NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF MAY

UNCLAS SECTION 01 OF 05 NEW DELHI 000991

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STATE FOR SCA/INS AND EEB
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E.O. 12958: N/A
TAGS: ECON EAGR EAIR ECPS EFIN EINV EMIN ENRG EPET ETRD
BEXP, KBIO, KIPR, KWMN, IN

SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF MAY
11 TO MAY 15, 2009


1. (U) Below is a compilation of economic highlights from Embassy
New Delhi for the week of May 11-15, 2009, including the following:

-- Exports Continue Contraction
-- March Industry Growth Down
-- But Manufacturing Sector Showing Revival Signs
-- Consumer Inflation Shows Some Abatement
-- SEZ Proposals Waiting for New Government
-- No Safeguard Duty on Steel for now
-- EU Challenges India's "Assessment Fee" on Wines and Spirits
-- Press Notes on FDI To Be Revisited
-- Commerce Secretary Pillai on WTO Doha Round and Wheat Exports
-- India Allows Export of 1 MT Long Grain
-- Tata Unveils its First "Nano Housing" Development

Exports Continue Contraction
--------------


2. (U) India's exports shrunk for the seventh consecutive month in
April 2009, falling by 33 percent compared to the same month last
year. Imports too contracted by 32 percent to $16 billion in April

2009. Analysts opine that demand slowdown in key export markets
like the US and Europe, which account for over 40 per cent of
India's exports, and a high base effect were the main reasons for
the sharp fall in exports. With imports declining at a faster rate
than exports, the trade deficit narrowed to $5.3 billion in April
2009 as compared to $8.75 billion in the corresponding month a year
ago. In FY 2008-09, exports had grown by an average of 30 percent
through September, when the global financial crisis and economic
downturn slowed demand in the US and Europe. Given the decline in
exports since October, exports for the total fiscal year of April
2008 to March 2009 expanded by only 3.4 per cent to reach $168
billion, missing the Commerce Ministry's lowered target of $175
billion.

March Industry Growth Down
--------------

3. (U) India's industrial output, as measured by the Industrial
Index of Production (IIP) declined by 2.3 percent in March, due
considerably to a high base effect but also because of the sharp
fall in exports. (Note: In March, exports fell by one-third,
compared to March 2008 when they rose by 18.6 percent. End note.)
The manufacturing sector, which comprises about 80 percent of the
IIP, fell to a low of negative 3.3 percent compared to the same
month the previous year. Electricity production was more
encouraging, up 6.3 percent in March 2009 from an average growth of
2-3 percent over previous months. In use-based terms, the capital
goods sector declined by 8.2 percent, suggesting a slowdown in
private investment. Consumer goods too remained in negative
territory at -0.8 percent for the second consecutive month, due to a
fall in non-durables. However, consumer durable goods recorded a
healthy growth of 8.3 percent, primarily attributed to the impact of
the payment of arrears of salaries to government employees and the
RBI's easing of monetary policy since October 2008. Industrial
growth for the full FY 2008-09 was just 2.4 percent, versus 8.5
percent in FY 2007-08. However, the last several months' IIP has
been revised upwards, suggesting a modest increase in the final
revised IIP performance.

4. (U) Saumitra Chaudhuri, Member of the Prime Minister's Economic
Advisory Council and Principal Economic Advisor at Credit Rating
Agency ICRA, cautioned against too much reliance on the IIP,
asserting that the "IIP has been underestimating growth by 3-4
percent over the years. This is evident from the difference between
growth in manufacturing as captured by the IIP and GDP. So at best,
the IIP numbers are indicative of a trend. But a contraction in
industrial growth is baseless". Overall, most analysts expect an
uptick in April's industrial production, as car sales have picked up
in the last three months, freight and port traffic have also shown
an increase and sectors such as steel and cement have shown an
improvement. RBI Governor Subbarao remarked that he expects India's
economic recovery to be sharper and swifter than that of others once
the world economy starts to recover, as he sees India's economy
backed by strong fundamentals and untapped growth potential.

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But Manufacturing Sector Showing Revival Signs
--------------

5. (U) A survey undertaken by the Confederation of Indian Industry
(CII) has revealed a higher percentage of firms reporting positive
growth in sales in the three month ended March 2009, compared with
that in the preceding quarter (October-December 2008). The increase
points to a marginal recovery in manufacturing, with a few sectors
moving from negative growth to moderate growth. Director-General of
CII, Chandrajit Banerjee, remarked that "...there are some green
shoots from a few sectors that have demonstrated a marginal pickup
during the second half of 2008-09 when compared with the first half.
These demonstrate a cautious optimism on signs of recovery."
According to the survey, sectors that moved from negative growth to
moderate growth include fertilizers, chemicals, pig iron, steel and
two-wheelers. Despite the improvement, manufacturing growth still
remains low on a year-on-year basis: while over 15 percent of
manufacturing sectors reported excellent growth in FY08, only six
percent did so in FY08-09. Thirty percent of sectors reported a
decline in production at the end of FY08-09, as opposed to just six
percent in FY08.
Consumer Inflation Shows Some Abatement
--------------


6. (U) The government belatedly released its latest consumer price
indices (CPI) figures this week, noting consumer inflation for
March. The inflation rate as measured by the CPI for industrial
workers fell by more than 1.5 percentage points to 8.03 percent in
March compared to 9.63 percent in February. The CPI for
agricultural workers and rural workers fell to 9.46 percent and 9.69
percent respectively compared to 10.79 percent for both indices in
February 2009. CPI has been trending much higher than the wholesale
price index (WPI),which has been under one per cent since early
March. This is mainly due to the significant weight of food
articles in the CPI compared to the WPI. Food prices have been high
in recent months, stemming from seasonal spikes in fruits,
vegetables, and sugar, as well as higher prices in pulses prompted
by less private imports. Meanwhile, WPI, which is more generally
tracked in India since it is a broader and more frequently released
index, slightly dipped to 0.48% for the week ending May 2, compared
to the same period the year before. WPI inflation the week before
was slightly higher, at 0.70.

SEZ Proposals Waiting for New Government
--------------


7. (U) As of March 31, 2008, the empowered board of approvals (the
Board) on Special Economic Zones (SEZs) had approved 568 SEZs, gave
144 'in-principle' approvals, and 311 notifications. However, since
then, and in light of the financial crisis, some of the approved SEZ
proposals have been withdrawn or put on hold. Ministry of Commerce
officials told media that a large number of SEZ developers have
sought extra time to complete their projects due to a lack of funds.
For example, major real estate players like DLF and Parsvanath have
been unable to raise funds for their SEZ projects, and DLF
reportedly approached the government on surrendering four of its
nine notified SEZs, while Parsvanath has put twelve of its IT SEZ
projects on hold. Moreover, although the Board is scheduled to
consider eighteen SEZ proposals after the new government in India
assumes office later this month, it remains to be seen whether the
ministry will approve the SEZ proposals in accordance with the
policy framework of the present government, if the same coalition
does not return to power.

No Safeguard Duty on Steel for now
--------------


8. (U) The Government of India (GOI)'s Board of Approvals, headed
by Commerce Industry Secretary GK Pillai, recently deferred a
decision on whether to impose a special import duty on hot-rolled
steel. The decision was taken despite a recommendation by the
Ministry of Finance's Directorate General of Safeguards to impose a
25 percent safeguard duty on flat steel products such as hot-rolled
steel. The Board stated that it wants to look at the submissions of

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all stakeholders before making a final decision, since domestic
producers who use the imported steel as an input would be hurt by
the increased steel cost. Domestic steel manufacturers Essar Steel
and Ispat Industries had filed complaints seeking protection against
imports of the product. India has lately re-commenced the use of
safeguard duties to protect domestic industry against alleged import
surges, as the procedure for imposing anti-dumping duties is more
time-consuming. While the safeguard duty has only been imposed on a
single chemical in recent months, the directorate of safeguards is
carrying out investigations into a number of products.


9. (U) Faced with recessionary conditions, the domestic steel
industry in India is trying to sustain its margins. Following
shrinking global demand, Indian steel makers are reportedly finding
it difficult to continue operating loss-making foreign subsidiary
operations. According to recent press reports, an Indian steel
giant, Jindal Steel Works (JSW),plans to sell its plants in the
U.S. to cut losses, although a senior manager of JSW immediately
denied the media report. Similarly, Tata Steel's Corus unit is
reportedly planning to shut temporarily some of its economically
unviable plants in Europe. According to a Tata Steel executive, the
temporary closure of some of its loss-making units since October
2008 has saved the company around $650 million, and the company is
now planning to set up new production capacities of up to 3 million
tons within India by 2012. As India's largest steel maker, Tata
Steel has said it is counting on its domestic operations to help the
company maintain profitability, based on its estimate of domestic
steel demand growth of 5-6 percent during the current year.

EU Challenges India's "Assessment Fee" on Wines and Spirits
-------------- ---


10. (U) The European Union recently asked for additional WTO
consultations with the Government of India (GOI) over the imposition
of an "assessment fee" levied by the state of Andhra Pradesh on
imported whiskies. The EU in their complaint claims "the assessment
fee levied by Andhra Pradesh appears to apply at rates which are
inversely proportional to the assessable value of imported wines and
spirits in the range of 100 per cent to 15 per cent ad valorem for
imported wines and 200 per cent to 60 per cent ad valorem for
imported spirits, respectively". The EU also claims that the fee is
not levied on similar products manufactured by Indian producers, and
thus it violates "national treatment" principle of the WTO mandate.
India has 60 days to respond to the EU request. If the two sides
fail to amicably resolve the issue, Brussels may ask for a WTO
dispute settlement panel. Last year, the EU called India for
dispute settlement consultations on state levies imposed by
Maharashtra, Goa, and Tamil Nadu on imported wines and spirits
claiming additional taxes higher than that imposed on domestic
products. The EU later suspended the proceeding after the GOI
removed the additional taxes.

Press Notes on FDI To Be Revisited
--------------


11. (U) According to local media, the controversial 2009 Press
Notes 2, 3, and 4 will be revised by the government to close
loopholes that would otherwise allow companies to exceed caps on
foreign direct investment. The February press notes, in an effort
to simplify how FDI is calculated, stated that if Indian promoters
hold a majority stake in a company, it would be considered
Indian-owned, and their downstream investments above sectoral caps
would be permitted. Many interpreted the notes to signify that as
long as the company is considered Indian-owned, it would be able to
invest through joint ventures in other companies operating in
sectors where FDI is currently limited or prohibited, such as
banking, insurance and multi-brand retail.


12. (U) The Ministry of Commerce and Industry has indicated that
the clarification to the Press Notes would note that the new
guidelines do not apply to the banking sector, and is currently
consulting with the Ministry of Finance and the RBI to resolve the
issue. The clarification will also likely revise how portfolio

NEW DELHI 00000991 004 OF 005


investment through Foreign Institutional Investors (FIIs) is
calculated. The Press Notes included FII investment in total FDI
limits, inadvertently changing the classification of ICICI Bank and
HDFC Ltd to "foreign owned" due to the total of their FII and FDI
holdings. Separating FII and FDI in a clarification would allow
ICICI and HDFC to be categorized as "Indian-owned" again, avoiding
the restrictions imposed on foreign banks.


13. (U) Two major companies have notably taken steps to take
advantage of the new calculation rules. Pantaloon Retail and media
house UTV (FDI is prohibited in multi-brand retail and limited to 26
percent in media) have restructured their companies to allow for FDI
through step-down subsidiaries or joint ventures. The changes and
any investments are in violation of the government's FDI policy, but
seem to be permitted by the Press Notes.

Commerce Secretary Pillai on WTO Doha Round and Wheat Exports
--------------


14. (U) Speaking at a May 14 conference on the WTO Doha Round
organized by Indian business chamber FICCI, Commerce Secretary GK
Pillai indicated that a mini-ministerial to 'take stock' of the
Round would take place in Geneva in November. Pillai said that if
the U.S. insists on a 'new approach', the talks were likely to be
delayed indefinitely as other members would come forward as well
with new issues for inclusion. "If the U.S. wants issues like labor
and environment to be included in the talks, we too would come up
with our own set of issues like disciplining of "green box" farm
subsidies and non-tariff barriers. Then you are in for a major
extension of timelines," warned Pillai.


15. (U) During the FICCI conference, Pillai also stated that the
GOI had decided to permit up to 2 million tons of wheat to be
exported after the national elections. However, given that domestic
Indian wheat prices are below prevailing international wheat prices,
exports are unlikely without government export subsidies.

India Allows Export of 1 MT Long Grain
--------------

16. (U) Easing trade curbs on food grains, the government of India
(GOI) recently allowed non-basmati rice exports of about one million
tons by state firms (MMTC, STC and PEC) to 21 countries. The new
guidelines also require that broken rice should account for at least
a quarter of exports, state firms should ensure shipments do not
raise local prices, and export consignments should be sourced from
more than one state. The announcement follows piling surplus stocks
of rice since October-November 2008. India banned non-basmati rice
exports last year to deal with shortages at home; however, a bumper
harvest crop motivated it to lift curbs and allow sales of specified
quantities to some countries. Earlier, in January 2009, the GOI
abolished the export tax on basmati rice, and reduced the floor
price for shipments. Indian exporters of rice have been lobbying
for lifting of the ban considering production estimates of rice of
about 99 MT (up 2.3 percent from last year) in the current crop year
ending June 2009.
Tata Unveils its First "Nano Housing" Development
--------------


17. (U) Following the recent launch of Tata Motors' Nano, called
the world's cheapest car, another Tata group company, Tata Housing,
announced its plan to build low cost homes across India. The first
of what is being referred to in the press as "nano housing"
developments will be in Boisar, approximately 60 miles outside of
Mumbai. The Boisar development will consist of 1,200 one bedroom
apartments ranging from 283 to 465 square feet in size and costing
between about USD 7,800 to 13,400. Like the distribution system
used for the Tata Nano, the apartments will be allocated by lottery
shortly after the close of the announced booking period (June 1
through June 15, 2009). According to media reports, Tata Housing
plans to build as many as 15,000 similar affordable homes over the
next four years.


18. (U) Visit New Delhi's Classified Website:

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http://www.state.sgov/p/sa/newdelhi.

BURLEIGH