VZCZCXYZ0001
RR RUEHWEB

DE RUEHCG #0569/01 2570536
ZNR UUUUU ZZH
R 140536Z SEP 07
FM AMCONSUL CHENNAI
TO RUEHC/SECSTATE WASHDC 1204
INFO RUEHCG/ALL SOUTH AND CENTRAL ASIA COLLECTIVE

UNCLAS CHENNAI 000569 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON PGOV PINR PHUM PTER KISL IN
SUBJECT: BELLWETHER PROJECT:  ANDHRA PRADESH:  ECONOMY BOOMING BUT 
TERRORISM CONCERNS LEAD TO POLITICAL UNCERTAINTY 
 
REFS:  A) CHENNAI 541 B) CHENNAI 500 C) CHENNAI 363 
D) 04 CHENNAI 487 
 
¶1. (SBU) SUMMARY:  The economy of the southern Indian state of 
Andhra Pradesh continues to boom.  But despite strong economic 
growth led by the IT and pharmaceutical industries centered in the 
state's capital Hyderabad, the agricultural sector continues to lag 
and unemployment remains high.  The ruling Congress party, which 
came to power on a populist wave, has deftly catered to the 
discontented rural masses.  The opposition TDP, led by former Chief 
Minister Chandrababu Naidu, is floundering.  Recent terror attacks 
and charges of rampant corruption in the Congress government may 
revive the TDP's hopes, but with the elections in 2009 it is too 
soon to tell.  END SUMMARY. 
 
¶2. (U) This is another in a series of cables in the bellwether 
project launched by Mission India's POL and ECON sections in 
September 2006 to take the economic and political temperature in 
states over the next year.  Previous reports covered Tamil Nadu, 
Punjab, West Bengal, Gujarat, Uttar Pradesh, and Bihar.  Andhra 
Pradesh's capital city Hyderabad rivals nearby Bangalore as an IT 
hub and is the future home of a U.S. consulate. 
 
ANDHRA PRADESH'S ECONOMIC GOOD TIMES KEEP ROLLING 
--------------------------------------------- ----- 
 
¶3. (SBU) Signs of Andhra Pradesh's economic boom abound in 
Hyderabad.  High-end retailers and restaurants dot the city's 
constantly expanding upscale neighborhoods.  Driving through 
Hyderabad's technology corridor is a veritable tour of the who's who 
of the world's information technology companies.  The sense of 
opportunity is palpable, much like in Bangalore, a city with which 
Hyderabad sees itself competing directly.  State government 
Industries Secretary Sam Bob proudly told post that Andhra Pradesh 
has moved past Karnataka (the state where Bangalore is located) into 
second place for foreign direct investment (FDI) among Indian 
states. 
 
¶4. (SBU) According to the Center for Economics and Social Studies, 
the state has averaged 7.8 percent annual growth from 2003 through 
2007, largely driven by the IT and pharmaceutical sectors. 
Government and private sector interlocutors uniformly expressed 
confidence that Andhra Pradesh could continue this run of strong 
growth.  The effects are evident in the state's residential real 
estate market.  A recent newspaper survey showed that residential 
real estate prices in Hyderabad's exclusive Banjara Hills 
neighborhood are the most expensive in all of India, eight times 
more costly than in the next most expensive city - Mumbai. 
 
¶5. (SBU) The effects of the boom have reached into Hyderabad's 
predominately Muslim, economically disenfranchised old city. 
Assaduddin Owaisi, the sole member of parliament from the 
Majlis-e-Ittehadul Muslimeen (MIM) party, said many of the young 
people from his district in the old city have found work in the IT 
industry.  Owaisi said when he was a young man he would frequently 
go to the upscale Taj hotel with friends and they would be the only 
Muslims present.  Sitting in the atrium of the same hotel, Owaisi 
pointed with great pride to several groups of Muslims having lunch, 
including a large family that had booked the hotel's most upscale 
restaurant for a private party.  "It was never like this when I was 
young," Owaisi said.  In the lobby of the hotel, visiting 
political/economic officer met two young Muslims from the old city 
who were there for an IT conference.  Both agreed that new 
opportunities exist for young Muslims, but they said many of their 
contemporaries lack the skills to take advantage of them. 
 
COMPETITION KEEPS SOUTHERN STATES ON THEIR TOES 
--------------------------------------------- --- 
 
¶6. (SBU) Industries Secretary Bob told us that competition for 
business with neighboring Karnataka and Tamil Nadu is "tough."  Bob 
said potential investors regularly "shop" among all three states for 
the best package of investment incentives.  (NOTE:  We frequently 
see potential investors making a circuit of Bangalore (Karnataka's 
capital), Hyderabad, Chennai (Tamil Nadu's capital), and Pune (in 
Maharashtra) in advance of making their final decision to invest. 
END NOTE.)  He said companies get an offer letter from one of the 
states, and then use that offer as leverage to secure further 
concessions from one of the other states. 
 
¶7. (SBU) The competition between states is cutthroat.  Bob recounted 
a recent telephone call he made to his counterpart in Tamil Nadu. 
Bob had asked the Tamil Nadu Industries Secretary for information on 
the package of incentives offered to Nokia in 2005 to get that 
company to set up in Tamil Nadu.  Bob said his Tamil Nadu 
counterpart, a fellow officer in the Indian Administrative Service, 
outright refused to share the information with him.  Despite his 
frustration at the intensity, Bob acknowledged that the competition 
forces the states to continue improving their business environment 
and policies.  The chairman of the Andhra Pradesh's chapter of the 
 
American Chamber of Commerce agreed that competition between Andhra 
Pradesh, Tamil Nadu, and Karnataka benefits the states and 
businesses locating there. 
 
BUT LAGGING AGRICULTURE SECTOR 
AND LOW EMPLOYMENT GROWTH CAUSE CONCERN 
----------------------------------------- 
 
¶8. (SBU) Strong overall growth does not mean Andhra Pradesh's 
economy is problem-free.  Economist S.M. Dev of the Center for 
Economic and Social Studies said growth rates for the agricultural 
sector have lagged, averaging 2.7% from 1993 to 2006.  Dev told us 
that in contrast to states like Tamil Nadu that have achieved 
"structural transformations" by transitioning the majority of their 
workforces to non-agricultural labor, more than half of Andhra 
Pradesh's workforce - 58% - is still employed in agriculture.   He 
added that high growth has not led to greater employment.  With 
employment increasing by an average of only 1.8% year, unemployment 
increased by 8.2% for the period from 1999 to 2006.  High 
unemployment has led to higher poverty rates in Andhra Pradesh when 
compared to the rest of south India, as well as lower performance on 
social indicators such as literacy and infant mortality. 
 
¶9. (SBU) Dev said he "supports the Washington consensus and economic 
liberalization" but emphasized that adjustments are necessary to 
steer Andhra Pradesh towards more inclusive growth.  Among a number 
of policy prescriptions, he said the state must improve agricultural 
growth rates and create manufacturing jobs.  Dev said Andhra Pradesh 
could not afford to skip past a manufacturing economy directly to a 
services-based economy because it has to find jobs for 40 million 
employable, primarily rural youth.  Industries Secretary Bob said 
much the same, "to date Andhra Pradesh has focused on the services 
sector, but we are now shifting focus to manufacturing." 
 
TERRORISM CASTS SHADOW OVER ANDHRA PRADESH; 
STATE'S RESPONSE RAISES HUMAN RIGHTS CONCERNS 
--------------------------------------------- - 
 
¶10. (SBU) On the evening of August 25, bombs exploded within minutes 
at two separate locations in Hyderabad, the capital of Andhra 
Pradesh, killing 42 and injuring more than 60 people (ref A).  The 
August 25 bombings came just months after a bomb exploded in 
Hyderabad's biggest mosque, Mecca Masjid, on May 18 (ref C) killing 
nine and injuring 58.  In both cases, media reports and statements 
by government officials blamed terrorist groups based in Pakistan 
and Bangladesh (ref A) for the attacks, but no conclusive evidence 
of foreign sponsorship has yet come to light. 
 
¶11. (SBU) In conversations in the days before the August 25 
bombings, observers from across the spectrum, including a 
high-ranking police officer, a human rights lawyer, and two 
journalists, told post that Andhra Pradesh has a good handle on 
Maoist (Naxalite) terrorism but is struggling to get a grip on 
Islamic terrorism.  Ref A discusses the August 25 bombings and 
Islamic terrorist groups in Andhra Pradesh. 
 
¶12. (SBU) K. Balagopal, a human rights lawyer who represents accused 
Maoists and is symphathetic to their goals, acknowledged that the 
state's special anti-Maoist force (the celebrated "Greyhounds") has 
been effective at suppressing Maoist violence.  Describing the 
state's efforts as "a military approach," Balagopal told us that the 
heart of the state's efforts is an effective intelligence collection 
system, including strong technical capabilities and a substantial 
number of paid informants.  Balagopal, who has been the target of 
police investigations himself, said on a number of occasions police 
officers have known things about him that demonstrated their 
sophisticated intelligence capabilities.  Balagopal said good 
intelligence coupled with the Greyhounds' ability to "find and kill" 
suspected terrorists has kept the Maoists in check. 
 
¶13. (SBU) While acknowledging the effectiveness of the government's 
efforts to combat the Maoists, Balagopal described the cost in terms 
of human rights.  He said extrajudicial killings are standard 
operating procedure for the Andhra Pradesh police when confronting 
Maoists.  The term "encounter killings" was invented in Andhra 
Pradesh.  It describes the shooting of a suspected Maoist where 
police later move the victim's body and plant evidence to create the 
appearance that they killed the Maoist in self-defense or while the 
victim was attempting to flee.  The Andhra Pradesh police used the 
tactic to such great effect that the practice has migrated to police 
departments throughout India and the term "encounter killing" has 
entered the national lexicon.  Balagopal added that one aspect of 
the "encounter killings" has improved:  in the past the police 
frequently killed innocent people but now, with improved 
intelligence methods, he said they only kill Maoists who are engaged 
in violence.  Balagopal also said that custodial torture by police 
is "the rule in Andhra Pradesh." 
 
¶14. (SBU) All agreed that development is the long-term solution to 
the Maoist threat.  A high-ranking police official said the state is 
 
working hard to bring development to rural areas because exposing 
rural youth to its benefits will inoculate them from recruitment by 
Maoists.  He mentioned that the state is providing satellite 
television connections to rural areas:  "if a youth sees [former 
Miss World and actress] Aishwarya Rai dance on television, there is 
no way he'll join a Maoist camp," said the police official.  Outside 
observers feel the government's development initiatives are too 
cosmetic.  Balagopal said poverty in the areas where the Maoists 
recruit has actually increased.  A media contact who reports 
extensively in those areas agreed that the government's development 
program has fallen short. 
 
CONGRESS GOVERNMENT KEEPS RURAL FOCUS 
-------------------------------------- 
 
¶15. (SBU) Chief Minister YSR Reddy led his Congress Party to power 
in a stunning upset victory in the 2004 elections on the strength of 
a populist campaign that highlighted rural issues, including a 
promise of free electricity for farmers (ref D).  He has since 
maintained the focus of his government on programs to benefit the 
state's rural poor.  Prabhakar Reddy, Special Secretary to the Chief 
Minister, spent the better part of our meeting highlighting the 
government's irrigation and housing programs.  He also said the 
Chief Minister's promise of free power is open-ended.  In contrast, 
when asked whether the Chief Minister's July 2007 trip to Silicon 
Valley had resulted in any new investments, Reddy was less animated 
simly saying investment development is a "constant prcess." 
 
 
¶16. (SBU) Sridhar Dudilla, Congress's wip in the state's 
Legislative Assembly, said theChief Minister is popular because his 
governments programs address the needs of the rural poor and he 
farm sector.  Dudilla said addressing rural neds is a political 
imperative because 65% of thestate's population depends on 
agriculture.  For hat reason, the government has dedicated fully 
oe-third of the state budget to irrigation projects lone. 
Dudilla, however, emphasized that the govenment was not neglecting 
industrial development: he said the government wants balanced 
developmet for Andhra Pradesh, which necessarily includes idustry. 
 Media observers agreed that Congress is n a strong position 
because the government has dlivered on its election promise of free 
power, ad has gone a step further with its aggressive irriation 
program.  On top of it all, they noted, th monsoon rains have been 
good, making farmers allthe more happy. 
 
NAIDU'S TDP "RUDDERLESS" 
-------------------------- 
 
¶17. (SBU) One journalistdescribed former Chief Minister Chandrababu 
Naid and his Telugu Desam Party (TDP) as "rudderless." Devender 
Goud, a former TDP Home Minister and curent member of the 
legislative assembly, outline a TDP position that could be 
described as tryin to "out Congress" the Congress party. 
Acknowleding that Congress had seized the political high grund 
with its programs aimed at the agricultural sctor, Goud said "we 
will do even more for farmer."  He said the TDP would continue the 
Congress overnment's policy of free power for farmers (a poicy the 
TDP opposed during the 2004 elections). When asked about the 
government's allocation of 3% of the budget for irrigation 
projects, Goud sad the TDP would increase spening to 50% of the 
budget. 
 
¶18. (SBU) Goud conceded that Congress had done a good job on the 
economy and law and order, two issues that the TDP traditionally 
dominates.  A TDP government would offer much of the same on 
agriculture, economic development and law and order, he said, with 
"the only difference being that Congress is more corrupt."  Contacts 
from the media, business, and academic communities agreed that 
corruption, especially relating to the irrigation and housing 
programs, is rampant.  But they feel that corruption alone will not 
be sufficient for the TDP to prevail against Congress.  One contact 
said "a certain amount of corruption is expected" by the electorate, 
especially in projects like the irrigation program.  They explained 
that so long as some benefit reaches the farmers they will accept 
the corruption. 
 
ALL POLITICS ARE LOCAL: CIV-NUKE NOT A FACTOR 
--------------------------------------------- - 
 
¶19. (SBU) Our contacts uniformly felt the national debate on the 
U.S.-India civil nuclear agreement will not have a significant 
impact on the state's politics.  Congress whip Dudilla said people 
simply "don't know what the 123 agreement and the Hyde Act are." 
These issues "might matter in Delhi but they don't matter to people 
here," he said.  Owaisi of the MIM said much the same, "what matters 
is people's pocketbooks."  (NOTE:  Owaisi did say that India's 
Muslims "hate George Bush" but will support the agreement because 
Prime Minister Singh has assured the Indian people that the 
agreement is for the good of India's prosperity and security.  END 
NOTE.)  The TDP's Goud said there is a great deal of "confusion" 
 
about the meaning of the deal.  A journalist put it simply:  "the 
common man is not interested at all in the 123 deal." 
 
CONSENSUS IS UNCERTAINTY 
PREVAILS; TERROR ATTACKS A WILDCARD 
----------------------------------- 
 
¶20. (SBU) COMMENT:  According to our media contacts, even with 
Congress "playing its cards right" and the TDP "rudderless," it is 
too early to tell what will happen in the 2009 elections.  They said 
the situation will be fluid until at least 2008. Uncertainty abounds 
with the TDP flirting with the possibility of joining forces with 
its former enemies in the Left parties, Congress ally MIM under 
increasing pressure from Left parties' efforts to woo Muslims in the 
old city, and the increasing drumbeat of corruption charges against 
the Congress party. 
 
¶21. (SBU) COMMENT CONTINUED:  The August 25 bombings only increased 
the uncertainty, providing another avenue of attack for the TDP 
against Congress.  Naidu and the TDP quickly took the offensive, 
calling for the Chief Minister's resignation on the grounds that the 
Mecca Masjid bombing in May and the August bombings demonstrate 
Congress's inability to keep the state's citizens safe.  They argue 
that Congress political leaders' appeasement of the MIM and its 
Muslim base has interfered with intelligence and law enforcement 
efforts to combat terrorism.  Media reports have speculated that, 
unlike the Mecca Masjid bombing, the August 25 bombings could have 
an impact on Congress's electoral fortunes because August bombings 
killed Hindus as well as Muslims.  Whether a focus on terrorism and 
corruption can combine to overcome Congress's targeted appeal to 
Andhra Pradesh's rural masses remains to be seen.  END COMMENT. 
 
¶22. This message was coordinated with Embassy New Delhi. 
 
HOPPER