New Delhi Weekly Econ Office Highlights for the Week of

UNCLAS SECTION 01 OF 07 NEW DELHI 001162 SENSITIVE SIPDIS 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/FERUS EEB/CIP DAS GROSS, FSAEED, MSELINGER E.O. 12958: N/A TAGS: ECON EAGR EAIR ECPS EFIN EINV EMIN ENRG EPET ETRD BEXP, KBIO, KIPR, KWMN, IN SUBJECT: New Delhi Weekly Econ Office Highlights for the Week of June 1 to June 5, 2009 ¶1. (U) Below is a compilation of economic highlights from Embassy New Delhi for the week of June 1-5, 2009, including the following: -- GDP Growth of 6.7% Surprises on the Upside -- Infrastructure Sector Recovers Somewhat in April -- Some Signs of Expanding Manufacturing Sector -- FY 2009-10 Begins With Continued Sliding Exports -- Industry Expects Stimulus in Budget 2009-10 -- Commerce Minister Discusses FDI; Previews Bali Talks -- Key Reforms in the Aviation Sector Looking Likely -- Policy Traction for Subsidy Reforms -- GM India Remains Mostly Insulated from U.S. Parent's Bankruptcy -- New Gas Find in Krishna Godavari Basin, Maybe -- Strategic Oil Reserve: Construction Begins -- Ministry of Corporate Affairs and Ministry of Minority Affairs - Salman Khursheed -- Ministry of Chemicals and Fertilizer - M.K. Azhagiri -- Ministry of Information and Broadcasting (MI&B)- Mrs. Ambika Soni GDP Growth of 6.7% Surprises on the Upside -------------- ¶2. (U) Government data released last week indicates that the Indian economy registered a better-than-expected 6.7 percent growth in FY 2008-09 (versus 9 percent registered a year earlier) despite the global downturn. The fourth quarter (January-March) growth figures of FY 2009-09 were also better than anticipated at 5.8 percent, due to higher government spending and robust performance of the services sector. However, the farm sector grew by just 1.6 percent during FY 2008-09, compared to 4.9 percent in the previous year. The high base was reportedly a major factor contributing to slower growth in the agricultural sector. ¶3. (U) The industrial sector slowed to 3.9 percent during FY 2008-09 compared with 8.1 percent growth in FY 2007-08. This was largely due to the weak growth in the manufacturing sector. Service sector growth for FY 2008-09 was more buoyant at 9.7 percent, driven mainly by trade, transport, hotels and communications which rose by 9 percent, while community, social and personal services were robust at 13 percent, the latter a reflection of the disbursement of Pay Commission raises. Finally, telecom sector growth remained steadfast, with the mobile subscriber base crossing the 400 million mark in April 2009. The higher than expected growth figure following elections prompted several economists to boost their Indian growth forecasts for the coming fiscal year. Citi raised its call from 5.5% to 6.8%, while Nomura Securities hiked its GDP forecast to 7%. (Note: These figures are not necessarily the final call on FY 2009 performance. GDP figures are frequently revised over time, as the government publishes four sets of estimates for each time period. For example, the October-December GDP growth figure released in February was revised upwards last week from 5.3% to 5.8%. End note.) Infrastructure Sector Recovers Somewhat in April -------------- ¶4. (U) The infrastructure sector rebounded in April 2009, showing a 4.3 percent increase (versus 2.3 percent in April 2008) - the most since July 2008 - on a better-than-expected performance in coal, electricity and cement. Increased government spending in the infrastructure sector could be one of the key reasons for this increase. Coal production grew at a healthy 13.2 percent in April, due to high output from new mines and additional demand for power as a result of rising industrial activity. Cement output at 11.7 percent in April was the highest since February 2007, also pointing towards increased activity in the infrastructure sector. Electricity production grew by a healthy 6 percent. Steel production also improved in April over the previous months. However, production of crude oil and petroleum products dipped due to ageing oil wells, coupled with no new discovery of high-yielding oil fields in the country. NEW DELHI 00001162 002 OF 007 ¶5. (U) The healthy core sector figures for April 2009 have raised hopes of recovering industrial production, as these infrastructure industries have a combined weight of 26.7 percent in the index of industrial production. Economists expect that revival in steel and cement production on the back of higher public spending will continue after April. Already, cement dispatches for the month of May from major cement manufacturers showed robust growth. Media reports that real estate sector in metros is seeing signs of revival in the first quarter of the FY 2009-10 as many new commercial deals on lease rentals with many big companies including Aditya Birla Group, KPMG, Wipro and Ernst and Young are getting ready to be signed. Some Signs of Expanding Manufacturing Sector -------------- ¶6. (U) The ABN Amro Purchasing Managers' Index (PMI) expanded for the second consecutive month in May. The index, which uses responses from purchasing managers in 500 industrial companies, increased to 55.7 in May, compared with 55.3 in April. A reading above 50 indicates expansion of that particular variable, while a reading below 50 indicates an overall decrease. Manufacturers reported higher new orders because of revival in domestic demand. However, it will take some more time for the revival phase to set in, given the weakness in India's exports. ¶7. (U) Despite an increase in new orders at 59.6 in May, firms have been under competitive pressure that prevented them from increasing prices. The output prices index stood at 49.3 in May this year. The employment index crossed the threshold 50-level mark for the first time in 2009 because of new orders, ending the retrenchment period. Firms employed more staff in order to increase productive capacity as orders started increasing. Purchasing activity and pre-production stocks rose sharply over the month, as firms expect higher production orders in the coming months. However, new export orders index fell to 49.9 in May, from 50.7 in the April. The survey reports that foreign demand for Indian manufacturers was broadly unchanged during the survey period. FY 2009-10 Begins With Continued Sliding Exports -------------- ¶8. (U) According to the latest Ministry of Commerce and Industry (MOCI) estimate, Indian merchandise exports dropped 33 percent to $10.7 billion in April 2009 compared to April 2008, although in rupee terms the drop was 16%. The downtrend in India's merchandise exports continued for the seventh month consecutively, indicating the enduring impact of the global slowdown. Exports had nosedived 33 percent in March 2009, the worst in 14 years. India's total merchandise exports for fiscal 2008-09 (ending March 31, 2009) touched $168.7 billion, recording only 3.4 percent growth - falling short of the government's revised target of $175 billion. Commerce Secretary G.K. Pillai has repeatedly said that current fiscal year, which began April 1, may witness a modest contraction in merchandise exports. However, the Federation of Indian Export Organization (FIEO) expects 10 percent growth in India's exports in FY2009-10, to $185 billion, on the expectation of a recovery in demand from Europe in view of that region's depleting inventories. ¶9. (U) Preliminary data also shows that India's imports contracted during April 2009 for the fourth month in a row, registering a 37.5 percent decrease compared with April 2008. Government and industry attribute the deceleration in imports to weak domestic demand and price effects from lower crude oil prices. In FY2008-09, India's total imports grew 14.3 percent to touch $287.7 billion. Industry Expects Stimulus in Budget 2009-10 -------------- ¶10. (U) Commerce and Industry Minister Anand Sharma has told reporters that the FY 2009-10 Budget, slated to be presented in Parliament in the first week of July, is expected to include incentives for the manufacturing and export sectors. The package may contain tax incentives, and special incentives for labor-intensive sectors such as textiles, gems & jewelry, and leather. Sharma is keen to provide incentives to make Indian NEW DELHI 00001162 003 OF 007 exports globally more attractive. He recently met with export promotion councils to devise incentives for the export sector and announced that "negative export growth might persist for some more time but the Government would work to minimize the impact of [the] global slowdown". Apart from seeking the abolition of the fringe benefit tax, service tax exemption, and concessional credit facilities, exporters also voiced concern about distorted prices of products all over the world due to huge stimulus programs extended by competitors such as China, Vietnam, Thailand, and Bangladesh. While some measures are expected to be rolled out in the Budget, others will be announced in the Foreign Trade Policy in August ¶2009. Commerce Minister Discusses FDI; Previews Bali Talks -------------- ¶11. (U) Commenting on India's foreign direct investment (FDI) regime, Minister Sharma emphasized the importance of FDI in infrastructure and other value-addition sectors in agriculture. He was quick to add that "the recently announced new FDI guidelines were decided by the empowered group of ministers on FDI after bringing in all points of views, and there is no question of a comprehensive review at the moment". Commenting on the impact of the US' proposed changes in its tax policy on investments in India, the minister was hopeful that private equity investors and other funds may come back to India now with stability in the government and equity climate despite the proposed U.S. tax law changes. ¶12. (U) In a press interview, Sharma indicated that he would discuss the issue of protectionism with USTR Kirk in their upcoming meeting in Bali during the Cairns Group Ministerial, June 7-9. Sharma also told the press that both the leaders will deliberate upon the impact of the global downturn and possible ways to deal with it. Commenting on the possibility of advancing WTO Doha Round talks, the Minister stated that he would like to discuss with the USTR the controversial issues that stalled WTO discussions last year and need to be sorted out for conclusion of the round. Key Reforms in the Aviation Sector Looking Likely -------------- -------------- ¶13. (U) With the UPA coming back to power with a clear mandate and Praful Patel resuming charge at the Ministry of Civil Aviation (MOCA),the GOI is likely to move forward with much needed reforms in the Indian aviation sector. Foremost among these is the revived MOCA proposal to allow foreign carriers to invest in domestic airlines and thereby help the cash-strapped carriers. At present, only non-aviation companies and financial investors, including private equity funds, can buy up to a 49% stake. Facing rising debt and losses and falling demand, coupled with expensive fuel last year and overexpansion in the last few years, the Indian aviation industry has been adversely affected by the economic slowdown. In addition to a direct cash infusion, allowing foreign airlines to take equity positions in domestic carriers is expected to encourage private equity players and hedge funds to invest more in the industry. That said, while Kingfisher Airlines Chairman Vijay Mallya welcomed this possible move, Naresh Goyal of Jet Airways is opposed to it. Also, some industry observers fear the reform may be coming too late, as foreign carriers have limited equity to invest in the midst of the global financial recession. ¶14. (U) Also, this week, Minister Patel announced plans to divest some of its stake in NACIL that operates Air India and Indian Airlines, through an IPO. With a current debt of almost $3 billion and annual losses of $600 million, as well as depressed market conditions, a successful IPO of Air India seems a difficult proposition. (Note: Air India recently merged with government-run domestic carrier Indian Airlines to increase operational efficiencies, a move that has not resulted in increased passenger revenues as expected. End note.) However, Air India's expansion plans are still in place and the carrier will take delivery of 26 new aircraft this year. MOCA is also expected to announce its ambitious program for development and modernization of 35 non-metro NEW DELHI 00001162 004 OF 007 airports. Other key priorities will include improving airport infrastructure, tax rationalization across states for Aviation Turbine Fuel (ATF),and aviation safety. Policy Traction for Subsidy Reforms -------------- ¶15. (SBU) Planning Commission Deputy Chairman Montek Singh Ahluwalia and Delhi Chief Minister Sheila Dikshit were the key speakers at a seminar on June 4 on the use of conditional cash transfers (CCT),such as school vouchers, as a form of social safety net. Ahluwalia stated that India had traditionally focused more on anti-poverty development than social safety nets. However, he observed, India's current and coming stages of economic transformation, where workers leave the agricultural sector for manufacturing and services, actually increased the need for safety nets. This is because economic restructuring will had adverse impact in some places and some sections of society will be hit. Ahluwalia said that India had been transforming many of its anti-poverty schemes to safety nets over the last few years in an ad hoc fashion, pointing to NREG and the health insurance scheme for below poverty line (BPL) citizens as examples. He ended by welcoming research on CCTs, since he noted wryly that it is hard to introduce a "new idea in India without close scrutiny." (Note: Another Planning Commission official at the event said that Ahluwalia had tasked him to research the use of CCTs in India. End note.) ¶16. (SBU) Ahluwalia was followed by Delhi Chief Minister Sheila Dikshit, who described her government's efforts to improve the delivery of existing subsidies to Delhi citizens. She said that Delhi had nearly 50 different schemes for various social groups, where a great element of corruption has crept in, citing as examples the food and kerosene subsidies administered under the Public Distribution System. As one step towards stemming corruption, Dikshit explained that her government has moved to excluse families whose annual incomes exceed Rs 100,000 (roughly $2000),because her government had found that most of those above that income threshold did not actually avail of the subsidy, leaving a vast amount that typically got "siphoned" off by contractors. The Delhi government is also examining moving to a cash transfer and a single smart card. Further, out of nearly 10 million Delhi residents eligible for government programs, only 4.5 million actually tap the benefits, due to a lack of awareness and difficulty navigating bureaucracies. That has led Delhi to start "mission convergence offices" to provide one-stop sites for poorer, often illiterate, residents to gain access to government benefits. GM India Remains Mostly Insulated from U.S. Parent's Bankruptcy -------------- ¶17. (U) In the wake of the announcement of General Motor's bankruptcy in the US, GM India moved quickly to announce that it would not be affected by the parent company's filing and that it will not alter expansion plans or make any reductions in its labor force. In a statement issued by GM India, Karl Slym, President and Managing Director, noted that the company's sales, services, spare parts and warranty coverage would go on uninterrupted. According to local media, GM India is also circulating a video among dealers and suppliers featuring Slym, stating that Indian operations don't fall under the bankruptcy and that business would continue as usual. The company also plans to launch a print media campaign to bolster consumer confidence in the company's brand. Despite GM India's assurances, GM dealers are reportedly concerned about the negative impact on the company's overall image, noting that there has already been a noticeable drop in footfalls in their showrooms. Auto component suppliers, on the other hand, were enthusiastic that the bankruptcy may present opportunities for increased sales as GM looks to cut costs and implement more effective sourcing. ¶18. (U) The Indian arm of the U.S. carmaker has invested $1.07 billion in the past 14 years to expand its factory capacity in hopes of capitalizing on cheap labor and high sales growth potential provided by India's emerging middle class. While sales of its five models in India have been low in comparison with its Indian NEW DELHI 00001162 005 OF 007 competitors, the company has significantly increased its capacity with new plants going online in Gujarat and Maharasthra, reducing the company's reliance on foreign imports. The company also plans to invest $200 million in the construction of an auto engine and transmission factory to be completed next year. Today, GM India launched a new model of the Spark, its compact car, the first of five new models to be introduced in the next two years. Two of the cars will be alternative fuel vehicles powered by compressed natural gas (CNG) and liquified petroleum gas (LPG). (Comment: As GM reorganizes in the US, growth in sales due to expanded operations in India may even bolster the company in the long run, provided GM India can continue to manage its brand and provide competitive products to Indian consumers. End comment.) New Gas Find in Krishna Godavari Basin, Maybe -------------- ¶19. (SBU) Hardy Oil and Gas PLC, a British joint venture partner with Reliance Energy, announced on May 26 two major gas discoveries in blocks D3 and D9 in the Krishna Godavari basin, off the coast of Andhra Pradesh. The company quoted estimates made by petroleum consultancy Gaffney, Cline and Associates that placed gas reserves at 9.5 trillion cubic feet (TCF) in D3 and 11 TCF in D9. Oil reserves in the two blocks are estimated to be 143 million barrels. A senior official at the Gas Authority of India told Consulate General Chennai that these estimates appear to be fairly accurate, adding that this find, with proper exploitation, could make India one the top 20 producers of natural gas in the world. The GOI's Director General of Hydrocarbons has yet to make its assessment of the two blocks, however, and has called Hardy's announcement "premature." Strategic Oil Reserve: Construction Begins -------------- ¶20. (SBU) Construction of underground crude oil storage tanks at two locations near Mangalore (350 km west of Bangalore, on Karnataka's coast) began on May 27. The underground storage tanks will form part of a strategic oil reserve being built by the Indian government capable of holding fourteen days' supply of crude for the country. Karnataka's Energy Secretary told Consulate General Chennai that the combined storage capacity of the project will be 2.5 million tons, and that they should be operational in 2011. He also told us that the site was chosen because of its proximity to Mangalore's refineries, which are India's largest producer of diesel fuel. Construction of a similar storage facility at Vishakapatnam (on the northeastern coast of Andhra Pradesh) should begin later this year. Ministry of Corporate Affairs and Ministry of Minority Affairs - Salman Khursheed -------------- -- ¶21. (SBU) On May 28, Salman Khursheed was appointed Minister of State in charge of the Ministry of Corporate Affairs (MCA) and the Ministry of Minority Affairs. Viewed as a suave intellectual, Khursheed assumes charge of the Ministry of Corporate Affairs at a time when it is dealing with the Satyam scandal. Since assuming charge, he has publicly stated the need to expedite the prosecution and close the probe of the Satyam scandal soon. Khursheed promised to review powers given to the Serious Frauds Investigation Office (SFIO) and examine ways to strengthen it. Also, on the issue of possible lay-offs, as many as 10,000, at Satyam by new owner Tech Mahindra Ltd, he said the government would intervene only if there was large-scale retrenchment. "In such a situation, it's not only MCA but other ministries, such as the labor ministry, will be also involved." ¶22. (SBU) Khursheed has also stated that reintroducing the Companies Bill of 2008, which replaces the Companies Act of 1956, is a top priority. The bill makes it easier to start and close firms and protects the interests of shareholders and investors; it also makes firms and their promoters more accountable and requires NEW DELHI 00001162 006 OF 007 disclosure of subsidiaries. While the basic structure of the bill is likely to remain intact, Khursheed may reintroduce the bill with some amendments, such as more power to auditors to ensure their independence in light of the Satyam scandal. Khursheed has repeatedly emphasized that the ministry will stand for transparency and seek to protect the interests of retail investors. He has also pledged to restructure the MCA and allied agencies like the SFIC and the Registrar of Companies (ROC) to increase their scope and efficiency. The Ministry has also helped to establish the Competition Commission of India (CCI),which should act as an independent regulator but will continue to lean on the ministry for guidance. As the CCI becomes fully operational as the anti-trust body for India overseeing merger and acquisition activity in India, Khursheed will play an important advisory role for this regulatory agency. ¶23. (U) Bio: Khursheed currently represents the Farukhabad Lok Sabha seat of Uttar Pradesh and is a member of the Congress Working Committee. Prior to this, Khursheed headed the Congress Party's state unit in Uttar Pradesh and chaired the party's policy planning and coordination department at the national level. In his later role, Khursheed was recognized for being one of the key architects of Congress' election campaign in the May 2004 Lok Sabha elections. In the early 1990s, he served as Minister of State for External Affairs in the Narasimha Rao government. Under Prime Minister Indira Gandhi, he was an Officer on Special Duty in the Prime Minister's Office. He is close to the Congress Party chief Sonia Gandhi, and son Rahul Gandhi. ¶24. (U) Described as suave, charismatic, gentle, and articulate, Khursheed is a lawyer by training and joined the Supreme Court Bar in 1977. He has also taught law at Trinity College at Oxford University. Known for his progressive, modern, and liberal outlook, Khursheed is an honorary chair of many of Delhi based educational institutions including Delhi Public School and cultural literary bodies. Khursheed is very knowledgeable on Indo-Pak relations, India's policies with neighboring countries, and overall foreign policy objectives of India. Ministry of Chemicals and Fertilizer - M.K. Azhagiri -------------- ¶25. (SBU) The Tamil Nadu-based DMK party, led by aging leader Karunanidhi, insisted upon several Cabinet positions for its MPs because of its pre-election alliance with Congress. One of the more colorful DMK MPs to find a place in the UPA government is the new Minister of Chemicals and Fertilizers, M.K. Azhagiri. Azhagiri has already signaled that his priorities are to "ensure the timely availability of...subsidized fertilizers to farmers" including through modernizing and restructuring factories and imports. [Note: India is a large importer of diammonium phosphate (DAP) fertilizer from the U.S. According to U.S. Commerce Department figures, Indian imports of DAP from the U.S. in 2008 totaled $2.78 billion, $778 million in 2007, and $587 million in 2006. End note.] He also indicated that in relation to the pharmaceutical sector, "all types of medicines used by the common people will be provided throughout the country at an affordable price." ¶26. (SBU) On the day he was sworn in, Azhagiri pledged that the DMK would revive the Sethu Samudram project, which involves dredging the Palk Strait between India and Sri Lanka to allow ships to pass through the channel rather than taking a circuitous route around Sri Lanka, although the project is not in his purview. The project - part of the DMK's election manifesto - was originally pursued in the previous UPA government by Union Minister of Shipping (and DMK official) T.R. Baalu, who has been replaced by a Congress party stalwart also from Tamil Nadu. The project is opposed by some Hindu religious groups who claim it would damage the 'Ram Sethu' bridge, which was believed to have been built by Lord Rama so he could cross over to Sri Lanka. ¶27. (SBU) Bio: Muthuvel Karunanidhi Azhagiri (pronounced AH-yah-gee-ree),born January 30, 1950 (or 1945, according to some NEW DELHI 00001162 007 OF 007 sources),is the second-oldest son of Tamil Nadu Chief Minister and DMK President M. Karunanidhi. DMK insiders believe Karunanidhi's decision to send Azhagiri to Delhi, while naming Azhagiri's younger brother (M.K. Stalin) to the post of Deputy Chief Minister in Tamil Nadu, is part of a plan to divide up responsibilities between his two sons. Azhagiri will look after the party affairs in New Delhi while Stalin is expected to become Karunanidhi's successor as Chief Minister. Based in Madurai since 1989, Azhagiri controlled party affairs in Tamil Nadu's southern districts without holding any official position until 2009. His father had sent him to settle down in Madurai due to the growing sibling rivalry between Azhagiri and Stalin. In May 2003, Tamil Nadu police arrested Azhagiri for criminal conspiracy in a case relating to the murder of a senior DMK leader. Azhagiri, along with 12 other co-accused, were acquitted in May 2008 for lack of evidence. Azhagiri's rise in the DMK took place after his organizational skills helped the DMK-led alliance win three state assembly by-elections in 2006, 07 and 09. The DMK won nine of the ten southern Tamil Nadu Lok Sabha seats up for grabs in the recent elections, thanks largely, say many observers, to the unrivalled pay-for-votes system engineered by Azhagiri. His English is limited, but functional. Ministry of Information and Broadcasting (MI&B) - Mrs. Ambika Soni -------------- -- ¶28. (U) Mrs. Ambika Soni (age 65),the new MI&B minister, served previously as Minister of Tourism and Culture from 2006-2009. The Ministry of Information and Broadcasting has authority over licenses and approvals related to media, entertainment and broadcasting - areas of central interest to U.S. media and entertainment companies (content providers). This ministry has participated in the U.S.-India Information and Communications Technology Working Group's Subgroup on Media and Broadcasting. Current policy issues of important to U.S. companies include: -- prohibition on any foreign equity interest in FM radio broadcasting; -- foreign ownership in satellite ventures up-linking from India, which is capped at 20 percent mandatory Indian; -- foreign content providers who want to downlink programming to India must either establish a registered office in India or designate a local agent, which has tax implications; and -- difficulty in importing film/video publicity materials and inability to license movie-related merchandise due to royalty remittance restrictions. ¶29. (U) Bio: Ambika Soni (born November 13, 1943) was born in Lahore (then undivided Punjab) and studied French and Spanish language and literature, including in Cuba. Her husband is a diplomat. She was the first woman to become Youth Congress president in 1975 and she headed the Congress Party's Women's Wing in 1998. ¶30. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi. BURLEIGH