VZCZCXRO2448
RR RUEHAST RUEHBI RUEHCI RUEHDBU RUEHLH RUEHPW
DE RUEHNE #5148/01 3341121
ZNR UUUUU ZZH
R 301121Z NOV 07
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 9500
INFO RUEHCG/AMCONSUL CHENNAI 1997
RUEHCI/AMCONSUL KOLKATA 1320
RUEHLH/AMCONSUL LAHORE 4218
RUEHBI/AMCONSUL MUMBAI 1093
RUEHPW/AMCONSUL PESHAWAR 4695
RUEHIL/AMEMBASSY ISLAMABAD 4235
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHMFIUU/FAA NATIONAL HQ WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE

UNCLAS SECTION 01 OF 05 NEW DELHI 005148 
 
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 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 THE WEEK OF 
NOVEMBER 26-30, 2007 
 
NEW DELHI 00005148  001.2 OF 005 
 
 
¶1.  (U) Below is a compilation of Economic highlights from Embassy 
New Delhi for the week of November 26-30, 2007. 
 
GOI ANNOUNCES ITS TAX 
REFORM AGENDA 
-------------- 
 
¶2.  (U)  At a November 29 seminar on Indirect Tax Reforms, Dr. 
Parthasarthi Shome, Advisor to the Finance Minister, discussed the 
GOI's short term tax reform agenda.  Earlier this week, the GOI 
Working Group announced its recommendations, which were accepted by 
the Empowered Committee on Tax Reforms on November 28, 2007.  The 
announcement assumes significance in view of the agreement among the 
federal and state governments to roll out a combined Goods and 
Services Tax (GST) beginning in April 2010 to ensure that producers 
are not taxed twice on the same product.  In 2004, Finance Minister 
Chidambaram proposed the introduction of a GST and appointed a panel 
to discuss the idea with states and produce a blueprint.  States are 
expected to submit their views to Chidambaram by December 20, 
followed by Center-State deliberations on GST rates.  Subsequently, 
industry input will be invited for consideration. 
 
¶3.  (U)  The GOI reps at the seminar explained that the GST system 
will allow states and the Center to have separate tax rates for 
goods and services, and input tax credit will be available in both 
cases along the same lines as on Value Added Tax (VAT).   With the 
introduction of a unified GST, excise tax and service tax will cease 
to exist and a much simpler tax regime is expected.  While GST will 
be applicable to locally manufactured products and services, it will 
be applied via countervailing duties (presently equivalent to the 
excise tax) in the case of imported products.  Shome emphatically 
pointed out that the GST regime will remove all cascading taxes and, 
therefore, reduce compliance costs.  He also claimed that the GST 
would be taxpayer friendly in terms of decision making and 
productivity.  Implementation of GST may require a Constitutional 
amendment at the central level and also at the state legislative 
level. 
 
¶4. (U) Industry welcomed the roadmap to a GST regime, but put 
forward its demands for tax exemptions and tax holidays in specific 
sectors.  The GOI reps pointed out their mandate for broadening the 
tax base and lowering rates, and hinted that tax exemptions do not 
help to improve industry competitiveness and that the tax exemptions 
eventually become economically unviable.  Shome also announced that 
the GOI is working on inter-state tax issues. 
 
JET AND AMERICAN - 
CODE SHARE PARTNERS 
------------------- 
 
¶5.  (U) On November 20, Jet Airways and American Airlines announced 
a code-sharing agreement for some flights out of New York.  The 
proposal is subject to regulatory approvals and if cleared, will 
become effective from Jan 16, 2008.  Jet Airways will place it 9W 
flight designator code on certain American Airlines' domestic 
flights out of New York's JFK Airport.  In turn, American Airlines 
will place its AA designator code on Jet Airways flights to some 
cities in India.    This codesharing agreement between the two 
airlines follows Jet's introduction of daily flights on Boeing 
777-300ER services from Delhi to New York JFK via Brussels as of 
Oct. 28, less than three months after it began serving Newark from 
Mumbai via Brussels on August 5. Jet also introduced service to 
Toronto via Brussels from Chennai on September 5. The airline also 
has plans to expand its network in North America, with plans to 
service San Francisco from Mumbai in February 2008 eastbound via 
Shanghai (and has all the requisite government approvals but still 
needs requisite slots at Shanghai airport).  Jet also intends to 
serve Chicago and Washington, D.C. via Brussels, with Chicago being 
the first destination it will launch after San Francisco. 
 
GOI SCRAPS EUROCOPTER DEAL, 
TO REBID FOR 197 HELICOPTERS 
 
NEW DELHI 00005148  002.2 OF 005 
 
 
---------------------------- 
 
¶6.  (SBU) Industry contacts have confirmed this week's press reports 
that India will seek new bids for the proposed USD 600 million 
purchase of 197 light observation helicopters after the USG and Bell 
Helicopters protested the selection of a Eurocopter aircraft.  The 
GOI first floated the requirement for Army helicopters to replace 
1970s-era Chetak and Cheetah helicopters in 2004, then added 
requirements for offsets in 2005. In March 2007, Indian Defense 
Ministry officials picked the Eurocopter helicopter, after 
disqualifying Bell for technical reasons.  After Bell Helicopter 
officials launched a complaint to ministry officials that the 
selection process had not been transparent, the matter was referred 
to an internal committee.  The GOI's investigation revealed that 
Eurocopter has fielded a civilian version of its helicopter for 
certain test trials, which is in violation of selection rules.  The 
investigation also involves a private company which acted as a 
go-between for the deal and the Defense Ministry is seeking an 
explanation from the European company about its links with Global 
Vectra Helicorp and Vectra Aviation Private, Ltd. 
 
¶7.  (SBU) After an internal investigation into the allegations, the 
Defense Ministry sent a detailed report to the Central Vigilance 
Commission (CVC), which has now held that sufficient grounds exist 
for scrapping the deal.  In mid-November, the internal committee 
recommended the purchase be rebid. Defense Ministry sources said the 
Army has been asked to cancel Eurocopter's selection and redraw the 
requirements to allow for a new global tender to be floated. The 
Indian Army, which first asked for replacements for its aging fleet 
in 1999, may have to wait at least three more years while a fresh 
round of selection trials are carried out. 
 
INDIA RATIFIES CAPE TOWN 
CONVENTION 
------------- 
 
¶8.  (U) On November 26, the GOI Cabinet approved the Cape Town 
Convention, an international treaty to facilitate asset-based 
financing and leasing of large commercial aircraft and aircraft 
engines.  The move will help reduce the cost of acquiring new 
aircraft for Indian carriers, with an estimated savings of USD 200 
million in aircraft acquisition costs in the short term and over $1 
billion in the long term, according to GOI officials.  In simple 
terms, the Cape Town Convention ensures a greater comfort level for 
arcraft makers or lessors in repossession of aircraft in the event 
of a default.  US Export-Import Bank Chairman Lambright urged GOI 
officials to  expeditiously ratifiythe Convention during his visit 
to New Delhi on November 1-2.  Now that India is a signatory to the 
convention, it is eligible for a cost savings or EXIM discount of 
one-third of the fee on future commercial aircraft purchases. 
 
SEZ POLICY UPDATE: GOI ANNOUNCES NEW 
PACKAGE TO PROTECT AGRICULTURAL LANDS 
------------------- 
 
¶9.  (U) On October 31, in the backdrop of violent protests over land 
acquisition of farming land in West Bengal and a few other states, 
the GOI notified the National Rehabilitation and Resettlement Policy 
2007, which will also apply to SEZs.  The new policy discourages 
acquisition of agricultural land for non-farming purposes and 
provides for establishment of a commission to look into resettlement 
issues.  The policy clearly outlines the types of acquirable land, 
including waste land, degraded land, or un-irrigated land.  The 
Indian cabinet has reportedly cleared amendments to the Land 
Acquisition Act of 1894 to "strike a balance between the need for 
land for development activities, and protecting the interests of 
farmers and landowners".  In order to implement the policy, the GOI 
will have to amend its Land Acquisition Act, which is expected to be 
introduced in the next session of Parliament. 
 
¶10.  (U) The GOI also plans to set up a committee to review and 
monitor the progress of implementation of rehabilitation and 
 
NEW DELHI 00005148  003.2 OF 005 
 
 
resettlement schemes across the country.   The new policy is 
expected to address political concerns in states (to some extent) 
but more specifically targeted towards West Bengal where the local 
population has been protesting the acquisition of farm land for a 
SEZ proposal by Indonesia's Salem Group. 
 
MOVING AHEAD WITH DEDICATED 
FREIGHT CORRIDOR PROJECT 
--------------------------- 
 
¶11.  (U) On November 27, the Cabinet Committee on Economic Affairs 
gave in principle approval to the Dedicated Multi-Modal High Axle 
Load Freight Corridor (DFC) Project on the Eastern Corridor and the 
Western Corridor, with an estimated total cost of USD 7 billion. 
The entire corridor will utilize a Computerized Train Control 
System.  The Eastern Corridor will connect Ludhiana in Punjab and 
Sonnagar in West Bengal while the Western Corridor will connect 
Jawaharlal Nehru Port near Mumbai to Tughlakabad/Dadri near Delhi. 
The Eastern Corridor is expected to most benefit coal companies, 
steel plans, and thermal power stations while the Western Corridor 
will provide a huge boost to exporters, importers, port 
companies/developers, shipping lines and container operators.  The 
DFC project will provide much needed rail infrastructure for growth 
of the Indian economy and also generate indirect employment during 
construction of the corridors.  The project has a timeline of 5 
years. 
 
US-BASED AMSTED RAIL INVESTS IN INDIA 
------------------------------------- 
 
¶12.  (U) Chicago-based Amsted Rail, the world's largest producer of 
rail cast wheels, is joining hands with JP Morgan One Equity 
Partners and Hyderabad's Patil Rail Infrastructure (PRIL) to set up 
a cast wheel manufacturing unit in India. This is first such JV 
company to approach the railway ministry, at a time when India is 
experiencing unprecedented growth in the rail sector (including 
various metro rail projects, replacement of existing tracks, port 
connectivity projects, and proposed freight corridors).  According 
to media report sources, the proposed greenfield facility will be 
owned by a separate company, in which Amsted will hold a 30% stake 
and JP Morgan OEP will have 25%. The remaining 45% stake will be 
owned by Patil Rail.  JP Morgan OEP holds 40% stake in Patil Rail. 
 
¶13. (U) The new manufacturing facilities are being set up to cater 
to the growing requirements of rail wheels for the freight wagons by 
Indian Railways.  Currently, wheels are supplied by Rail Wheel 
Factory, which can manufacture 120,000 wheels per year. An 
additional 70,000 wheels are produced by the Durgapur steel plant of 
SAIL and the balance is imported from companies, including Amsted. 
Indian Railways requires close to 300,000 wheels a year, which is 
expected to grow 20% annually to meet additional demands. 
 
¶14.  (U) The Indian Railways has already invited bids for a 100,000 
wheels a year plant at Chhapra, Bihar. Larsen & Toubro and Tata 
Projects submitted bids and the result is forthcoming.  With the 
investment for the project likely to be above USD 253 million, 
Indian companies will have to hire technology from outside. 
 
STREAMLINING FOREIGN 
PILOT CONVERSION 
----------------- 
 
¶15.  (U) With India facing an acute pilot shortage and airlines 
unable to fully utilize their aircraft fleet or deferring 
acquisition, the Director General of Civil Aviation (DGCA) has taken 
a forward leaning step to address this problem.  The government has 
simplified the process of converting a professional pilot's license 
issued abroad to an Indian one.  Now, those holding a foreign 
pilot's license will be able to convert this into an Indian pilot 
license in six days.  This announcement is a great relief to the 
more than 800 pilots who are holding a foreign pilot license issued 
by an ICAO contracting country.  Moreover, thousands of Indian 
 
NEW DELHI 00005148  004.2 OF 005 
 
 
students have gone abroad to complete flight school training, 
sensing a lurking job opportunity arising out of acute pilot 
shortage in the country. 
 
¶16.  (U)  Civil Aviation Minister Praful Patel recently told 
Parliament that the "exponential growth in Indian civil aviation 
industry" is "manifested in shortage of pilots." "With the present 
growth...it has been estimated that in the next five years, 5,000 
additional pilots would be required for scheduled operations, and 
1,000 for non-scheduled and private operations," . 
 
INDIA-EU BUSINESS SUMMIT 
---------------------- 
 
¶17.  (U) On the heels of a visit to the PRC to raise EU-China trade 
imbalances, EU Trade Commissioner Peter Mandelson kicked off the 
EU-India Summit in Delhi on November 29.  At a bilateral business 
summit preceding the government-to-government summit discussions to 
take place November 30, Mandelson discussed prospects for the 
ongoing EU-India trade talks.  He stated that the EU and India want 
an 'ambitious' agreement in place in 2008.  During the Summit, where 
EC President Barroso will meet with PM Singh, the two sides are 
expected to announce a timetable for future negotiating rounds. 
Other items on the agenda include boosting two-way investment flows 
and IPR protection.  Mandelson cited the industrial goods sector as 
a key area in the discussions, noting that India - as a large 
consumer of intermediate goods - stands to benefit from reducing 
tariffs on imported parts and components.  Some sharp elbows were on 
display, however, as Commerce Minister Nath pushed back after 
Mandelson raised non-tariff barriers and classified India as an 
'emerging economy'.  Accustomed to shooting off the cuff, Nath 
replied that if India is an emerging economy, "the EU is a 
submerging economy."  [Comment:  Most informed observers note that 
the timetable for completion of the EU-India trade agreement in 2008 
is not realistic given the slow progress since talks were launched 
earlier this year]. 
 
TAMIL NADU EXPECTS POWER 
OUTAGES THIS SUMMER 
-------------------- 
 
¶18. (SBU) Tamil Nadu's Minister of Electricity told a press 
conference on November 26 the state will likely experience an 
electricity shortfall this summer of up to 1300 megawatts.  Blaming 
rapid industrial expansion for the expected deficit, he said that 
the state will manage the situation through a combination of planned 
outages and continued attempts to secure additional power from 
India's national grid.  A senior Tamil Nadu official told Consulate 
Chennai that two other factors were the state of Kerala's decision 
to sell some of its hydro power to other states and the 
less-than-expected output from Tamil Nadu's nuclear power plants. 
He emphasized, however, that these outages were a short-term problem 
that would be resolved by late summer, when Tamil Nadu will have 
additional capacity installed. 
 
¶19. (SBU) Local companies are making plans to deal with the 
situation and keep their operations running.  Ford and Visteon have 
special arrangements with the Tamil Nadu government that should 
allow them to operate unimpeded (neither has enough back-up 
generation capacity to operate fully should the grid go down).  They 
worry, however, that some of their suppliers may face problems. 
Tamil Nadu's reputation as one of India's most effectively 
administered states may be called into question if these planned 
outages cause major disruptions to the economy or are seen to 
presage longer-term problems stemming from inadequate investment in 
the state's infrastructure. 
 
INFORMATION TECHNOLOGY 
MAJORS SLOW HIRING 
-------------------- 
 
¶20. (SBU) Responding to fears of cutbacks in U.S.!corporate spending 
 
NEW DELHI 00005148  005.2 OF 005 
 
 
on information technology, at least some of India's infotech majors 
have slowed the (admittedly breakneck) pace at which they are hiring 
new employees.  An Infosys executive told Consulate Chennai that the 
company cut its growth in recruitments by half over the past year, 
even though it is still building new training facilities.  A 
Cognizant executive told us that his company had adopted a "cautious 
approach" to hiring, emphasizing that the company was paying close 
attention to "market changes." 
 
ENJOY YOUR BEER WHILE IT'S CHEAP 
-------------------- 
 
¶21. (SBU) Beer manufacturers in South India are worried.  With 
barley harvests in Canada, Europe and Australia falling, Indian 
barley exports have picked up, with some fifty thousand tons 
exported this year.  This exodus of local barley has left some 
Indian brewers worried that there won't be enough barley for their 
brews.  One executive from a major Indian brewer told Consulate 
Chennai, perhaps exaggerating for effect, that export of Indian 
barley must be banned.  He added that the current high price of 
barley in India meant that beer prices would almost certainly rise 
this summer. 
 
SOUTH INDIA GETS MORE RETAIL 
--------------- 
 
¶22. (U) South India welcomed yet another retail chain this week, 
with the MORE brand of Aditya Birla Retail opening retail outlets in 
Coimbatore (Tamil Nadu) and Warangal (Andhra Pradesh).  Previously, 
MORE stores operated only in northern India.  Aditya Birla Retail 
acquired the Trinetra's 225 stores, mostly in the South, in January. 
 Aditya Birla is now rebranding these outlets, and it expects to 
convert half of the Trinetra stores by the end of the year. 
 
¶23.  (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi 
 
MULFORD