NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF

UNCLAS NEW DELHI 000280

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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/CARVER/RIKER
EEB/CIP DAS GROSS, FSAEED, MSELINGER

E.O. 12958: N/A
TAGS: ECON EAGR EAIR ECPS EFIN EINV EMIN ENRG EPET ETRD
BEXP, KIPR, KWMN, IN

SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF
FEBRUARY 9 TO FEBRUARY 13, 2009


1. (U) Below is a compilation of economic highlights from Embassy
New Delhi for the week of February 9-13, 2009, including the
following:

-- India Modifies FDI Procedures
-- Inflation Continues to Fall
-- December Industrial Output Falls
-- Interim Railway Budget Announced
-- FII Holdings Fall to Five Year Low
-- J&K Chief Minister Invites India Inc to Kashmir
-- GOI Waives Duty on Newsprint Paper
-- Leading Retailer in Trouble
-- Retailers Back out of Leases
-- U.S. Retailers Try to Divest IT Assets Without
Causing Local Job Losses
-- McDonald's Plans Expansion in India in 2009
-- Bharti Foundation Recognized for CSR Activities

India Modifies FDI Procedures
--------------


2. (U) In a bid to address the present economic slowdown in India,
the Cabinet Committee on Economic Affairs (CCEA) on February 11
liberalized guidelines used to determine the amount of foreign
direct investment (FDI) in sectors that are subject to FDI caps.
The move is geared towards facilitating greater foreign capital
inflows into the country. The new guidelines outline procedures for
the calculation of foreign investments in Indian companies and the
transfer of ownership or control of Indian companies in sectors that
currently have foreign direct investment (FDI) caps. Under the new
guidelines, downstream investments by an Indian company that has
foreign investment but is owned and controlled by Indians will not
be considered FDI.


3. (U) Currently, Press Note 9 (1999) governs foreign direct
investments enabling foreign-owned Indian holding companies to make
downstream investments under the automatic route. In recent years,
the government has counted existing FDI in the Indian partner of a
joint venture with a foreign company - called indirect investment -
towards the FDI cap in the joint venture. In response to industry
and investor comments, the CCEA press release
(http://pib.nic.in/release.asp?relid=47408) clarified the norms for
calculation of foreign investment.


4. (U) A real-life example of how the new rules could potentially
operate is illustrated by the case of the Indian telecom company
Vodafone Essar (VE). The overall cap for foreign investment in the
telecom sector remains 74 percent. However, the UK parent company
(Vodafone) will be able to raise more FDI since, in addition to its
42 percent direct holding in VE, it has an additional 10 percent
indirect foreign holding in VE - via money invested through other
companies that are "controlled and managed" by Indians. Previously,
Vodafone would be deemed to hold a combined 52 percent stake in VE.
Under the new policy, Vodafone's 10 percent indirect holding,
invested through Indian-controlled companies - is not deemed FDI,
effectively meaning that Vodafone owns 42 percent of VE for purposes
of the FDI cap and now has an additional 10% of equity that it could
invest in VE without breaching the FDI cap.

Inflation Continues to Fall
--------------


5. (U) Year-on-year inflation for the week ending January 31 fell to
4.39%, down from the prior week's reading of 5.07%. This brings
wholesale price inflation to its lowest level since January 2008.
Much of the decline was attributed to the government's reduction in
controlled energy prices, which was implemented on January 28.
Energy and mining prices actually experienced contractions, while
food article inflation remained stubbornly in the double-digit range
at 11.5%. The overall continued decline in inflation has fuelled
expectations that the central bank, the RBI, will institute further
policy rate reductions. The last interest rate reductions were on
January 2.


December Industrial Output Falls
--------------


6. (U) According to the latest official estimates, industrial
production in India fell 2 percent in December 2008 - the largest
recorded year-on-year decline in any month in 15 years. The drop
was attributed to a 2.5% reduction in manufacturing sector growth.
The remaining 20 percent of the India's Index of Industrial
Production (IIP) is comprised of mining and electricity. Both of
the latter components showed declining, but still positive, growth.
Despite the contraction in industrial output, many economists do not
see this as a threat to the Central Statistical Organization's (CSO)
advance forecast of 7.1 percent GDP growth for the current Indian
fiscal year (FY) 2008-09, which ends March 31. The official
estimates project manufacturing growth at 4.1 percent for the whole
fiscal year.


7. (SBU) Analysts view the drop in the production of consumer
durables as industry caution over perceived falling consumer
confidence in making big-ticket purchases. However, Prime
Minister's Economic Advisory Council (EAC) member Saumitra Chaudhari
has dismissed the 12.8 percent fall in consumer goods output as an
anomaly, stating that the IIP will show a recovery in the final
quarter of the current fiscal year (January-March 2009). (Comment:
Several Embassy contacts question the accuracy - although not the
trend direction - of the IIP since its base year is 1993-94 and the
basket of goods and reporting firms has not been updated since then.
End comment.) Industry, meanwhile, is expecting a revival in
demand in the second half of 2009. General Motors India president
and managing director Karl Slym has told the media that some
positive results of the fiscal packages are expected in three months
when the consumer actually increases spending. Similarly, consumer
durable firms reported a significant upswing in consumer durable
sales, such as televisions and refrigerators, in January.

Interim Railway Budget Announced
--------------


8. (SBU) Railway Minister Lalu Prasad Yadav presented the (interim)
railway budget for FY 2009-10 on February 13, including a number of
populist measures aimed at upcoming national elections. Lalu has
served as Railways Minister since 2004, proudly avoiding raising
passenger fares yet still generating revenues. Some of the
highlights of his interim budget include a marginal reduction in
passenger fares for all classes, a 2-percent cut in air conditioned
and mail express trains, introduction of 43 new train services,
plans to start high speed bullet trains, laying of new rail lines
and more passenger amenities. Lalu said that Indian Railways plan
to invest $47 billion (Rs 2300 billion) in the 11th Five Year Plan
(2007-12) to increase the transport capacity of the railways and to
reduce the unit cost of operations.

FII Holdings Fall to Five Year Low
--------------


9. (U) Foreign institutional investors (FIIs) in India's stock
markets significantly reduced their equity through 2008, in the
process lowering the percentage of their holdings to 15.5%, the same
level it was in end-2003. In value terms, FII equity is still
higher than December 2003, coming in at $94 billion. Meanwhile,
domestic institutional investors (DIIs) - mainly mutual funds,
insurance companies and banks - have stepped into the breach and
raised their holdings of portfolio equity to 8.86%, surpassing
retail investors for the first time. The rise of DIIs is a sign of
a deepening financial market.

J&K Chief Minister Invites Industry to Kashmir
-------------- -


10. (U) Recently elected Jammu and Kashmir Chief Minister Omar
Abdullah addressed members of the Federation of Indian Chambers of
Commerce and Industry (FICCI) at its annual general meeting on

February 12. He was part of a "Session with Chief Ministers" that
also included re-elected Delhi Chief Minister Sheila Dixit and
Madhya Pradesh CM Shivraj Chouhan. The 39-year old Abdullah, a very
comfortable public speaker with good English, exhorted the audience
to visit Kashmir to discover for themselves the improvement in
security and the opportunities for investment. He stressed to the
packed and receptive audience that he was not trying to pressure the
FICCI members into business commitments. Rather, Abdullah invited
the industry chamber members to vacation in his state, at which time
they would discover for themselves the investment opportunities that
Jammu and Kashmir provided. FICCI General Secretary Amit Mitra
committed at the panel session to holding a FICCI retreat in
Kashmir.


11. (U) Abdullah also noted that major cell phone service provider
Airtel had invested in the state, as well as conglomerate Essar.
Airtel senior executive Rajan Bharti Mittal shared the dais and
stated that Airtel has been in the state since 2004 and has always
got "tremendous support" from the government. Chief Minister
Abdullah said his business development goals for the state were
improving infrastructure, especially connectivity, and tax
incentives. He pointed out that a new international air route had
recently opened between Srinagar, Kashmir and Dubai, which he hoped
would increase foreign tourism. Finally, to make the Line of
Control into a "Line of Commerce," Abdullah identified the need to
establish communication and financial links across the Line of
Control between India and Pakistan. Otherwise, he asserted, trade
was limited to barter trade, since potential business partners
cannot place orders or confirm payment.

GOI Waives Duty on Newsprint Paper
--------------


12. (U) On February 11, the GOI announced a reduction in the duty on
newsprint (uncoated paper) and lightweight coated paper used for
newspaper and magazine publishing, respectively. Previously, the
duty rates were three and five percent on these two items. Since
newsprint is fully exempted from excise duty, it will also be exempt
from countervailing and special additional duties. Newspaper and
magazine publishers had pressed for the measure due to increased
international prices and declining ad revenues.

Leading Retailer in Trouble
--------------


13. (U) Subhiksha Trading Services, one of the country's largest
grocery chains, has closed 1,600 stores and laid- off most of its
workers, according to media. Through the end of 2008, the chain was
opening stores at a rate of 50 per month with the expectation that
expansion would be funded by an international investor. When the
economic crisis struck in September, press reports, the investor
walked away from the deal and credit to finance store openings was
no longer available. As a result, the chain was not able to pay
salaries, rents or suppliers. The company is now looking to
restructure its $153 million debt with the government and 13
lenders. Unable to pay employees and security guards, reportedly
over 600 of the chain's stores have been looted.

Retailers Back out of Leases
--------------


14. (U) Local media reports that many retailers are currently
moving out of spaces they had leased due to their inability to pay
high rental rates that were agreed to prior to the economic
slowdown. Over the past two years, projections of the Indian retail
sector touted its significant growth potential, prompting retail
chains to rapidly expand and sign leases wherever they could find
space. The anticipated increase in business led to an inflation of
rental rates, so drastic that retailers took their landlords to
court to dispute sharp rent increases. As the economic slowdown has
hit India, retailers have not been able to afford high rental rates
and have been forced to reevaluate their business strategies,
resulting in the closure of outlets, store size reductions and

postponement of expansion plans. They have also seen local
financing options narrow and become more expensive. Retailers have
reportedly been reneging on their leases and moving to cheaper
spaces in order to cope with the slower economic growth and the lack
of available credit. Over the past couple of months, landlords have
been filing cases against several of India's larger retail
operations, including Pantaloon Retail and Subhiksha, for failure to
pay rent. High rental rates and litigation add to the difficulties
retailers have faced in expanding and developing their businesses.

U.S. Retailers Try to Divest IT Assets Without
Causing Local Job Losses
--------------


15. (SBU) Retail giants Walmart and Target are each in negotiations
to sell their information technology (IT) offices in Bangalore to
information technology majors such as IBM, Infosys, and WIPRO.
While the price tags for these operations remains uncertain, a
Walmart Global executive told Consulate General Chennai that his
company estimates that its Bangalore IT offices provide services
worth nearly USD 300 million per year. A Target executive also
confirmed to us his company's plans to sell its Bangalore IT shop,
emphasizing that Target sees the move as a way to rationalize its
cost and personnel structure.


16. (SBU) Both companies are keen on ensuring that the sales of
their IT arms do not damage their longer-term aims of entering into,
and succeeding in, India's retail market. Executives from both
companies told us that the companies want to shield themselves from
any bad publicity that would result from a divestiture that resulted
in job losses (together, Walmart and Target's operations in
Bangalore employ around 4000 people). Both companies are therefore
making sure that any sale includes provisions that the buyer retain
employees currently working in the retailers' Bangalore offices.

McDonald's Plans Expansion in India in 2009
--------------


17. (U) The fast-food chain plans to open 40 new restaurants in
India by the end of this year, according to managing director Amit
Jatia. McDonalds serves 180 million Indian customers per year
through its 155 locations and expects its customer growth rate to
expand at 30-40 percent per year. The company will invest Rs.120
crore (approx $25 million),excluding real estate costs, in its
expansion plan this year. "We are also increasing our headcount to
7000 from 5000 at a time when most companies are either cutting
costs or reducing employee numbers," said Jatia.

Bharti Foundation Recognized for CSR Activities
-------------- --


18. (U) Bharti Foundation, the philanthropy arm of Bharti
Enterprises, received the 2008 Best Practices Award for its Social
and Corporate Governance Responsibility activities. Bharti
Enterprises is one of India's leading business groups working in
telecommunication, agri-business, insurance, and retail. The
prestigious award was founded by the Bombay Stock Exchange Limited,
Nasscom Foundation, and Times Foundation to honor organizations for
their contributions to society. Bharti Foundation was this year's
recipient for introducing the Satya Bharti School program which
provides free, quality education to rural underprivileged children,
with a focus on the girl child. At present, about 158 Satya Bharti
primary schools are operational across the states of Punjab,
Haryana, Rajasthan, and Uttar Pradesh with a staff of 600 teachers
and a total enrolment of more than 17,000 children. Bharti
Foundation plans to set up another 500 primary schools and 50 senior
secondary schools to enroll an additional 200,000 children.


19. (U) Visit New Delhi's Classified Website:
http://www.state.sgov/p/sa/newdelhi

MULFORD