VZCZCXRO1472
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHCI #0464/01 2901152
ZNR UUUUU ZZH
P R 171152Z OCT 06
FM AMCONSUL CALCUTTA
TO RUEHC/SECSTATE WASHDC PRIORITY 1210
INFO RUEHNE/AMEMBASSY NEW DELHI 1079
RUEHBI/AMCONSUL MUMBAI 0427
RUEHCG/AMCONSUL CHENNAI 0427
RUEHKT/AMEMBASSY KATHMANDU 0262
RUEHKA/AMEMBASSY DHAKA 0262
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHCN/AMCONSUL CHENGDU 0025
RUEHBJ/AMEMBASSY BEIJING 0071
RUEHKO/AMEMBASSY TOKYO 0031
RUEHUL/AMEMBASSY SEOUL 0013
RUEHIL/AMEMBASSY ISLAMABAD 0201
RUEHLM/AMEMBASSY COLOMBO 0096
RHMFIUU/CDR USPACOM HONOLULU HI
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RUEHCI/AMCONSUL CALCUTTA 1479

UNCLAS SECTION 01 OF 04 CALCUTTA 000464 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT PLS PASS USTR 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV WTRO EIND IN NP BG
SUBJECT: INDIA'S LOOK EAST ECONOMIC POLICY - JUST LOOKING, NOT 
BUYING 
 
CALCUTTA 00000464  001.2 OF 004 
 
 
¶1. (SBU) SUMMARY:  India continues to adopt a contradictory 
attitude in its trade relations with its Eastern neighbors, 
claiming to seek more bilateral trade agreements but placing 
severe limits and barriers to those agreements to make them 
essentially meaningless.  The opening on July 1 of Indo-China 
border trade at Nathu La was seen as an important initiative by 
India in strengthening regional trade as part of its much touted 
"Look East Policy."  Subsequent developments indicate a 
continuing protectionist stance due to concerns over national 
security and the potential dumping of goods from China.  A 
closer analysis of the trade relationship between India and its 
other neighbors also shows that fear of direct external 
competition continues to stifle India's "Look East Policy." 
Ironically, while the GOI criticizes developed countries for 
unfair trade practices against developing countries, India 
itself conducts highly discriminatory trade policies with other 
developing Asian countries.  END SUMMARY. 
 
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Trade through Nathu La Purely Symbolic 
--------------------------------------------- ------------ 
 
¶2.  (U) On July 1, the opening of the Himalayan Nathu La trade 
crossing between India and China was heralded as a great leap 
forward in the trade relations between these two Asian giants. 
However contrary to the initial hype, India's restrictions on 
the type and number of commodities, a lack of unified standards 
for commodity inspection and quarantine, a limited trading time 
as a result of the climactic conditions, and bad infrastructure 
have ensured that the volume of trade through Nathu La remains 
low.  For example, the GOI has limited items for trade to goods 
such as yak tail, yak milk and other esoteric products.  The GOI 
has also imposed stringent quarantine provisions on these 
agricultural items.  Currently, there are no provisions for 
obtaining a quarantine clearance on the border, so the paper 
work has to be done in Calcutta, compounding delays.  The GOI 
Commerce Ministry is examining alternatives to resolve the issue 
but has not reached a decision. 
 
¶3.  (U) Other administrative delays abound, such as requiring 
Nathu La traders to provide their income tax number (known as a 
PAN number), during transactions.  This requirement caused 
long-holdups, as Sikkim residents were exempt from income tax 
requirements and did not have PAN numbers.  The GOI has now 
removed this requirement for Sikkim resident traders.  Trade is, 
however, curtailed by restricting the maximum value of each 
consignment to USD 555. 
 
¶4.  (SBU) In addition, the permitted trade list includes just 29 
items for export and 15 items for import by India from China. 
The Sikkim government has submitted an application to the GOI 
urging it to expand the list, but the application remains 
pending with the Commerce Ministry.  The Sikkim government would 
like to include, among other things, agricultural and 
horticultural products, including orchids.  It has also urged 
the GOI to permit tourism sector operations through Nathu La. 
The GOI has shown little interest in opening the crossing to 
tourists.  (Note:  Contacts have told Post that during his 
recent visit to Gangtok, the Chinese Ambassador indicated that 
his government asked the GOI for an expansion of the trade list. 
 End Note.) 
 
¶5.  (SBU) India's development of infrastructure on its side of 
the Nathu-La border lags behind China's.  While international 
media have touted the development of rail and road access to 
Nathu-La on the Chinese side, the GOI and Sikkim government have 
so far only just decided to upgrade the road network from 
Siliguri (in West Bengal) to Nathu La.  USD 111 million was 
allotted to upgrade the road between Siliguri and Sikkim's 
capital, Gangtok, so that it can support larger container 
trucks.  The Border Roads Organization (BRO), an agency under 
the Ministry of Defense, builds and maintains this road.  USD 44 
million has been earmarked for upgrading the stretch between 
 
CALCUTTA 00000464  002.2 OF 004 
 
 
Gangtok and Nathu La.  The work is projected to be completed by 
¶2008.  Assuming the road improvements happen, significant 
India-China border trade through Nathu La cannot be expected 
prior to 2009. 
 
¶6.  (SBU) Comment:  India's historical distrust of China is a 
contributing factor in its hesitation to compete with Chinese 
products.  The outcome of the 1962 Indo-China war and continued 
fears of border disputes remain etched on the Indian psyche. 
While the opening of the Nathu La border was portrayed as a 
warming of relations between the two nations, India's real 
achievement was China's final recognition of Sikkim as an Indian 
state in 2003.  End Comment. 
 
 
--------------------------------------------- --------- 
The Imbalance with Bangladesh 
--------------------------------------------- --------- 
 
¶7.  (SBU) India's trade relationship with Bangladesh is also 
instructive of how India treats its South Asian neighbors.  The 
trade imbalance between the two countries is sizeable. 
According to the Bangladesh Deputy High Commissioner (BDHC) in 
Calcutta, Bangladesh exports approximately USD 240 million to 
India, while India exports nearly USD 2 billion to Bangladesh. 
The BDHC noted that although overall exports to India have 
increased year-on-year, a series of non-tariff barriers continue 
to impede free trade into India.  For example, cotton and silk 
saris must be checked for potential skin irritants.  This 
process involves sending a sample of the material to Lucknow, a 
process that delays the imports by about three weeks.  Indian 
law requires that a tax commissioner attest to imports coming 
from Bangladesh, but the tax commissioner has his office in 
Calcutta, not at the border.  Some customs posts are unmanned. 
Customs officials capriciously apply tariffs and duties on 
goods, preventing uniformity.  Like the Chinese experience with 
Nathu-La, infrastructure is much less developed on Indian side 
of the border as compared to the Bangladesh side.  India's 
restrictions on trade with Bangladesh have regional implications 
as well.  Bangladesh and Nepal had entered into an agreement 
with India to permit transit of goods crossing a narrow strip of 
land in India that divides the two countries.  However, there is 
little use of the route as Bangladeshi and Nepali trucks are not 
permitted in India.  Goods therefore must be unloaded at the 
border and reloaded into new trucks just to travel the 
approximately 30 kilometers across India. 
 
¶8.  (SBU) Comment: The BDHC felt that India had little incentive 
to agree to a more liberalized trade regime with Bangladesh. 
For its part, the GOB does not press its case too hard with the 
GOI because it relies so heavily on Indian imports and because 
it feels that the GOI can affect the market price of basic 
foodstuffs.  The BDHC cited as an example, the GOI stopping 
exports of onions and sugar to Bangladesh three months ago, 
ostensibly due to low domestic supply.  This move was seen in 
Bangladesh, though, as the GOI reminding Bangladesh as to who 
controlled the market.  End Comment. 
 
 
--------------------------------------------- -------------- 
----------------- 
Stonewalling on Trade Pacts with Southeast Asia 
--------------------------------------------- -------------- 
----------------- 
 
¶9.  (U) India has signed Framework Agreements with Thailand, 
ASEAN, Malaysia, Indonesia and Korea in hopes of achieving 
Comprehensive Economic Cooperation Agreements (CECA) in line 
with the CECA India signed with Singapore in 2005.  The CECA, a 
euphemism used by the GOI for a Free Trade Agreement to avoid 
conflict with domestic anti-free trade lobbies, typically begins 
with just liberalized trade in a limited range of products. 
 
 
CALCUTTA 00000464  003.2 OF 004 
 
 
¶10.  (U) The Indo-Thai Framework Agreement signed in October 
2003 involves an FTA in goods, services and investment.  After 
prolonged negotiations over rules of origin and a drawing up of 
lists for phased, tariff-free trade, a scheme listing 82 
products allowed for trade began September 1, 2004.  Tariff 
reduction was to be 50% for the first year, increased to 75% for 
the next year, with free trade in effect from September 1, 2006. 
 Trade between the two nations is dominated by ten products. 
India's exports to Thailand include fuel, oil, precious stones, 
and electrical items, and in turn India imports chemicals, 
agricultural products, precious stones, machinery, plastics, 
spare parts, electronic items and auto components.  The balance 
of trade was weighted slightly in India's favor in 2004-2005, 
but has since shifted in favor of Thailand in 2005-2006.  Thai 
exports to India have increased by 1.7% in the last six months. 
 
¶11.  (SBU) The Framework Agreement further called for widening 
the free trade list, once the scheme got off ground.  On April 
12, Congress President Sonia Gandhi wrote to Prime Minister 
Manmohan Singh advising the government to "very carefully 
scrutinize" FTAs to protect farmers.  A Thai Consul in Calcutta 
informed Post that this led to a delay in further negotiations; 
though, he hopes negotiations will be resumed after the 
mid-October elections when the political situation stabilizes in 
Thailand.  Liberalizing trade in another 4,000-5,000 products 
and expanding cooperation in services and investment are some of 
the issues that will be discussed when talks resume.  The deal 
is supposed to be expanded by 2007, since the rules of origin 
issues have been resolved and the primary focus would be to 
lower the number of items on the sensitive list.  Post contacts 
note that Indian suppliers of agricultural products, small scale 
industry products, chemicals and electronics, fearing 
competition, have sought to block the GOI from opening these 
sectors to trade. 
 
¶12.  (U) Indo-ASEAN trade talks had also been stalled on the 
ground of India's "sensitivity" to further lowering the number 
of products on its exclusion list from its high of 1,414 items. 
Negotiations took over a year just on items like toilet seats, 
dolls and chewing gum.  Though India agreed to reduce the 
excluded items list to 850 products, Malaysia, the country 
coordinator and the chair of the trade talks, was not satisfied. 
 Malaysian International Trade and industry Minister Datuk Seri 
Rafidah Aziz observed that the negotiations had become 
"difficult," since goods on the exclusion list accounted for 30% 
of ASEAN's exports to India. 
 
¶13.  (U) Malaysia wants the list to contain no more than 60 
items.  Malaysia and Indonesia are especially interested in 
market access for palm oil, which is included in India's 
negative list.  Earlier, India had agreed to allow import of the 
commodity in limited amounts through tariff rate quotas. 
Malaysia had refused to accept the offer.  India has now 
proposed to reduce the excluded items list to 560, while 294 
items will continue to enjoy tariff protection for just five 
additional years.  India has agreed to reduce duties on palm oil 
to 50%, refined palm oil to 60% and pepper and tea to 50% over a 
ten year period.  The future of India-ASEAN CECA talks now 
depends on how ASEAN and in particular Malaysia reacts to 
India's offer.  The implementation of the Indo-ASEAN FTA has 
already been delayed by over a year and both sides have dropped 
a proposed "early harvest scheme" program for immediate tariff 
cuts on specific products.  The new deadline for the 
implementation of the FTA is January 1, 2007 - which is unlikely 
to happen.  Malaysia too had called off its bilateral economic 
cooperation negotiations with India until it felt India was 
genuinely interested in trade liberalization. 
 
--------------------------------------------- -------------- 
--------------------- 
Domestic Interests Hamstring Further liberalization 
--------------------------------------------- -------------- 
--------------------- 
 
CALCUTTA 00000464  004.2 OF 004 
 
 
 
¶14.  (U) In addition, Post's domestic industry contacts object 
to implementation of tariff concessions under the regional trade 
agreements (RTA).  Indian industry complains that with products 
such as chemicals, electronic and auto components, the RTAs have 
resulted in finished products being imported at a lower duty 
than the related raw material inputs used for domestic 
manufacture.  For example, the import duty on color televisions 
is 6.25%, but the duty on color tubes is 12.5% and glass parts 
is 15%.  (Note: From September 1, color televisions from 
Thailand are imported duty free.  End Note.)  Electric fans 
receive a duty of 15%, while the import duty on the input, iron 
alloy coil, is 20%.  The import duty on transmission assembly at 
15% is the same as the import duty on its raw materials like 
bearing and rubber parts.  Indian auto manufacturers have also 
complained that the bilateral FTAs threaten their future 
existence.  The import duty on natural rubber, for instance, has 
remained unchanged at 20%, while the import duty on tires is 15% 
and even lower at 7.5% under the FTA with Sri Lanka.  To correct 
this anomaly, the Prime Minster's Office has formed a "Committee 
on Inverted Duty Structure" under the chairmanship of Planning 
Commission Member Anwarul Hoda. 
 
--------------------------------------------- ---------- 
More Trade for Me - Not For You 
--------------------------------------------- ---------- 
 
 
¶15. (SBU) Comment:  While complaints about this inverted duty 
structure may have dampened enthusiasm for FTAs/RTAs, the Doha 
deadlock has led to greater GOI stress on bilateral and regional 
trade agreements, including a renewed push for greater marker 
access in Southeast Asian countries and its immediate 
neighborhood.   India sees good prospects in forging greater 
economic ties with Southeast Asia, Latin America and South 
Africa to bolster its growing foreign trade sector.  Among these 
regions, Southeast Asia is the most advantageous for India in 
terms of cost-competitiveness. 
 
¶16.  (SBU) Comment Continued:  However, recent experiences 
indicate that in bilateral/regional trade pacts, GOI trade 
negotiators tend to adopt an inherently inward-looking approach. 
 Tariffs on  products of interest to India's trading partners 
that might impact domestic producers are kept high,  while 
products  with low trade prospects are given primacy in drawing 
up free trade/"early harvest" lists.  In addition, the 
non-tariff barriers and customs regulations that affect much of 
the trade in the northeast  are a significant logistical barrier 
to accessing the Indian market.  This is evident in India's 
restrictive trade agreements with its small neighbors like 
Bangladesh and Nepal - countries with little potential to 
disrupt the Indian domestic market.  India's posturing in Geneva 
as defender of the least developed countries is belied by the 
meager terms it offers these same countries in trade 
negotiations. 
JARDINE