New Delhi Weekly Econ Office Highlights for the Week of

UNCLAS SECTION 01 OF 04 NEW DELHI 001222

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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 8 to June 12, 2009


1. (U) Below is a compilation of economic highlights from Embassy
New Delhi for the week of June 8-12, 2009, including the following:

-- MOF Preparing for Budget Session
-- Indian Commerce Minister Meets with USTR, Others on WTO
-- Tax Concessions Proposed for Broadcast & Film Industry
-- Will Govt Give Bailout for Air India's Mounting Losses
-- IT Industry Threatens Retaliation If US Tax Breaks Are Withdrawn
-- Chennai Breaks Ground on Metro Rail Project
-- Local Distiller to Produce Smirnoff in Tamil Nadu

MoF Preparing for Budget Session
--------------


2. (SBU) In a meeting on June 11, Ministry of Finance Joint
Secretary (Capital Markets) KP Krishnan told Emboffs and visiting
Deputy Assistant USTR for South Asia Claudio Lilienfeld about the
preparations underway in his Ministry for the upcoming Budget
Session of Parliament next month. Krishnan noted that the prebudget
"number crunching" had been done. While the Prime Minister was
aware of the fiscal deficit, which acted as a constraint on
spending, he also felt challenged to deliver on the social promises
made by the government. The media has been correctly characterizing
the budget, Krishnan stated, as a vehicle for signaling policy
intent and announcing policy changes. He indicated that only the
last stage of the budget proposal process was left - the Finance
Minister meeting with the Prime Minister. Krishnan described the
Finance Minister, based on their meetings together, as someone who
is not concerned with minutae but wants to focus on policy goals and
the political issues surrounding change in order to address the
political hurdles.


3. (SBU) Krishnan then spoke more broadly about the policy review
efforts underway across the government. The Joint Secretary stated
that the Prime Minister had tasked ministries back in February to
identify "unfinished business" that needed completing. He said the
PM wanted it done before elections so that, if they won, the UPA
could hit the ground running. If they lost, the PM reportedly said
the plans would be left as suggestions for the new Prime Minister.
That way, the policy reviews done from February to May were either
going to be the PM's own plan or his legacy. Krishnan told Emboffs
that the Prime Minister had decided to chair three cabinet
committees himself in the new government, as priority areas where he
wanted to ensure progress: Human Resource Development,
Infrastructure, and Financial Services. Krishnan said that the
Prime Minister had also tasked several ministries with drafting
legislation to be introduced in the July session with the goal of
trying to pass some of the legislation before the session ended
sometime in August. (Comment: A very ambitious timeline for Indian
legislation. End comment.) Ministries are being pushed because of
the government's view that it must accomplish its policy goals in
the first two years, ideally this year or next.


4. (SBU) Krishnan himself had been tasked with rewriting the
pension reform bill (the PFRDA Act),as old age income security was
a high priority of the Prime Minister, which he sees as a key part
of inclusive growth. The bill would, among other things,
consolidate into the New Pension Scheme (NPS) disparate existing
pension schemes for workers in different sectors, like handlooms,
cigarette rollers, and plantations. He said the Finance Minister
was trying to keep an FDI provision out of the legislation, since
any future changes would then require additional legislation. They
are not wed to any FDI cap in general, Krishnan acknowledged, but
the Finance Minister is aware of the time and energy it took to move
on the insurance bill amendment raising the FDI cap from 26 to 49%,
since he chaired the Group of Ministers on the issue, and has
signaled his intent to keep FDI issues out of the legislation and
leave it for the notification process. Krishnan then shared that
the Prime Minister wants the pension reform bill passed and notified
by August 15, so that he might reference it in his Independence Day
Speech, as something accomplished, not just promised. The
government did not view promises as adequate.


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Indian Commerce Minister Meets with USTR,
Others on WTO
--------------

5. (U) Media widely covered Commerce Minister Anand Sharma's first
bilateral meetings with his counterparts, including USTR Ron Kirk,
during the Cairns Group ministerial in Bali this week. Sharma,
since taking charge as Commerce Minister in late May, has asserted
India's commitment to conclude the WTO Doha Round, with an emphasis
on the development aspects of the trade talks. At the Bali
conference, Sharma emphasized that the "development dimension of the
Doha round must be central to all discussions and the aspirations of
all developing countries for a fair trading regime must be
recognized." In addition to USTR Kirk and WTO Director General
Lamy, the Indian minister also held talks with representatives from
New Zealand, Australia, Malaysia and Indonesia, broadly highlighting
the need to arrive at an early conclusion of the trade talks. Ahead
of his departure for Indonesia, Sharma had reportedly said he hoped
to re-start the process for the successful conclusion of the Doha
Round and looked forward to his meeting with other trade ministers,
especially USTR Kirk. Indian media reported there was considerable
interest in the meetings Sharma had with other trade ministers, as
India holds the key, along with the U.S., to the conclusion of the
trade talks.
Tax Concessions Proposed for
Broadcast & Film Industry
--------------

6. (U) Press reported that the Ministry of Information &
Broadcasting (MI&B) has recommended to the Ministry of Finance a
"rationalization," i.e., lowering, of the tax/tariff structure on
digital television set top boxes (STBs) and digital head-end
equipment used by India's broadcasting and film industries. The
proposals include: removal for five years of the current special
additional 4% duty and the prevailing 8% duty on set top boxes in
order to promote the conditional access system (CAS). MI&B also
recommended that the Broadcasting, Cable, and Direct-to- Home (DTH)
television industries be included in the "infrastructure sector,"
thereby granting to them the special benefits and incentives
applicable to this sector. MI&B also recommended a 100% tax
exemption on profits for digital cable service providers and DTH
operators for the first five years. These proposals will be
presented in the Parliament in early July during the budget session.


7. (SBU) Arvind Kumar, Director, MI&B confirmed to Post that these
recommendations have been submitted, noting the Ministry of Finance
has authority to accept or reject any or all of them. The USG,
through the U.S.-India Information and Communication Technology
Working Group (ICT-WG),has been advocating tax rate reductions,
implementation of CAS, and tighter regulation of the cable industry
as a whole to stimulate consumer demand and to help reduce pirating
of broadcasts.

Will Govt Give Bailout for Air India's
Mounting Losses
--------------

8. (U) The government-owned National Aviation Company of India Ltd.
(NACIL),the holding company for the merger of Air India and Indian
Airlines, is facing mounting losses. NACIL has requested a bailout
of $2.8 billion from the central government in the form of equity
infusion, soft loans, and grants. The bailout demand is higher than
the carrier's actual operating revenue of $2.4 billion in 2008-09.
While NACIL's accounts for 2008-09 are still being finalized, losses
are estimated to be around $1 billion instead of the projected $600
million at the beginning of the fiscal year. Given that this
estimated loss is five times the combined losses of the two carriers
before the merger in 2007, the merged entity continues to face
criticism for underperforming and higher revenue losses. Industry
observers have noted that part of the problem, amidst the global
recession and downturn in aviation, is the large number of NACIL
employees - including 33,000 direct hires and 20,000 contract
employees - who have not been downsized to streamline costs of the
merged entity. Press reports that NACIL has already used up a $3.2
billion working capital loan facility; the company now faces the
risk of lenders invoking the sovereign guarantee provided by the

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GOI.

9. (U) Civil Aviation Minister Praful Patel has recommended an
initial public offer of NACIL's shares to help the airline get back
on track. The public and aviation industry will also expect the
ministry to impose tough pre-conditions on NACIL before approving
such a hefty bailout. This may include a variety of measures to
reduce costs, such as downsizing flights on unprofitable routes;
reducing incentives, allowances, and placing a moratorium on wage
escalation agreements for employees; returning leased planes; and
minimizing the number of foreign pilots (which earn higher salaries
than domestic pilots). However, despite the various problems facing
NACIL, the company still plans to accept delivery of 111 new
aircraft, of which 30 will be inducted this year. In contrast,
private Indian carriers have withdrawn purchase orders and have
deferred expansion plans. The aviation ministry will have to make a
strong case for a government bailout of NACIL as well as outline
measures to help NACIL turn around into a performing, profitable
airline.
IT Industry Threatens Retaliation If
US Tax Breaks Are Withdrawn
--------------

10. (U) President Som Mittal of the National Association of
Software and Services Companies (NASSCOM) commented to media that
any protectionist actions taken by the US that would adversely
impact the outsourcing industry may trigger "counter-protectionist"
measures by India. Mittal was referring to the Obama
Administration's proposal to eliminate tax breaks that create
incentives for U.S. companies to locate jobs overseas. Mittal did
not elaborate on what "measures" would be taken, but estimated that
ending tax incentives would affect approximately one million Indian
IT professionals, a large portion of India's business process
outsourcing (BPO) industry. The Indian IT industry has been closely
monitoring President Obama's administration since the announcement
of the proposal.
Chennai Breaks Ground on Metro Rail Project
--------------


11. (SBU) Chennai Metro Rail Limited began construction of a light
rail link connecting northern Chennai to the city's international
airport, southwest of town. The 23-kilometer rail project is
officially slated for completion in 2015. Skeptics, however, have
their doubts. An official at Chennai's Metropolitan Development
Authority (which authorizes permits for buildings and other
projects) told Consulate General Chennai that land acquisition for
the corridor continues to be problematic as much of the required
land belongs to private owners in the city's central business
district. He expects lengthy litigation to surround the acquisition
process and that the project may run out of money as the acquisition
process becomes more and more costly.

Local Distiller to Produce Smirnoff in Tamil Nadu
-------------- --------------


12. (SBU) International beverage giant Diageo has reached a deal
with SNJ distilleries, a local bottler, to produce Smirnoff "Red"
vodka for the local market, starting in September. Some Diageo
products have been available at local "wine shops" (run by Tamil
Nadu's state monopoly, known as TASMAC) since November 2008, but
they have generally been too expensive to make much headway in the
local market. The tie-up with a local distiller will allow Diageo
to avoid paying the state's notoriously high import taxes and to
therefore price "Red" more competitively. The marketing director
for TASMAC told us that the new arrangement will allow Diageo to
expand its customer base and revenue growth, emphasizing that
TASMAC's customers are very price-conscious. (Comment: The owner
of SNJ distilleries is politically well-connected, known to be a
close friend of M.K. Stalin, Tamil Nadu's Deputy Chief Minister, who
is also the son of Tamil Nadu's Chief Minister. While we do not
have any direct information that these connections played a role in
this venture, we suspect that they may have played a role in
Diageo's decision. End Comment.)


13. (U) Visit New Delhi's Classified Website:

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http://www.state.sgov/p/sa/newdelhi.

BURLEIGH