New Delhi Weekly Econ Office Highlights for the Period

UNCLAS SECTION 01 OF 02 NEW DELHI 000301 SIPDIS USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD, USPTO DEPT OF ENERGY FOR A/S KHARBERT, TCUTLER, CZAMUDA, RLUHAR DEPT PASS TO USTR MDELANEY/CLILIENFELD/AADLER TREASURY FOR OFFICE OF SOUTH ASIA MKAPLAN TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN USDA PASS FAS/OCRA/RADLER/BEAN/FERUS E.O. 12958: N/A TAGS: ECON EFIN EIND EINV ECIN IN SUBJECT: New Delhi Weekly Econ Office Highlights for the Period February 1 to February 15, 2010 ¶1. (U) Below is a compilation of economic highlights from Embassy New Delhi for the period of February 1 to February 15, 2010, including the following: -- GOI Releases MSME Task Force Report -- Industrial Production Continues to Grow -- PayPal No Friend of the RBI -- Inflation Running Fast and Furious GOI Releases MSME Task Force Report -------------- ¶2. (U) The Task Force on Micro, Small and Medium Enterprises (MSMEs) on January 30 presented its action plan to Prime Minister Manmohan Singh recommending immediate relief for the MSMEs hit by the economic downturn. The Prime Minister (PM) reportedly stressed the importance of swift implementation of the report's recommendations and asked the MSME Minister Dinsha Patel to accelerate reforms in the small scale industry sector. The PM also underscored that India needs thriving, vibrant, and strong enterprises in the MSME sector in order to achieve its economic development goals. India's MSME sector, employing about 42 million people, contributes almost 45 percent of India's total manufactured output and 40 percent of exports. ¶3. (U) The Prime Minister formed the MSME Task Force in September 2009 to suggest steps to help the sector blunt the impact of the global economic slowdown. Headed by T.K.A. Nair, Principal Secretary to the PM, the MSME Task Force included the MSME Minister, a Planning Commission member, Secretaries of concerned government departments, a Reserve Bank of India Deputy Governor, the Small Industries Development Bank of India Chairman & Managing Director, and representatives of MSME associations. According to Minister Patel the task force report is based on recommendations submitted by seven sub-committees, which were constituted to look into different areas that impact MSMEs, such as credit, infrastructure, taxes, and labor laws. The report recommends that MSMEs receive more accessible bank funding, preferential procurement by public sector enterprises, and tax concessions. An executive summary of the MSME Task Force Report is available at http://pib.nic.in/release/release.asp?relid=5 7553. Industrial Production Continues to Grow -------------- ¶4. (U) Growth in industrial production continued to rise, increasing a much better than expected 16.8 percent in December, and is now up 8.6 percent for the fiscal year beginning April 1, 2009. Manufacturing, which accounts for 80 percent of the industrial production index, grew 18.5 percent, the highest increase since ¶1995. Manufacturing was led by machinery and equipment (up 44.6 percent) and chemical products (up 29 percent),which combined accounted for almost half of the increase in industrial production. Production in food products was the only sector showing negative growth, down seven percent in December and 7.4 percent for the first nine months of the fiscal year. ¶5. (U) All five use categories - basic goods, capital goods, intermediate goods, consumer durables, and consumer non-durables - had positive growth in December. Capital goods and intermediate goods were up 38.8 percent and 21.7 percent respectively. ¶6. (U) Analysts were expecting 12.4 percent growth in industrial production for December and the strong demand has potential policy and economic implications. The GOI may be more inclined to begin to phase out economic stimulus measures enacted to improved demand such as lower excise taxes, which the GOI had implemented in response to the global economic crisis. GDP growth for the fiscal year (ending March 31, 2010) may also be better than expected as industrial production may compensate for any negative results from agriculture due to the erratic monsoon season. PayPal No Friend of the RBI -------------- ¶7. (U) The Reserve Bank of India (RBI) has suspended electronic NEW DELHI 00000301 002 OF 002 payment gateway PayPal's operations in India as the RBI reviews PayPal licensing requirements. PayPal has reported that it has temporarily stopped making local bank transfers and personal payments to and from India and has responded to RBI questions regarding PayPal remittance services. PayPal uses Deutsche Bank Singapore for its Indian transactions as it does not have a presence in India. Despite the lack of presence, the RBI enforced its decision by asking Deutsche Bank India to suspend their operations with PayPal. ¶8. (U) According to PayPal employees, PayPal does not offer remittance services but had mistakenly advertised remittance services in India on their website. Two months after agreeing to remove the offending advertisement, the RBI ceased PayPal operations, presumably because the offending advertisement for remittance services could still be found on the PayPal website. Post has offered PayPal assistance in resolving this issue and Consulate Mumbai plans to meet with the RBI in order to discuss the RBI's concerns. Inflation Running Fast and Furious -------------- ¶9. (U) January wholesale price index (WPI) rose 8.56 percent, the highest rate in 14 months, higher than analysts' expectations and above RBI's projection of 8.5 percent by March 2010 and its near-term inflation target of 4-4.5 percent. Manufactured products, which accounts for 63.7 percent of the WPI, rose 6.55 percent in January, accounting for half of the rise in the WPI. Food articles, which rose 17.4 percent, were the other main contributor to the rise in the WPI. ¶10. (U) With demand strong as evidenced by the growth in industrial production and inflation rising, debate now centers on when the RBI will react and by how much it will raise borrowing rates. The RBI will most likely not react prior to the Ministry of Finance's fiscal year 2011 budget on February 26 as the GOI's plan to address its fiscal deficit will be a factor in any RBI decision on borrowing rates. RBI has taken a decided turn towards greater and clearer communication in the last policy review January 29, including a shorter policy statement, a subsequent conference call with the public. On February 11, Deputy Governor Subir Gokarn announced that there will be no further RBI moves until the next review unless the Budget or external factors bring unexpected shocks to the economy. This represents a definitive increase in transparency of monetary policy. ¶11. (U) Visit New Delhi's Classified Website: http://www.state.sgov/p/sa/newdelhi. ROEMER