NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF

UNCLAS SECTION 01 OF 04 NEW DELHI 002528 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 E.O. 12958: N/A TAGS: ECON EFIN EINV EAID ECIN EIND ELTN ETRD IN SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF DECEMBER 14 TO DECEMBER 18, 2009 Ref: A. NEW DELHI 02515 ¶B. NEW DELHI 02486 ¶1. (U) Below is a compilation of economic highlights from Embassy New Delhi for the week of December 14, to December 18, 2009, including the following: -- All's Quiet in Parliament on the Economic Reform Front -- Unbundling Electricity in Tamil Nadu -- U.S. Firm Azure Power Opens India's First Grid Solar Plant -- Mobile Tariff War: Consumers Win, Government & Industry Lose -- Figures Confirm Indian Railways on Recovery Path -- Rule Changes for International Borrowing -- Moody's Upgrades Local Currency Debt Rating All's Quiet in Parliament on the Economic Reform Front -------------- ¶2. (U) Parliament's winter session, which began on November 19, intended to consider a number of economic bills. However, with only one day remaining in the session, it appears that Parliament will take up none of the financial sector bills, as it spent considerable time debating political issues and the rise in food prices (see Reftel A). ¶3. (U) As the GOI faced dissent from some key members within the coalition government, it decided against bringing to Parliament key economic bills such as the Insurance Laws (Amendment) Bill, the Pension Fund Regulatory and Development Authority Bill, the Land Acquisition (Amendment) Bill, and the Banking Regulation (Amendment) Bill in this session. While the Insurance Bill is already pending in Parliament with the Standing Committee's report, the three other bills still must be introduced as each bill expired at the time of the May elections. ¶4. (U) Other bills that Parliament failed to take action on included the Foreign Contribution Regulation Bill, which seeks to prevent "misuse" or diversion of foreign funds received by the non-governmental agencies (to avoid money laundering),and the goods and services tax (GST). It is now unlikely that the GST will be in place by April 1, 2010, as was the GOI's original plan. The Draft version of the Direct Tax Code received much criticism and Finance Minister Mukherjee promised to revisit several contentious clauses. Finally, Parliament failed to take action on the pending "Food Security Act," which had been a campaign promise of the UPA government. Instead, the draft right-to-food legislation was put on the backburner. ¶5. (U) Parliament did pass the Competition (Amendment) Bill 2009, which transfers all cases and investigations relating to unfair trade practices to the Competition Appellate Tribunal and curbs monopolistic abuses. Parliament changed pricing for sugarcane through an ad hoc amendment. The price of sugar will now be based on "fair and remunerative price" instead of the earlier "minimum price." Unbundling Electricity in Tamil Nadu -------------- ¶6. (SBU) Tamil Nadu's new electricity transmission corporation (Tantransco) began functioning on December 15, bringing to an end the Tamil Nadu Electricity Board's (TNEB) 52-year reign of absolute control over electricity generation and transmission in the state. This reform will bring Tamil Nadu closer to compliance with the Electricity Act of 2003, which obliges states to "unbundle" the functions of electricity generation and transmission into separate organizations. (Note: The state has been receiving extensions from the central government for years to prolong TNEB's existence while working out arrangements for its successor. End Note.) ¶7. (U) Tamil Nadu's government approved in October 2008 the reorganization of TNEB into three separate, government-owned entities: Tantransco, which will own and manage transmission over the state's power grid; Tangedco, which will produce electricity; NEW DELHI 00002528 002 OF 004 and TNEB Ltd., a holding company for the other two entities. The government approved Tantransco's Board of Directors on December 11, paving the way for the official inauguration of the company on December 15. ¶8. (SBU) The Energy Secretary told Consulate General Chennai that TNEB's powerful unions, always suspicious of anything they believe may dilute their negotiating power, have resisted the reforms to TNEB and that there were reports of some union members protesting near the Tantransco inauguration ceremony. The Energy Secretary said, however, that he is fully supportive of unbundling, emphasizing that doing so would help attract much-needed investment to help Tamil Nadu cope with its electricity shortage. U.S. Firm Azure Power Opens India's First Grid Solar Plant -------------- -------------- ¶9. (U) On December 15, U.S.-based Azure Power launched the first privately-operated, utility-scale solar power plant in India. The plant, inaugurated by Dr. Farooq Abdulla, Union Minister of New and Renewable Energy in Amritsar, will provide electricity to approximately 42 villages under a 30-year power purchase agreement with Punjab State Electricity Board. The plant will provide power to 4,000 rural homes for nearly 20,000 people. The passive solar plant eliminates carbon emissions and optimizes cooling through natural ventilation. The plant's power is transmitted directly to a substation in the local community, reducing transmission and distribution losses. The plant was commissioned in a record time of six months with an investment of USD four million, including project finance support from the U.S. Overseas Private Investment Corporation (OPIC) and policy support from the U.S. Foreign Commercial Service. Mobile Tariff War: Consumers Win, Government and Industry Lose -------------- ¶10. (U) India has about 14 telecom service providers compared to the world average of three to five operators per country. India's telecom market, which has reached a phenomenal 500 million subscribers, is still growing at a rate of about 10 million new subscribers every month. The telecom sector has been one of the key drivers of India's economic growth in recent years. ¶11. (U) Indian operators have been offering the lowest tariff rates compared to anywhere in the world, thanks to the robust competition. Prices began to drop even further earlier this year as the first round in the current price war was fired by Tata DoCoMo when it introduced per second billing, which was quickly followed by Reliance, Airtel, MTS and others. The Mahanagar Telephone Nigam Limited (MTNL),a public sector company, sent a shock wave earlier this month by offering customers calls for as little as half a paisa (100 paisa in a rupee) a second - or just over one hundredth of a US cent per second. ¶12. (U) While a low tariff regime has certainly been welcomed by consumers, plunging call rates have led telecom to become the worst performing sector in India's stock market. Down by 27 percent this year compared with double and triple-digit rises in other industries, industry experts are increasingly questioning whether Indian mobile operators themselves can afford the vicious price war that has shaken their industry in recent months. It is expected that the tariff competition will further intensify as more new players enter the already unsustainable market. Overall, the telecom industry in India has too many operators chasing a market with a high subscriber base, but with very low ARPU's (average revenue per user/subscriber). ¶13. (U) A devalued telecom market, fierce competition, a significant drop in tariffs, lower per-user revenues, and regulatory uncertainty provides a disincentive for telecom companies to participate in the upcoming 3G auction as does the potential USD 745 million payment for a pan-India 3G license and the related hefty capital investment needed to operate a 3G system. These factors strongly suggest that NEW DELHI 00002528 003 OF 004 the 3G auction (Reftel B) will generate lower than the expected USD seven billion in revenues. Reportedly, the Ministry of Finance has already revised the projected revenues down to about USD five billion. Figures Confirm Indian Railways on Recovery Path -------------- ¶14. (U) Indian Railways increased overall earnings nearly nine percent for the April-November 2009 period (transported goods and passenger bookings). Total earnings for the period were USD 11.8 billion compared to USD 10.8 billion during the same period last year. Total goods earnings went up from USD 7.3 billion to USD 7.9 billion, an increase of almost eight percent. Approximate numbers of passengers booked during this period were 4937.73 million compared to 4717.56 million the previous year, up 4.67 percent. Passenger revenues during the first eight months of financial year 2009-10 total USD 3.3 billion compared to USD 3.07 billion during the same period the previous year, an increase of 8.01 percent. ¶15. (SBU) Comment: Indian Railways first saw signs of a positive turnaround under the leadership of the previous Railway Minister Lalu Prasad Yadav (Rashtriya Janta Dal party). However, after elections in April, Lalu's party could not retain the Ministry in the coalition government. The post was allotted to Lalu's arch rival Trinamool Congress Chief Mamata Banerjee, who claimed Lalu had fudged figures to show growth, allegations that Prasad vehemently denied. These latest positive growth figures support Lalu's denials and lend credence to his claim that Banerjee's allegations were without support and politically motivated. End Comment. Rule Changes for International Borrowing -------------- ¶16. (U) In a December 8 notification, the Reserve Bank of India (RBI) said it would withdraw some temporary concessions on external commercial borrowings (ECB) for Indian firms introduced during the global crisis but would loosen some rules for the infrastructure and telecom sectors. Beginning January 1, 2010, the interest rate ceiling for Indian companies borrowing abroad would return to LIBOR plus 300 basis points for three to five year loans and LIBOR plus 500 basis points for loans maturing after five years. ¶17. (U) Non-banking finance companies (NBFCs),which lend exclusively to infrastructure projects, will now be able to borrow from international banks with RBI approval. Previously, infrastructure NBFCs could only borrow from multilateral and regional financial institutions and government-owned financial institutions. The GOI hopes this will increase the availability of funds for the infrastructure sector. In addition, Indian companies are now permitted to borrow on international markets in order to participate in the proposed 3G auction (see reftel B). Other borrowing measures, including the $500 million limit per borrower per fiscal year, remain unchanged until December 2010. Moody's upgrades Local Currency Debt Rating -------------- ¶18. (U) On December 15, Moody's Investors Service (MIS) upgraded India's outlook on India's local currency sovereign bond rating to positive from stable, while retaining the rating at Ba2. The rating, however, is still below investment grade and below the rating given by S&P/Fitch. Moody's also raised its foreign currency bank deposits rating to Ba1 from Ba2 to better reflect the robust external position of the country. MIS's outlook on the government's foreign currency bond rating remained stable at Baa3, the lowest investment grade that the agency assigns. ¶19. (U) According to Moody's press release, the change in outlook was due the India economy's demonstrated resilience to the global financial crisis and MIS's expectation that India will resume its high growth rates. ¶20. (U) Visit New Delhi's Classified Website: NEW DELHI 00002528 004 OF 004 http://www.state.sgov/p/sa/newdelhi. ¶21. (U) This is the last weekly Econ Section highlights cable for ¶2009. Our next highlights cable will be January 8. Happy Holidays and wishing everyone a healthy and prosperous new year! ROEMER