Identifier
Created
Classification
Origin
09NEWDELHI324
2009-02-20 11:23:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy New Delhi
Cable title:  

NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF

Tags:  ECON EAGR EAIR ECPS EFIN EINV EMIN ENRG EPET ETRD 
pdf how-to read a cable
VZCZCXYZ0001
RR RUEHWEB

DE RUEHNE #0324/01 0511123
ZNR UUUUU ZZH
R 201123Z FEB 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 5459
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHMFIUU/FAA NATIONAL HQ WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC
UNCLAS NEW DELHI 000324 

SIPDIS
SENSITIVE

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 17 TO FEBRUARY 20, 2009

UNCLAS NEW DELHI 000324

SIPDIS
SENSITIVE

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 17 TO FEBRUARY 20, 2009


1. (U) Below is a compilation of economic highlights from Embassy
New Delhi for the week of February 17-20, 2009, including the
following:

-- Inflation Declines to 14-Month Low
-- India-ASEAN FTA Authorization May Be Postponed
-- State-owned Banks to Be Recapitalized
-- GOI Extends Duty Credit for Raw Cotton Exports
-- Independent Directors Flee the Boards of Indian Companies

Inflation Declines to 14-Month Low
--------------

2. (U) Wholesale price index (WPI) inflation, after reaching a peak
of 12.9 percent in August 2008, continued to decline. For the week
ended February 7, WPI inflation dropped to a 14-month low of 3.92
per cent, due to lower prices of manufactured items. Lower
inflation rates of sugar, imported edible oil, textile items,
chemical products, iron and steel and metal products also
contributed to the fall. However, prices of some food items, such as
pulses, fruit and vegetables and maize, continue to remain high.
Fuel items also became expensive during the week on account of
higher prices of naphtha and furnace oil (despite a fall in prices
of crude oil),offsetting a moderate drop in prices of aviation
turbine fuel and light diesel oil. Reserve Bank of India (RBI)
Governor D Subbarao hinted that lower inflation may allow the RBI to

cut interest rates to prop up demand, something economists and
market participants have been expecting for the last month.
Economists project the inflation rate to come down to two percent by
end-March. And prices may even fall subsequently.
India-ASEAN FTA Authorization May Be Postponed
--------------


3. (U) Indian business daily Mint, interviewing two "senior
government officials" on condition of anonymity, reported on
February 19 that the formal signing of the pending India-Association
of Southeast Asian Nations Free Trade Agreement (India-ASEAN FTA)
may face another delay due to the present political and economic
situation in India. The unnamed GOI officials stated that the FTA
is ready for authorization and said the decision to move forward is
now dependent upon cabinet approval. "It is now a political
decision," one of the unnamed officials stated. The India-ASEAN FTA
was originally planned to be formally inked in December 2008, but
was put off following political instability in Thailand. Recent
indications were that the deal would be signed on February 27, 2009
in Thailand. According to some trade observers, the Congress-led
United Progressive Alliance government may find it difficult to
justify a freer trade regime when economic conditions are not very
favorable in India due to the impact of a global recession. A
decline in export, reported job losses, and upcoming national
elections in April-May may prompt the GOI to delay plans to sign the
FTA.


4. (U) In addition, the Mint quoted the GOI officials as saying the
agreement may now face "procedural problems." The first round of
tariff cuts was originally scheduled on January 1, 2009, which was
later negotiated to take effect from June 1, 2009. The agreement
mandates a second round of tariff cuts on January 1, 2010. Even if
the deal is signed now, with the first round of tariff cuts on June
1, 2009, India may not be able to implement two rounds of tariff
cuts in a six month period. One of the officials maintained that a
compromise could be worked out with ASEAN if the GOI Cabinet does
clear the deal. Meanwhile, a FICCI official argued that the tariff
cutting measures in the FTAs aim for long-term gains and the
short-term recessionary pressures should not discourage the
implementation of the FTA.


5. (U) India and ASEAN have agreed to reduce or eliminate tariffs on
95 percent of the items in the trade basket over the next nine
years. India has agreed to do this in three phases starting from
June 1, 2009 and ending by 2018. According to Mint, ASEAN has now
demanded the whole process be completed in two phases. The quoted
Commerce Ministry official confirmed the different viewpoints, but
termed the differences 'minor' and resolvable. India and ASEAN

bilateral trade stood at $38 billion in Indian fiscal year (IFY)
2007-08, and it is projected to reach $48 billion in 2008-09, a
figure that may require revision in the face of the worldwide
slowdown. India's main trading partners within ASEAN are Singapore,
Malaysia, Indonesia and Thailand.

State-Owned Banks to Be Recapitalized
--------------


6. (U) Media reports that the government is planning to
recapitalize almost all government-owned banks except Punjab
National Bank, Bank of India, and Canara Bank. With the government
near the legally required minimum 51 percent equity to maintain
government control, many of the state banks are finding it difficult
to expand their equity base. Additional private sector capital would
reduce the government share.


7. (U) The money would form a part of Tier I Capital, which will
increase the government equity in these banks so that they can raise
funds from the market at a later date. Although the capital
adequacy ratio (the ratio of capital fund to risk weighted assets)
of all public sector banks is above the prescribed level of 9
percent, capital infusion will help these banks to raise their
capital adequacy to over 12 per cent. The government recently
announced that it will give more than $825 million (Rs 40 billion)
to UCO Bank, Central Bank of India, Vijaya Bank and United Bank to
shore up their capital adequacy to 12 percent. The Department of
Financial Services in the Finance Ministry is working out details
for the remaining public sector banks.

GOI Extends Duty Credit for Raw Cotton Exports
-------------- -


8. (U) In an effort to revive exports in the face of declining
global prices, the Directorate General of Foreign Trade (DGFT) on
February 18 extended to raw cotton exports benefits available under
the Vishesh Krishi and Gram Udyog Yojana programs (VKGUY - an export
subsidy that entitles exporters a 5-percent duty credit on the FOB
value of their shipments). The benefit is to be effective on a
retroactive basis from April 1, 2008 until June 30, 2009. Cotton
exports were not previously covered under the scheme. The GOI has
earlier granted VKGUY benefits to barley on October 21, 2008 and
meat and meat products on November 3, 2008.


9. (U) On a financial year basis, India's total raw cotton exports
are estimated around $387 million during April-September 2008, which
is 54.5 per cent more than the $250.5 million for the corresponding
first half of 2007-08. Welcoming the latest move of the GOI,
President of the Mumbai-based Cotton Association of India has
reportedly stated that the VKGUY incentive will facilitate movement
of cotton in the supply chain and it is also expected to open new
marketing channels and create fresh demand for Indian cotton, which
will benefit the Indian farmers.

Independent Directors Flee the Boards of Indian Companies
--------------


10. (U) The Economic Times reports that the number of independent
directors resigning from boards in Indian companies more than
doubled in the month immediately following the discovery of the
mammoth fraud at Satyam Computer Services. The report relies on
data from research firm Prime Database and the Bombay Stock Exchange
that shows as many as 115 independent directors on the boards of
over 100 listed firms stepped down between the period January 7 to
February 7, a significant increase from the approximate 50 to 60
resignations per month in the preceding two years. According to the
article, the Satyam debacle has highlighted the risks associated
with signing on to a company as an independent director.


11. (U) Not only has the Satyam fraud affected the number of
directors resigning from boards, but independent directors
apparently are now hesitant to join companies unless the company has
a "squeaky clean" image and follows good corporate governance

procedures. Potential independent directors are reportedly
especially wary of companies that are promoter-led or where the
possibility exists that the company may have obtained contracts
through government connections. This has led to certain sectors
having difficulty finding anyone to serve on their boards.
According to the Economic times, infrastructure and real estate
firms are particularly affected because potential independent
directors are worried that these types of companies may have
illegally obtained contracts.


12. (U) The issues raised by the Economic Times were echoed at the
recent annual general meeting of the Federation of Indian Chambers
of Commerce and Industry (FICCI) in a special session on corporate
governance. Participants noted that a number of independent
directors had resigned as a result of Satyam, voicing concern that
unless potential directors could be persuaded Indian companies
followed good corporate governance procedures, many companies would
have difficulty attracting the right kind of person to serve on
their boards. FICCI members saw a dilemma: Satyam had underscored
the need to companies for genuinely independent directors to help
improve corporate governance, but as a result of Satyam, potential
independent directors did not want to join a corporate board unless
it was assured that top quality corporate governance was already in
place.


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

MULFORD