originally founded on now-abandoned principles of
moderate socialism. Yet despite this, a number of factors led
India to adopt an unfavorable posture towards Israel following
the two nations' emergence as independent states in 1947-1948.
For the first five decades of its independence, India's foreign
policy towards Israel was guided by Cold War alignments (or
desire for non-alignment in India's case) and politics, India's
fear of alienating its large Muslim population over Israel's
treatment of Palestinians, and New Delhi's strong ties to the
Arab world. These factors prompted India to reject establishing
full diplomatic ties with Israel until 1992. With the collapse
of the Soviet Union and the launching of the Madrid Peace
Process in 1991, however, the impetus behind New Delhi's
Israel-adverse policies quickly dissolved. India reoriented its
foreign policy to accommodate to the changing international
political landscape. It chose to embark on paths of economic
liberalization at home and international pragmatism abroad
(Note: India's process of economic liberalization of the early
1990s in many ways reflected Israel's own economic reforms of
the 1980s. End Note.) In 1992, India extended full diplomatic
recognition to Israel, after which ties between the two
countries accelerated and diversified.


3. (SBU) Bilateral relations between India and Israel today are
robust and multi-faceted, and are continuing to strengthen.
According to observers of the relationship, the two states share
several congruent interests and have acted to expand cooperation
in a number of key areas. Increasingly, this improved
cooperation has manifested itself in coordinated
counter-terrorism projects and advanced weapon systems sales.
Israeli missiles, rockets, radar and communication equipments,
ships, assault and sniper rifles, night-vision devices, and
border monitoring equipment have all been added to the Indian
arsenal. Between 2002 and 2007, India reportedly purchased over
USD 5 billion worth of military weapons and systems from Israel
(with $1.6 billion in 2006 alone),making Israel India's largest
worldwide supplier of defense equipment.


4. (U) While this growing military relationship has received
wide notice, both in the international and domestic Indian
media, far less attention has been paid to the growing
non-military business ties between the two countries. (Note:
Leftist and Muslim groups in India have vociferously objected to
the growing Indo-Israeli union. End Note.) From a baseline of
USD 200 million in 1992, consisting of almost exclusively of
diamonds and cotton, trade in goods and services grew and
diversified to surpass USD 3 billion in 2007. Total trade is
estimated to exceed USD 5 billion by the end of 2009. India is
now Israel's largest trading partner in Asia and the developing
world (behind China),and its sixth largest globally for
non-military goods and services, according to the Economic
Division of the Embassy of Israel.


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5. (U) While the majority of Indo-Israeli bilateral trade
continues to be in diamonds (65 percent of total trade in 2007),
the diversity of trade goods has increased rapidly in recent
years. New industries and sectors are replacing the established
commodities of years past. Twenty two percent of Israel's 2007
exports to India came from the high-tech sector, a remarkable 35
percent increase from 2006. Telecommunications, one of the new
centerpieces of Indo-Israeli trade (accounting for 14 percent of
total Israeli exports to India),registered a 15 percent growth
rate in 2007 from the previous year. As a leader in rural
telephone networks, Israel is helping India develop its
telecommunication capabilities outside urban network hubs. Both
Israel and India have increased trade of sophisticated chemicals
to one another, with a dramatic increase of 65 percent in total
sales over the past two years.

A Match Made In Heaven?

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6. (U) The sharp increase in trade and investment has been
driven in part by a complex mix of geo-political considerations.
However, most observers agree that the rapid growth is a
result of ordinary economic pragmatism on the part of both
governments, as trade in most goods is complementary. India, in
spite of its impressive economic performance in recent years, is
still predominantly an underdeveloped country in need of foreign
investment and technology transfer. Many in the business
community in India believe that Israel's advanced industries and
technological expertise are well-suited to serve the needs of
India's expanding -- yet still immature -- market. Indian
business contacts report that Israel is looking to India both as
a source of inexpensive labor for manufacturing Israel's
products, either for the Indian market or export globally.
Moreover, India's budding middle class represents to Israeli
businesses - as it does for much of the industrialized world - a
virtually untapped and unlimited well of potential new
customers.


7. (U) In turn, Indian businesses have begun to look to Israel
as a profitable export market and investment destination.
Israeli imports from India have grown at an impressive annual
rate of more than 24 percent since 1992, higher than the annual
average growth rate for total trade. Foreign Direct Investment
(FDI) - which for years almost exclusively flowed from Israel
into India - is today moving in both directions. The Tata Group
and the State Bank of India have taken their businesses to Tel
Aviv and Haifa. Moreover, as a Free Trade Agreement (FTA)
signatory with both the US and the EU, Israel has for years
functioned as a conduit by which Indian businesses sell goods in
what would otherwise be inaccessible or unprofitable foreign
markets. Joint ventures (JV) between Israeli and Indian
companies have also proliferated; it is reported that over a
thousand Indo-Israeli JVs have been launched in India.



Bilateral Trade and Investment Advanced by Key Agreements and
Delegations

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8. (U) A number of key bilateral trade and business agreements
have helped encourage and sustain the over 20 percent rate of
trade growth. Beginning in 1994, Israel and India entered into
a Most Favored Nation (MFN) agreement, which stated that India
and Israel were obliged to offer each other the most preferred
treatment in all trade negotiations. In other words, all
favorable trade policies (such as a low tariff) extended to
foreign nations must also be offered to India or Israel,
respectively. The MFN agreement set the stage for a series of
key agreements signed in the following years, the most important
of which were the Avoidance of Double Taxation agreement, the
Bilateral Investment Protection agreement, and the Customs
Cooperation agreement, all signed in 1996. In 2002 and 2003,
the governments continued to move their bilateral relationship
forward by signing an Agreement on Cooperation in Peaceful Uses
of Outer Space, an Agreement on Cooperation in the Field of
Health and Medicine, an Agreement on Cooperation in the Field of
Protection of the Environment, and a Memorandum of Understanding
(MoU) on India-Israeli Research and Development. Since 2006,
discussions concerning a full-fledged Indo-Israeli Free Trade
Agreement (FTA) have begun but were put on the backburner while

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the two governments prepared for their respective national
elections.


9. (SBU) On June 2, EconOff met with the Israeli Consul
General, Orna Sagiv, to discuss the proposed FTA and to hear her
take on the current state of the Indo-Israeli business
relationship. Sagiv explained that the Government of Israel
(GOIS) has been actively promoting increased investment and
trade in Asia, and that in recent years India has increasingly
become the focal point of that campaign. The GOIS has launched
a number of initiatives to encourage trade growth, and has sent
scores of high-profile government and business delegations to
India to sell the Israel brand. "Asia is the future of Israeli
business," Sagiv observed. "In India we're working hard to
shift away from a diamond dominated relationship to a
multifaceted one. We want to expose Israeli high-tech know-how
and capabilities to the Indian market." Since 2007, Israel has
sent dozens of delegations to India, representing business
opportunities as diverse as water management, financial
consulting, high yield agriculture, IT, telecommunications, and
infrastructure. "The problem," Sagiv lamented, "is in the
branding." Very few businesspeople in India have dealt with
Israelis. Those who have still tend to think of Israel only in
terms of defense or drip irrigation. "Few Indian business
leaders are aware of all that Israel can offer in terms of
high-tech or infrastructure," Sagiv continued. Israel hopes
that these delegations and trade missions will help change that
limited view and "show that Israel has the experience and
expertise to manage projects as well as provide niche services."
When asked about the likelihood of an Israel-India FTA coming
into being in the near future, Sagiv noted optimistically that
the necessary ingredients are all in place. The FTA was held up
by the two countries' election cycles, but "it is only a matter
of time" until it is expected to become a reality.


10. (SBU) Note: At a June 25 lunch with the American Jewish
Committee's India representative, Priya Tandon, EconOff learned
that a number of these JVs and business partnerships have been
launched by members of the Indian-Jewish Bene Israel religious
community. The Bene Israel, who number nearly 70,000 (of which
all but 5,000 have emigrated to Israel),trace their history in
India back to the Second Century A.D. Jewish exile. They
resemble the Maharashtra state's Marathi majority in appearance
and customs, but have over the centuries maintained a resilient
Jewish identity by keeping traditional Jewish laws and
practices. Tandon - not a member of the Bene Israel community
herself - noted that while most Bene Israel have left for
Israel, strong bonds continue to connect the Bene Israel of
India - particularly of Mumbai - with those who have left.
These bonds have helped establish and sustain vibrant business
partnerships. End Note.

Agricultural Ties Growing, Hoping to Surpass Diamonds as
Dominant Trade Sector

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11. (U) Observers have highlighted the agricultural sector as
one of the new driving forces behind the expansion in trade, and
an area with enormous potential for expansion. At a recent
seminar on Indian-Israeli agricultural partnerships in Mumbai,
leading Israeli agricultural scientists explained that Israel
has been a leader in low-water farming methods and technologies
since the 1960s. In recent years, however, the country has
diversified its expertise to include a number of other
agricultural practices, including food storage, food processing,
fertilizers, desalination technologies, and genetically modified
seeds. Israel has been looking for foreign trading partners and
has been encouraged by India's agricultural reforms of the past
few years, especially the adoption of liberal policies in the
food processing industries and in agricultural research and
technology transfer, with 100 percent foreign direct investment
permitted.


12. (U) To this end, Israel and India culminated more than
three years of negotiations with the signing of a far-reaching
Agricultural Work Plan in 2006. Sharad Pawar, the Indian Union
Minister of Agriculture
,
led a delegation of farmers, agricultural scientists, and
politicians to Israel in May of that year to hammer out the deal
with his Israel counterpart, Shalom Simhon. The plan calls for
a number of cooperative measures, including the establishment of

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a joint fund for collaborative research on agriculture,
development of energy efficient greenhouses for semi-arid
tropical climates, numerous studies on recycling of domestic
wastewater for irrigation, post harvest processing and storage
subsidies, and enrollment of Israeli and Indian students and
scholars of agriculture in each other's universities and
research institutions. The panelists at the Mumbai seminar
bemoaned the fact that the implementation of the Work Plan has
been sluggish, but are satisfied nonetheless that the Plan has
laid the foundation for a potentially mutually beneficial
partnership in agriculture.

Potential for Advancement - But Tread Cautiously

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13. (SBU) Comment: Since India's full diplomatic recognition
of Israel in 1992, the relationship between the two countries
has quietly expanded, diversified and solidified, due to a
complex mix of geopolitical considerations and economic
expediency. As India continues its quest to secure more
advanced technologies in a variety of sectors, it will likely
continue to look for opportunities with an economically
aggressive Israel, which has its own reasons to look towards
India as a trade and investment partner. In addition, in Mumbai
many corporations have turned to Israeli security experts to
improve their security profile in the aftermath of the November
2008 terrorist attacks, a more strategic tie-up that will likely
grow. Nevertheless, given the sensitivities of India's
relationships with Arab countries, where most of its oil imports
originate, and the concerns of its own large, Muslim community,
India's public acknowledgement of this increased coziness will
remain muted. End Comment.
FOLMSBEE