New Delhi Weekly Econ Office Highlights for the Week of

UNCLAS SECTION 01 OF 03 NEW DELHI 002209 SENSITIVE SIPDIS USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD DEPT OF ENERGY FOR A/S KHARBERT, TCUTLER, CZAMUDA, RLUHAR DEPT PASS TO USTR MDELANEY/CLILIENFELD/AADLER TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN USDA PASS FAS/OCRA/RADLER/BEAN/FERUS EEB/CIP FSAEED, KDUNNE, AGIBBS E.O. 12958: N/A TAGS: ECON EFIN EINV ENRG ETRD ECPS BEXP PHUM PINR TSPA IN SUBJECT: New Delhi Weekly Econ Office Highlights for the Week of October 23-29, 2009 ¶1. (U) Below is a compilation of economic highlights from Embassy New Delhi for the week of October 23-29, 2009, including the following: -- Central Bureau of Investigation Raids Department of Telecom Offices -- The RBI Takes A Bow -- Economic Advisory Council Expects Better Days Ahead CBI Raids Department of Telecom Offices -------------- ¶2. (U) Pursuant to a recommendation by the Central Vigilance Commission (CVC),the Central Bureau of Investigation (CBI) raided the Wireless Planning Cell (WPC) at the Department of Telecom (DoT) on Thursday, October 22, 2009. The raid is the result of a CVC investigation of alleged irregularities in the allocation of 2G spectrum by the DoT. DOT has been accused of allocating 4.4 MHz of pan-India startup 2G spectrum to Swan Telecom and Unitech Wireless through a first-come-first-serve process in January 2008 for approximately US$ 340 million. There was no competitive bidding. Both the licensees, without even rolling out services, sold their equity stake to Telenor and Etisalat for roughly US$ 1.8 billion to US$ 2.1 billion, six to eight times the price at which they had purchased the spectrum from the government. This has allegedly resulted in a gross under pricing of spectrum, causing a loss of almost U.S. $10.5 billion to the Government. ¶3. (U) Under the first-come-first-serve process, DoT allegedly hand-picked companies, even though it could have easily chosen the global auction route, as has now been prescribed for 3G. Under this process, spectrum was allocated to a select 120 companies against 575 applications. Minister Raja was also accused of arbitrarily deciding on a cut-off date and favoring only companies that had applied on or before September 25, 2007, instead of October 1, 2007 as was originally announced. Raja had argued that he had done so to be in line with the recommendations of the Telecom Regulatory Authority of India (TRAI),which has denied making any such recommendations. Former TRAI chairman Misra in turn accused the DoT of cherry- picking portions of TRAI's recommendations instead of taking a holistic view. Telecom Minister Raja is also accused of giving away 2G spectrum to Reliance and Tata out of turn under the cross over technology license. DoT allowed these CDMA operators to make the necessary payments and complete all formalities for allocation of spectrum, bypassing the queue of the GSM operators who had applied earlier. ¶4. (SBU) The opposition led by the Bharatiya Janata Party has termed the allocation process as one of the largest scams, and has demanded Telecom Minister Raja's resignation. Despite allegations and the opposition's demand, Prime Minister Manmohan Singh has spoken in Mr. Raja's defense as the Telecom Minister represents the Dravida Munnetra Kazhagam (DMK) party of Tamil Nadu, a key coalition ally in the ruling United Progressive Alliance (UPA) led by the Congress. In the UPA's regime, the Telecom portfolio has historically been reserved for the DMK party. The RBI Takes A Bow -------------- ¶5. (U) The Reserve Bank of India (RBI) congratulated itself in its mandatory annual report on India's Banking Sector, stating that Indian banking is a success story thanks to the regulatory environment in place, and after the global financial crisis, has many practices worth emulating. The banking system was relatively immune from the global economic recession as the RBI's counter-cyclical regulatory framework, both during the credit boom as well as during the slowdown, proved successful. (Note: The complete report can be read in the Publications section of the RBI website: www.rbi.org.in. End Note.) NEW DELHI 00002209 002 OF 003 ¶6. (U) The annual report claims that Indian banks avoided the worst of the recession due to their negligible exposure to subprime mortgages and their minimal exposure to equity investments. The RBI notes that India's scheduled commercial banks showed tremendous resilience for the twelve month period ending June 2009 (FY09) despite the ongoing global liquidity crisis. As proof of this, the RBI gave several indicators including: -- overall capital to risk-weighted assets ratio (a measure of the capacity of the banking system to absorb unexpected losses) improved to 13.2 percent, remaining far above the stipulated nine percent minimum; -- leverage ratio in India (tier 1 capital as a percent of total adjusted assets) remained high and rose to 6.3 percent; -- Indian banks gross non-performing assets (NPAs) ratio to gross advances ratio remained unchanged from a year ago at 2.3 percent, much better than other developing countries; -- return on assets remained unchanged at 1.0 per cent from a year ago indicating no deterioration in efficiency with which banks deployed their assets; and -- Indian banks return on equity increased to 13.3 per cent, showing increased efficiency with which capital was used by Indian banks. ¶7. (U) According to the annual report, Indian banks were not immune to the global economic recession. The report noted slower growth in the banks' balance sheets, income, and profitability during FY09. Net profits were less due to the rising costs of deposits coupled with a declining return on investments. The balance sheet of private sector banks and foreign banks grew at a slower pace, while public sector banks maintained their high growth rates. Growth in credit slowed as banks became more cautious and deposits grew at a slower rate during FY09. Economic Advisory Council Expects Better Days Ahead -------------- -------------- ¶8. (U) On October 20, the Prime Minister's Economic Advisory Council (EAC) released its economic outlook for fiscal year 2009-10 (FY10, beginning April 2009 and ending March 2010),forecasting the economy to grow 6.5 percent, with a range of 6.25 percent to 6.75 percent. The EAC expects industry to grow 8.2 percent, up from 3.9 percent in FY09, led by growth in construction activity, services to grow 8.2 percent, versus 9.7 percent in FY09, and the agriculture sector to decline two percent as erratic monsoon rains have adversely affected cultivation and farm output. Investment and savings should continue at 36.5 percent and 34.5 percent, respectively, of GDP. (Note: The complete report can be read at the Economic Advisory Council website: http://eac.gov.in/index.html. End note.) ¶9. (U) The EAC outlook states that managing inflation, particularly food price inflation, is the biggest challenge to policy makers. The wholesale price index (WPI) is likely to rise to six percent by March 2010 due in part to the drought and expectations of lower supply. Although the EAC believes there is an adequate supply of food grains in public stocks, the GOI will have to invest considerable effort and resources to protect the winter crop and focus on the public distribution system so that food grains reach different markets and locations. ¶10. (U) Although recognizing that the large government deficits for the past two years were unavoidable, the EAC recommends that the GOI have an exit strategy and return to fiscal consolidation, as the 10 percent of GDP consolidated central and state fiscal deficit is not sustainable over the long term. The EAC noted that the increase in fiscal deficit was not due to the stimulus package but rather due to subsidies, increased salaries for government employees, loan waivers, and broader coverage of the National Rural Employment Guarantee Act. The EAC said the fiscal deficit could decrease 1.5 percent of GDP in FY11 if spending on various social welfare schemes NEW DELHI 00002209 003 OF 003 are kept constant in nominal terms. ¶11. (U) The EAC complimented policy makers for their response to the financial crisis and the regulatory framework, especially in financial services, that helped India avoid the worst of the financial crisis. It warned that the economy is constrained by physical infrastructure, specifically electricity. As the government is the largest player in production, transmission, and distribution of power, better government intervention is necessary for India to return and sustain eight to nine percent growth. EAC recommends more private investment in power generation, diversifying fuel sources, developing natural gas and nuclear energy based power plants, and leveraging the U.S. - India Nuclear Agreement to rapidly enhance India's nuclear power generating capacity. ¶12. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi. ROEMER