NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF

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