New Delhi Weekly Econ Office Highlights for the Week of

UNCLAS SECTION 01 OF 03 NEW DELHI 002245 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 November 2-6, 2009 ¶1. (U) Below is a compilation of economic highlights from Embassy New Delhi for the week of November 2-6, 2009, including the following: -- No Major Changes Yet to Monetary Policy -- Insurance Sector Growing -- Alok Nigam: New Joint Secretary of Financial Services -- Tarun Das Retires No Major Changes Yet to Monetary Policy -------------- ¶2. (U) In its quarterly review, the Reserve Bank of India (RBI) maintained key policy rates, leaving the repo rate at 4.75 percent, the reverse repo rate at 3.25 percent, and the cash reserve ratio at five percent. The RBI increased the statutory liquidity ratio (SLR -- percentage of deposits that banks must use to buy government securities) by one percent to 25 percent but this should have little effect on liquidity as banks already are above the 25 percent minimum. In various economic reports, analysts maintained that the increase in the SLR is an indicator of future tightening of interest rates and the cash reserve ratio. ¶3. (U) The RBI also raised the cost to banks for real estate lending in an effort to prevent an asset bubble in the real estate sector. The RBI raised provisions for commercial real estate to one percent from 0.4 percent. Developers feel the cost of provisioning will be passed along to borrowers through higher interest rates, making affordable housing more expensive, and reducing the demand for mortgage loans. The RBI also required banks to raise their provision against non-performing assets to 70 percent by September ¶2010. ¶4. (U) The RBI discontinued some special liquidity support measures that it had introduced in late 2008 to boost liquidity such as a special refinance facility for banks, and a special term repo facility for banks to provide funding to non-bank finance companies, mutual funds, and housing finance companies. Vivek Kudva of Franklin Templeton told U.S. Treasury Attache that he feels nervous about the removal of support for mutual funds, since $85 billion sit in liquid funds that could be redeemed in 24 hours, but total daily market turnover is less than $500 million. The RBI also reduced export credit financing from 50 percent of eligible outstanding export credit back to its pre-crisis level of 15 percent. ¶5. (U) RBI Governor Subbrao indicated these measures constitute the first phase of exit from the special liquidity support measures taken earlier to cushion the Indian economy from the impact of last year's global downturn. Despite few changes to monetary policy rates, the RBI indicated its first priority is to monitor inflation and to respond swiftly to stabilize inflation expectations. With inflation expected to rise in the near term, analysts expect the RBI to be more hawkish on inflation in the future although the RBI's biggest challenge will be to support India's desire to return to nine percent growth without compromising on price stability. Insurance Sector Growing -------------- ¶6. (U) The Insurance Regulatory and Development Authority (IRDA) reported that the insurance industry grew 11.4 percent in the first six months (April - September) of fiscal year 2009-10 (FY10),with new life insurance premiums up 13 percent and new non-life insurance premiums up eight percent. ¶7. (SBU) The increase in life insurance, however, was primarily due to state-owned Life Insurance Corporation of India (LIC),whose new premiums rose by 35 percent, while new premiums for the 21 private life insurance firms declined by 15 percent during this period. Saibal Choudhury of MetLife told Econoff that private life insurance firms have positioned themselves primarily to promote Unit-Linked Insurance Products (ULIPs),which act like a mutual fund with a term life component. The apparent preference of new insurance customers NEW DELHI 00002245 002 OF 003 for the more traditional products offered mostly by LIC indicates that retail investors are still not returning to the newly hot Indian equity markets. Public sector companies in the non-life insurance sector also did better than their private sector competitors. The four public sector companies (Oriental Insurance, New India Insurance, National Insurance, and New India Insurance) grew 10 percent during the first six months of FY10 but the 13 non-life private sector players grew just five percent during this period. ¶8. (U) A McKinsey report painted a rosy picture for the insurance industry, forecasting the insurance sector to grow 17 percent annually and reach a size of $73-87 billion by 2012. Key to such predictions is India's young population who will need insurance, more people entering the workforce, and rising income levels. Foreign investors, however, are still waiting for the government to introduce to Parliament the Insurance Laws (Amendment) Bill in parliament, which would allow foreign companies to raise their foreign direct investment to 49 percent from the current 26 percent. Alok Nigam: New Joint Secretary of Financial Services -------------- -------------- ¶9. (U) Alok Nigam has replaced Amitabh Verma as the Joint Secretary of the Department of Financial Services (dealing with banking operations) in the Ministry of Finance as of October 29. This will be Nigam's first assignment at the central level as he has spent his career in the state of Haryana. Since becoming an Indian Administrative Services officer in 1986, Nigam has held various positions including Joint Secretary to the Governor of Haryana, Special Secretary in the Haryana Finance Department, and Director of the Haryana Urban Development Authority. He has also worked as Chief Administrator with the Haryana State Agricultural Marketing Board. Nigam holds a post graduate degree in mathematics. ¶10. (SBU) Comment: Nigam has fairly big shoes to fill as Verma was highly versed in the issues affecting the banking sector and was well aware of the Indo-U.S. financial sector issues. He will have to tackle several challenges such as passing legislative initiatives to consolidate and recapitalize public sector banks, boosting lending to SMEs, and reviving the roadmap for foreign bank participation. All of these must be done in conjunction with the Reserve Bank of India, which will present an unfamiliar partner with a strong and unique organizational culture. End comment. Tarun Das Retires -------------- ¶11. (U) The Confederation of Indian Industry (CII) announced the retirement of their well-known Chief Mentor Tarun Das. Das, 70 years old, held the post of Chief Mentor since 2004 after acting as CII's Director-General for three decades. He helped CII to rise from being a small engineering association to a world class institution and high-profile lobbying group. Under his leadership, CII has been instrumental in managing and initiating changes that have shaped India's socio-economic environment. ¶12. (U) In addition to his involvement in business, Das contributed to issues like track-II diplomacy and social sector reforms. He has been an advisor to the government on several controversial issues and has built a formidable network of friends and contacts across political parties, government, industry, and across the world. ¶13. (U) Das told the media he would not be joining the government or any corporation in an advisory role but would concentrate on broader issues of foreign policy and international strategic dialogue, specifically with the United States, Japan, Singapore, and Israel. He also plans to be involved in a leadership and personal development program for the young that is part of the Aspen Institute India. ¶14. (SBU) Comment: Despite his retirement, Das will most likely NEW DELHI 00002245 003 OF 003 still be actively involved in policy issues and will remain an influential mediator with the GOI and continue to be a useful contact for Post. End comment. ¶15. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi. ROEMER