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UNCLAS SECTION 01 OF 04 NEW DELHI 004419 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD 
DEPT OF ENERGY FOR A/S KHARBERT, TCUTLER, CZAMUDA, RLUHAR 
DEPT PASS TO USTR DHARTWICK/CLILIENFELD/AADLER 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA ABAUKOL 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
STATE FOR SCA/INS AND EB/TRA JEFFREY HORWITZ AND TOM ENGLE 
 
E.O. 12958: N/A 
TAGS: EFIN EINV EPET ETRD SENV IN
SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR SEPTEMBER 
24-28, 2007 
 
 
NEW DELHI 00004419  001.2 OF 004 
 
 
¶1.  (U) Below is a compilation of Economic highlights from Embassy 
New Delhi for the week of September 24-28, 2007. 
 
MIXED SIGNALS ON RETAIL 
--- 
¶2.  (U) Two key GOI figures in the U.S. this week gave conflicting 
messages on the future of organized retail in India.  Minister of 
Commerce and Industry Kamal Nath, speaking at an "India AT 60" event 
in New York on Monday, said that the governing issue in retail 
policy is not FDI versus indigenous companies, but large versus 
small, referring to many small retailers' fears that their 
livelihoods are threatened by organized players.  He explained that 
the GOI is interested only in incremental growth in the sector but 
did not clarify what that might mean, leaving the press to infer 
that Nath was pessimistic about greater FDI in retail.  Then on 
Thursday, Finance Minister Chidambaram, addressing an audience at 
the Wharton Business School, said that it was only a matter of time 
before India permitted greater FDI in retail, adding that the GOI 
would gradually convince small retailers that they can coexist with 
organized retailers, clearing the way for greater liberalization. 
Currently, the GOI permits 51 percent FDI in single-brand retail and 
100 percent FDI in wholesale and cash-and-carry formats but does not 
allow FDI in multi-brand retail. 
 
¶3.  (U) Reliance Fresh had another busy week on the ground.  Monday 
saw violent trader protests interrupt the opening of a pair of 
outlets in the state of Orissa.  The press also reported that 
Reliance Fresh will pull out of Uttar Pradesh (UP), India's most 
populous state, because the government there has proved intractable. 
 UP Chief Minister Mayawati has not rescinded her closure order on 
Reliance outlets in the state, nor has the committee she assigned to 
study the affects of organized retail produced its report, though 
the one-month deadline Mayawati set at the time of the closures has 
passed.  (Note:  Although Mayawati declared on August 23 that all 
free-standing produce retailers in the state had to cease operation, 
only Reliance Fresh actually closed most of its doors.  The press 
tends to ignore the fact that Spencer's and others have remained 
open.  End note.)  Reliance reportedly has begun lay-offs of 1,000 
of its 2,800 total employees in the state and will relocate many 
others. 
 
¶4.  (U) Despite these setbacks, Reliance Retail marches ahead.  The 
company quietly opened nine Reliance Fresh outlets in Mumbai midweek 
and pushed ahead with its effort to become a franchisee for Gap 
clothing brands.  Gap, which has demonstrated some reluctance to 
work on the franchise model, has had discussions with many Indian 
companies, but The Economic Times reports that Reliance is the 
frontrunner to close the deal. 
 
COOPERATION ON 
URBAN TRANSPORT 
--------------- 
 
¶5.  (U) On September 24, the Department of Transportation signed a 
Memorandum of Cooperation (MOC) with Minister Jaipal Reddy of the 
Ministry of Urban Development.  The MOC signing was overseen in New 
Delhi by Deputy Administrator Sherry Little of the Federal Transit 
Administration (FTA), under the Department of Transportation.  The 
FTA visit is a follow on to a trip by Minister Reddy and colleagues 
to view urban infrastructure and mass transit systems in the US 
earlier this year in May.  Under the MOC, both governments will look 
for opportunities to collaborate on public transport, inter-modal 
transportation, safety in transport, transport for persons with 
disabilities, Intelligent Transportation Systems, Traffic 
Information Centre, capacity building and training in public 
transportation, and other fields of mutual interest. 
 
¶5.  (U) This is an important development at a time when the central 
government is focusing on India's infrastructure gaps and ways to 
attract much needed investment as well as the Ministry of Urban 
Development's focus on emphasizing urban transport policy as a key 
element in building urban infrastructure.  Following the signing, 
 
NEW DELHI 00004419  002.2 OF 004 
 
 
Urban Development(Minister Jaipal Reddy said: "Large-scale 
urbanization in India has put severe strain on urban infrastructure 
which includes water supply, road and transport, sewerage and 
sanitation, drainage, and solid waste management. If momentum of 
economic growth is to be maintained, challenges thrown up by 
large-scale urbanization will have to be addressed without delay." 
 
DEDICATED FREIGHT CORRIDORS 
OF THE INDIAN RAILWAYS - 
A MATTER OF DEBATE 
------------------ 
 
¶6.  (SBU) The Japan Bank for International Cooperation (JBIC) has 
proposed to offer loans at attractive rates to build Dedicated 
Freight Corridors (DFC) in India subject to two preconditions: (1) 
both east (Delhi-Kolkata) and west (Delhi-Mumbai) corridors are 
electrified and (2) electric locomotive manufacturing in India is 
established under public private partnerships (PPPs) with Japanese 
manufacturers.  While India certainly welcomes Japanese assistance 
in developing railway corridors (as GOI has done with other 
infrastructure development projects - most notably the Delhi metro), 
USG is advocating that the above two preconditions are simply not 
sound economics. 
 
¶7.  (U) The Indian Railways has asked the GOI to not electrify the 
Western DFC since it is likely to handle a lot of container traffic 
from Indian ports and northern Indian cities to Delhi which 
necessitates double stack and triple stack container operations. 
Such operations require significantly higher investment 
(approximately five more times) when run on electrified lines versus 
non-electrified lines. 
 
INDIAN RAILWAYS SEEK PPPS 
FOR MANUFACTURING DIESEL 
LOCOMOTIVES 
------------------------- 
 
¶8.  (SBU) GE Rail estimates that Indian Railways faces an annual 
deficit of 500 to 700 diesel locomotives - above and beyond the 
country's current diesel locomotive manufacturing capacity.  GE also 
notes that the Indian Railways, through its production arm of Diesel 
Loco Works (DLW), has the capacity to manufacture about 150 to 200 
diesel locomotives per year or 1,000 trains in the next five years. 
Given the apparent shortfall and expected future demand, Indian 
Railways is seeking to enter into a PPP joint venture for the 
establishment of a new greenfield locomotive manufacturing facility 
in India (rumored to be in Bihar, Railways Minister Lalu Prasad's 
home state).  GE anticipates taking a 74 percent stake in this joint 
venture and thereby, maintaining operational control.  This order is 
valued at approximately USD 4 billion. 
 
¶9.  (SBU) In order to meet Indian Railways' short-term locomotive 
needs, GE envisions several phases, whereby a first phase launch 
order of 50 fully assembled locomotives would be shipped from its 
manufacturing hub in Erie, PA.  The second phase would entail 450 
locomotive kits to be sourced from Erie and assembled in-country. 
After which, any remaining orders would be processed at the new 
locomotive manufacturing facility in India.  Even after this plant 
is fully operational, GE still anticipates that certain core 
equipment, like the rail traction and braking systems, would still 
be sourced from Erie along with other maintenance and service work. 
 GE estimates this commercial opportunity at USD 1.3 billion with 
approximately USD 520 million in U.S. content (goods and parts 
imported from the United States). 
 
¶10.  (SBU) GE foresees competition from Transmash (Russia), Dalian 
(China), QSY (China), and EMD (LaGrange, Illinois).  GE also expects 
Indian Railways to release a similar tender for the establishment of 
a new electric locomotive facility.  As such, GE anticipates that 
the Europeans and the Japanese will be lobbying Indian Railways to 
increase the number of electric locomotives. 
 
 
NEW DELHI 00004419  003.2 OF 004 
 
 
MOVING FROM SERVICES 
TO MANUFACTURING LED 
GROWTH 
-------------------- 
 
¶11.  (U) On September 27, during a major economic summit, Secretary 
Ajay Shankar from the Department of Industrial Promotion and Policy 
(DIPP) at the Ministry of Commerce and Industry commented on the 
bright performance of the manufacturing sector during the last two 
to three years.  He was confident that India will emerge as the 
world's favorite manufacturing base within a decade when 
infrastructure constraints will cease to exist given other 
comparative advantages - such as low cost labor, good product 
quality, stable political and legal environment, strong knowledge 
base, and a big consumer market. 
 
¶12.  (U) While giving the keynote address at the summit, Secretary 
Shankar pointed to the flashy double digit growth rate of the Indian 
manufacturing sector since 2005-06, despite facing infrastructure 
bottlenecks and regulatory obstacles.  He was emphatic that the 
1990s' perception of India having a competitive advantage in only 
services and not manufacturing is changing with many MNCs opting for 
India as one of their production bases with future expansion plans. 
Shankar also discussed how the GOI is prioritizing infrastructure 
development and hopes to attract huge investments for the sector 
through public private partnerships, special economic zones (SEZs), 
and themed manufacturing clusters which attract FDI.  Other efforts 
include rationalization of regulatory procedures at the micro level 
to save cost and time, skill enhancing training programs, education 
management based on industry needs, and promotion of an intellectual 
property culture. 
 
¶13.  (U) Also featured on the panel were private sector 
representatives from Motorola, Microsoft India, Infotech 
Enterprises, Sri City SEZ, AT Kearney India, Yes Bank, and Quatrro 
BPO Solutions.  They all agreed with Secretary Shankar's assessment 
that India has the ability to emerge as a major global manufacturing 
hub in the middle to long-term as evidenced by the remarkable 
transformation of the sector.  Panelists commented that India is no 
longer just an IT service provider, but that its strength leans 
towards vibrant knowledge based manufacturing units (in engineering, 
design, and R&D).  While the company representatives expect the 
strong performance in manufacturing to continue for sometime, they 
were also quick to point out that problems relating to 
infrastructure and taxation need to be addressed for overall 
economic growth and sector expansion. 
 
¶14.  (U) According to the panel, India's manufacturing sector is 
playing a pivotal role in the economy with a 21 percent share of 
GDP, 7 percent of total FDI inflows, and 51 percent of total 
exports.  India is rapidly emerging as a sourcing base for global 
operations.  Key manufacturing sectors propelling growth over the 
last two years are engineering, automobiles, chemicals, textiles, 
electronics, and hardware.  The next wave of growth is expected in 
food processing, pharmaceutical and biotech, and wind energy. 
 
¶15.  (U) The telecom industry representative stated that the telecom 
revolution in recent years has led to 7-8 million additional mobile 
phones each month in India.  Multinational companies like Motorola 
and Nokia are finding it profitable and easier to manufacture mobile 
equipment in India rather than exporting big consignments.  Now that 
R&D is driven mainly by the private sector, India has great 
potential to become a world leader in R&D activities.  India also 
scores better than China in this field as the Indian R&D industry is 
both traditional and knowledge based. 
 
¶16.  (U) With the development of SEZs across the country, panelists 
predicted that manufacturing activities are slated to pick up 
drastically.  They also concluded that the SEZ concept may also 
prove beneficial for India's infrastructure integration efforts, 
thereby making India an attractive destination for manufacturing 
giants. 
 
NEW DELHI 00004419  004.2 OF 004 
 
 
 
¶17.  (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi 
 
WHITE