NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF

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STATE FOR SCA/INS AND EEB
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD
DEPT OF ENERGY FOR A/S KHARBERT, TCUTLER, CZAMUDA, RLUHAR
DEPT PASS TO USTR CLILIENFELD/AADLER/CHINCKLEY
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN
USDA PASS FAS/OCRA/RADLER/BEAN/CARVER/RIKER
EEB/CIP DAS GROSS, FSAEED, MSELINGER

E.O. 12958: N/A
TAGS: ECON EAGR EAIR ECPS EFIN EINV EMIN ENRG EPET ETRD
BEXP, KIPR, KWMN, IN

SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF
JANUARY 12 TO JANUARY 16, 2009


1. (U) Below is a compilation of economic highlights from Embassy
New Delhi for the week of January 12-16, 2009, including the
following:

-- Trade Roundtable with Canada, EU, NZ, Australia
-- Update on the Pension Sector
-- FDI Slows in November
-- Aviation Industry Likely to Fare Better in 2009
-- Only 37 Foreign Companies Invest in Single-Brand Retail
-- Shipment of Indian Drugs Seized in the Netherlands

Trade Roundtable with Canada, EU, NZ, Australia
--------------


2. (SBU) Econ Couns attended a January 16 lunch roundtable hosted by
the Canadian High Commission for visiting chief trade negotiator
(and former Canadian ambassador to the WTO and NAMA chair) Don
Stephenson where officials discussed their experiences of bilateral
trade negotiations with the GOI. Stephenson noted that Canada's CEO
Roundtable had asked the GOC to look into the possibility of a
comprehensive FTA with India and he wished to understand how other
countries had approached trade talks. The EU is in the midst of a
FTA negotiation which is taking longer than expected (with an
original targeted completion in late 2008). New Zealand and
Australia are separately conducting Joint Study Groups with the GOI
on the broad parameters of an FTA. The GONZ hopes to formally
launch FTA elections before the Indian national election; althought
it realizes that may not be possible. Meanwhile, Canada negotiated
a FIPA with India in July 2007, but has not managed to exchange
texts.


3. (SBU) All countries present emphasized the significant lack of
capacity and coordination in the GOI to handle an FTA negotiation,
especially when faced with multiple, simultaneous talks with
different countries. Many officials cited the Indo-ASEAN FTA as
symbolic of the difficulties of bilateral talks, noting that even
with strategic Indian interest, and a developing
country-to-developing country format, it had taken many years to
come close to completion. The GOI was very tactical and cautious in
talks. GOI trade officials also negotiated in a very defensive
mode, not focusing on offensive interests and sectors of export
interest. Stephenson noted that Canada's Trade Minister would
arrive next week to hold some exploratory discussions with Commerce
Minister Kamal Nath.


Update on the Pension Sector
--------------


4. (U) The Pension Fund and Regulatory Development Authority (PFRDA)
continues with its efforts to open the New Pension Scheme (NPS) to
private sector investors, mainly those in the informal sector, who
are not covered by the Employee Provident Fund. Media report that
the PFRDA has received about 20 applications from various financial
sector players (mainly life insurance and asset management firms)
for managing the private retirement funds for individuals on a
voluntary basis. The current state-owned fund managers SBI Pension
Fund, LIC Pension Fund, and UTI Pension Fund have also applied to
manage the private pension sector business. The PFRDA is expected
to shortlist the fund managers for the technical evaluation by
January 16 and the final selection will be made by end-February.
Significantly, the application guidelines permit FDI up to 26
percent in the fund management company, which PFRDA requires to be a
new, separate company from the parent company. The government has
determined that the FDI cap in the pension sector must mirror that
in the insurance sector. Should the insurance FDI cap be raised
from 26 to 49 percent, as pending legislation proposes, the FDI
ceiling in the pension sector should rise accordingly.


5. (U) Newspapers also report that the PFRDA has invited bids from
banks and regulated non-banking finance companies and institutions
to be appointed as points-of-presence (PoPs),which will be the
interface with the investors. The PFRDA will register designated

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branches of PoPs as service providers for five years in the first
phase. The PoPs would offer services such as collection of regular
contributions, changes in subscriber details, switching of schemes
or fund manager, withdrawal requests and print-outs of account
statements. The pension system will be two-tiered with the first
one being a non-withdrawable pension account and the second one
being a withdrawable savings account.


FDI Slows in November
--------------


6. (SBU) New data from the Reserve Bank of India (RBI) shows that
foreign direct investment (FDI) into India, which was at a new high
for much of 2008, slowed in November. Robust FDI flows had soared,
with April-September FDI up 137 percent compared to the same period
in 2007. Analysts credited this to investors' assessment that
India's long-term growth story was still intact, even as the storm
clouds regarding the financial and economic slowdown were brewing.
The FDI surge provided a welcome counterweight to more than $10
billion in portfolio outflows. However, the global liquidity crisis
has now started to bite, with October and November 2008 down roughly
one-third over the same two months in 2007. The government had set
a target of $35 billion for the fiscal year (ending March 2009),
which it might miss if FDI continues to slow. April to November
2008 was still up 81 percent over the same period in 2007.


Aviation Industry Likely to Fare Better in 2009
--------------


7. (U) Due to the economic slowdown, higher fixed costs,
particularly for aviation turbine fuel (ATF),and an increase in
ticket prices, the year 2008 saw negative domestic passenger growth
for the airlines. The GOI stated that passenger traffic declined by
five percent with 411,000 passengers flying in 2008, compared to
433,000 in 2007. Moreover, 2007 was a record year for Indian
aviation with passenger traffic increasing by 32 percent from 2006
which witnessed 327,000 passengers. During most of 2008, airlines
faced increasing losses due to high fuel prices and excess capacity
which forced the airlines in turn to keep ticket prices high. As a
cost saving measure, airlines reduced capacity, resulting in nearly
23 aircraft being removed from the registry in 2008. In 2009,
analysts predict that India's aviation industry is likely to recover
from the shocks of 2008 mainly because of significantly lower ATF
prices. The Center for Asia Pacific Aviation (CAPA's) Policy
Outlook 2009 states that while passenger demand will remain low in
the first half of 2009, it will improve in the later part of the
year.


8. (U) Over the last four years, the aviation industry has incurred
losses of over US $3 billion. If oil prices stabilize around $50
per barrel, airline losses, particularly in India which levies high
sales taxes on ATF, will come down significantly. With airlines
already reducing fares and cutting other costs, air traffic is
expected to return to the 2007 growth rates.


Only 37 Foreign Companies Invest in Single-Brand Retail
--------------


9. (U) In an update on FDI in the retail sector, local media report
that approximately 37 foreign companies have entered the Indian
market since the GOI allowed 51 percent foreign direct investment in
single-brand retail in early 2006. Several well-known brands in
segments including fashion, apparel, footwear, watches, sports
equipment and luggage have entered the country either through joint
ventures or through licensing agreements with local partners. There
are reportedly still several brands, including Diesel and Starbucks,
holding out for a more liberal FDI policy in retail. Ikea claims to
be waiting for the policy to change rather than enter the Indian
market with a local partner. As real estate costs and rental prices
in malls and retail locations fall, industry representatives are

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hopeful barriers to entry in retail will seem more reasonable and
attract more single-brand FDI.


Shipment of Indian Drugs Seized in the Netherlands
--------------


10. (U) A consignment of drugs from Dr Reddy's Laboratories Ltd
being shipped from India to Brazil was seized by Dutch customs
authorities on charges of patent infringement. The shipment is the
first from a large Indian company to be seized and has reportedly
angered Indian commerce officials, who have called the seizure an
"act of piracy by the European Union." The event comes amid a
growing number of shipments from small and medium-sized bulk
drug-makers being seized in European ports while in route to South
America and Africa. Indian pharmaceutical representatives,
concerned the seizures will cause a standstill in exports, are
pressuring the GOI to challenge the EU law that allows for seizure.
Meanwhile, small and medium Indian companies are using different
routes to avoid EU ports.


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


WHITE