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P 071336Z NOV 07
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UNCLAS SECTION 01 OF 04 MUMBAI 000649 
 
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TAGS: ECON EINV ENRG PREL IN
SUBJECT: SECRETARY PAULSON SPEAKS AT INDIAN INFRASTRUCTURE CONFERENCE 
HIGHLIGHTING INVESTMENT POTENTIAL 
 
¶1.  (U) Summary:  At an Infrastructure Conference in Mumbai on 
October 29, 2007, visiting U.S. Treasury Secretary Paulson 
encouraged continued economic reforms in India, especially 
transparent and independent regulatory frameworks.  He 
underscored India's need to develop a domestic corporate bond 
market to facilitate long-term investment in infrastructure. 
Indian Finance Minister Chidambaram said India needs to raise 
infrastructure investment from 5% to 9% of GDP over the next 
five years or to about $488 billion, with  private sector 
investment opportunity in India's infrastructure estimated at 
around $150 billion.  In addition to promising to broaden and 
deepen the bond market, the Finance Minister invited US 
companies to participate in the current bidding for the `ultra 
mega power projects.'  Despite these welcoming comments, and a 
recognition of the great opportunities in infrastructure 
investments, U.S. investors are still concerned about political 
and economic risk and project implementation.  End Summary. 
 
 
 
U.S. and Indian Government Officials Emphasize India's Urgent 
Need for Infrastructure 
 
------------------- 
 
 
 
¶2.  (U) On October 29, 2007, Secretary Paulson and 30 U.S. firms 
participated in a conference in Mumbai to highlight investment 
opportunities in India's infrastructure. Organized by the 
US-India CEO Forum, the Infrastructure Investment Conference was 
attended by CEOs of some of the largest Indian companies as well 
as senior Government of India (GOI) officials, including Finance 
Minister P. Chidambaram and Deputy Chairman of the Planning 
Commission Montek Singh Ahluwalia.  In his speech, Secretary 
Paulson emphasized the need to improve India's financial 
infrastructure and expressed support for developing Mumbai into 
an International Financial Center (IFC).  Urging the Indian 
government to continue opening and liberalizing the economy, he 
underscored India's need to develop a domestic corporate bond 
market to facilitate long-term investment in physical 
infrastructure.  The Secretary also highlighted the USG's 
commitment to the civil-nuclear deal as an avenue for India to 
obtain clean energy.  The Secretary emphasized that a Doha 
agreement is within reach, and the single greatest beneficiary 
will be the Indian people.  He concluded his remarks by pledging 
to continue working with his Indian counterparts to limit 
protectionist sentiment in U.S. and India. 
 
 
 
¶3.  (U) In his remarks, Finance Minister Chidambaram noted that 
India needed to develop its lagging infrastructure to achieve 
and sustain its continued growth. According to Chidambaram, 
India needs to raise infrastructure investment from 5% to 9% of 
GDP over the next five years.  This is equal to $488 billion 
over five years with roughly 30% of that expected to be financed 
by the private sector. He admitted that the regulatory process 
could be improved, as some dedicated infrastructure funds have 
been held up, not for lack of funds but rather for a lack of 
projects. 
 
 
 
Finance Minister Defends Slow Capital Liberalization and Legal 
Process 
 
----------------------------------- 
 
 
 
¶4.  (U) In the Question and Answer session, Finance Minister 
Chidambaram defended India's slow-moving capital market 
liberalization process.  He maintained that capital market 
reforms were being carried out at a slow pace to avoid shocks 
and to prevent irreversible mistakes "that the Indian economy 
cannot afford."  He noted that several Western pension funds, 
including CALPERS and the Norwegian national pension fund, and 
insurance funds were already investing in the Indian capital 
 
MUMBAI 00000649  002 OF 004 
 
 
markets.  All registered funds are free to invest in India, he 
continued.  The Finance Minister added that the government is 
only concerned about inflows made by unregistered entities, or 
coming from un-regulated countries.  Asked about the dollar's 
global depreciation, Secretary Paulson declared that a strong 
dollar is in the U.S. national interest and the market should 
set the value of the currency.  The Secretary emphasized that 
India has let the market determine its currency rate and kept 
inflation low as a result; his focus has been on China which has 
not let its currency appreciate.   He noted that economic 
reforms have continued for the past 15 years in India, 
regardless of the government in power. 
 
 
 
¶5.  (U) Responding to a question about the transparency of the 
dispute resolution process in India, Chidambaram offered a 
surprisingly strong defense of India's judicial process, 
comparing it favorably to those of the U.S. or the U.K.  He 
noted that India was one of a few countries which recognized 
"rule of law" and which had an "independent and well-functioning 
judiciary."  He assured the audience that there was no need to 
feel that their disputes would not be resolved, adding that 
India's arbitration system is "as good as any in the world." 
Arbitration is conducted by a panel of international arbitrators 
from Singapore, Hong Kong and London.  The Finance Minister 
added that India recognizes foreign awards and those awards are 
enforceable in India.  He specifically mentioned the Dabhol 
power plant case from 1998, saying that it was resolved by 2005. 
 Chidambaram said he was told that it could have taken an even 
longer time to resolve a similar case in the U.S. or the U.K. 
 
 
 
¶6.  (U) Questioned about the corporate bond market, Chidambaram 
acknowledged that India had fallen behind in developing a 
corporate bond market.   He noted that, at present, the bond 
market represents less than 1% of India's GDP, trading volumes 
are insignificant, and process of issuance and clearing trades 
is cumbersome.  He said that he "has a list of things" that are 
in process of being implemented to broaden and deepen the bond 
market. 
 
 
 
¶7.  (U) One audience member suggested to Secretary Paulson that 
an independent and equidistant regulator be created to address 
the needs of all three stakeholders in a public/private 
partnership: the public sector, the private sector and the 
consumer.  Secretary Paulson pointed out that in sectors where 
government entities act as both regulator and providers of 
financial services, independence is difficult to achieve, making 
it difficult to attract private sector investment.  The 
Secretary suggested that greater regulatory dialogue between 
 
SIPDIS 
American and Indian regulators was a possibility.  He 
highlighted the need for transparent and independent regulatory 
frameworks that are moving towards global consistency and mutual 
recognition. 
 
 
 
¶8.  (U) In the following session chaired by Mukesh Ambani, 
Chairman of Reliance Industries Limited,  Montek Singh Ahluwalia 
addressed the current state of India's development (Note: His 
address drew on themes expressed in an interview with McKinsey 
that has been published at the following weblink: 
 
http://www.livemint.com/2007/11/05002031/8216 We8217re-clear 
ly-hea.html).  Al Hubbard, the Director of the U.S. National Economic 
Council, discussed the strong and strengthening U.S.-India 
relationship, touching on defense, the environment and Doha as 
areas where further progress could be made.  He also pressed for 
action with regards to the civil nuclear accord, stating the 
window to complete the deal is closing.  Asked about 
infrastructure development in the U.S., Hubbard noted that U.S. 
has its own challenges in ensuring transparency; in particular, 
he pointed out that some companies have tried to lobby Congress 
to change the winning bidder for certain projects.  Asked 
 
MUMBAI 00000649  003 OF 004 
 
 
whether, the government had too large of a hand in 
infrastructure development, Ahluwalia replied that 
infrastructure development is being done in different ways in 
different states and in different sectors.  In particular, he 
noted that the development of "minor" ports had been deregulated 
in order to introduce competition with the "major" ports, which 
remain regulated by the central government. 
 
 
 
Poor Response for GOI-touted Ultra-Mega Power Projects 
 
--------------------------------------------- --------- 
 
 
 
¶9.  (U) During the Question and Answer session, Finance Minister 
Chidambaram conveyed that for the four 4000MW "ultra mega power 
projects (UMPP),"  bidding had been aggressive.  However, the 
Finance Minister expressed surprise that U.S. companies had not 
bid on these projects.  He specifically invited U.S. companies 
to participate in either the construction or financing of these 
projects.  The innovative financing methodology that these 
companies could bring would bring down the cost of power, he 
maintained.  In a separate panel discussion, Sanjay Reddy, of 
the GVK Group, explained the lack of interest in these ultra 
mega power projects.  He observed that the power sector requires 
large capital investments, but are risky due to the political 
environment surrounding them.  (Note: His group did not bid on 
UMPPs despite experience in building power plants.).  Responding 
to an American investor's question about project delays, Reddy 
noted that this is largely due to a lack of large construction 
companies in India. 
 
 
 
¶10.  (U) At a session of the leading bureaucrats from  four 
Central Government ministries- Civil Aviation, Urban 
Development, Power, and Road Transport -  each emphasized that 
projects in their respective sector were open to investment by 
domestic and foreign investors.  Responding to a questioner who 
termed the UMPPs to be "Soviet Style," Anil Razdan, Secretary of 
the Ministry of Power, informed the audience that these projects 
were inspired by China's recent build-out of power capacity.  He 
spoke admiringly of how the Chinese added 100,000 MW of power 
capacity last year while India's total power capacity is about 
120,000 MW. 
 
 
 
Enormous Opportunities for U. S. Investment 
 
------------------------------------------- 
 
 
 
¶11.  (U) During a panel discussion of Indian infrastructure 
companies, Rajiv Lall of IDFC said that there is an acute 
shortage of infrastructure services and that U. S. companies 
could make large returns on investment by providing 
infrastructure services to Indian companies.  He also noted that 
Indian entrepreneurs have an advantage over international 
entrepreneurs mainly due to an "information asymmetry."  There 
is a golden opportunity for smart financial capital from 
overseas to team up with this domestic talent, given the depth 
and quality of Indian entrepreneurial talent and management 
expertise, he added.  In a separate session chaired by James 
Lambright, Chairman of the U.S. Export-Import Bank, leading 
American institutional investors - Richard Frank of Darby 
Overseas Investment, Joseph Azelby of JP Morgan, Emil Hendry of 
Lehman Bros, and Tracy Wolstencroft of Goldman Sachs - all 
concurred with Lall and said they would  prefer to partner with 
local entrepreneurs and leverage on their talent, skill and 
knowledge of local conditions.  They added that no international 
company could think of not investing in India, given its strong 
economic fundamentals and the size of its market.  They 
emphasized that "a wall of money" was ready to invest in Indian 
infrastructure if more projects were approved. 
 
 
MUMBAI 00000649  004 OF 004 
 
 
 
 
¶12.  (U) During the closing session of the conference, B.K. 
Chaturvedi, a member of the Planning Commission, contradicted 
the remarks of the Finance Minister by stating that, from his 
perspective, he saw more projects than investment capital.  When 
pressed about this point from the audience, he emphasized that 
major institutions, like the Wall Street investors who had 
spoken earlier, seemed to be looking only at large projects; 
there are many smaller projects that have not come on the radar 
of these investors, he said.  He admitted, however, that in the 
recent past, project scopes were not up to international 
standards but he thought that this problem had been corrected. 
Dinesh Chandiok of Tata Realty and Infrastructure noted that the 
more pressing need was to develop urban infrastructure.  The 
added pressure on urban infrastructure due to the increasing 
migration from rural to urban areas and the lack of investment 
in urban infrastructure has created a "mismatch between the 
quality of life demanded and what is available," he added. 
 
 
 
¶13.  (U) Comment.  This Infrastructure Conference was useful in 
highlighting the many areas where U.S. and Indian investors and 
officials agree - and disagree - on infrastructure investment 
opportunities in India.  All participants agreed on India's 
strong economic fundamentals, and the need for  massive 
infrastructure investment, as well as  regulatory changes that 
would attract this investment, such as those that would create a 
broader, deeper corporate bond market.  However, there is a 
disconnect between U.S. investors and the Indian government on 
the utility of India's dispute resolution and arbitration 
system, as well as  risk assessments for large  projects like 
the ultra-mega power projects.  While the UMPPs are an essential 
part of the Indian government's infrastructure strategy, U.S. 
investors so far have shown little interest in these "Soviet 
style" projects.  Considering the GOI's dismal record in 
implementing large infrastructure projects, post believes that 
the percentage of India's infrastructure needs that come from 
public/private partnerships should be much higher than the 
projected 30 percent.  The recent quarterly report by the GOI's 
Ministry of Statistics and Program Implementation suggests that 
out of a total of 866 public infrastructure projects, across 13 
ministries, 218 have no specified completion date and another 
297 are running badly behind schedule - over 16 years in extreme 
cases.  The Ministry estimates that delays have increased 
project costs by 37%. 
OWEN