VZCZCXRO9377
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHNE #0499/01 0461157
ZNR UUUUU ZZH
R 151157Z FEB 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 0465
INFO RUEHCG/AMCONSUL CHENNAI 2452
RUEHCI/AMCONSUL KOLKATA 1765
RUEHLH/AMCONSUL LAHORE 4305
RUEHBI/AMCONSUL MUMBAI 1557
RUEHPW/AMCONSUL PESHAWAR 4767
RUEHIL/AMEMBASSY ISLAMABAD 4539
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 06 NEW DELHI 000499 
 
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 
USDA PASS FAS/OCRA/RADLER/BEAN/CARVER/RIKER 
 
E.O. 12958: N/A 
TAGS: EAGR EFIN EINV EPET ETRD SENV IN
SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF 
FEBRUARY 11 - FEBRUARY 15, 2008 
 
 
NEW DELHI 00000499  001.2 OF 006 
 
 
¶1.  (U) Below is a compilation of Economic highlights from Embassy 
New Delhi for the week of February 11-15, 2008. 
 
FURTHER DE-RESERVATION OF 
SMALL-SCALE INDUSTRY ITEMS 
----------------- 
 
¶2.  (U) Continuing its steady reform process to increase the 
competitiveness of the Indian industry, the Indian Cabinet on 
February 8 decided to further prune the list of items reserved for 
small-scale production.  It announced the "de-reservation" of 79 
items, thus leaving only 35 items for exclusive production in the 
small scale industry (SSI) sector.  The remaining items include food 
and allied products, wood and wood products, paper and paper 
products, plastic products, organic chemicals, drugs and drug 
intermediates, glass and ceramics, mechanical engineering excluding 
transport equipment items, and electrical machines and appliances. 
 
¶3.  (U) The de-reservation policy of the GOI aims at increasing the 
competitiveness of the Indian small scale industry and promoting job 
creation opportunities.  While quantitative restrictions were 
removed in the 1990s, facilitating liberal imports, the continuation 
of reservation prevented domestic large units from producing the 
reserved items.  This, in essence, has protected SSI units from 
internal competition.  Critics have also charged that the 
reservations discourage small scale businesses from expanding, since 
they would lose the targeted benefits.  This has acted as a brake on 
increasing economies of scale as well as on employment growth. 
Despite the recommendations of the 1997 Abid Hussain Committee 
Report for immediate complete de-reservation of items (more than 800 
items at that time) reserved for small scale production, the GOI 
decided to implement the recommendations in a phased manner.  The 
pace for de-reservation of the items accelerated from 2005 on, 
however resulting in the removal of 579 items, a 94% reduction. 
 
PEPSI AND COCA COLA 
------------------- 
 
¶4. (U) Pepsi won a major legal battle in its fight to operate in 
Kerala on February 11 when India's Supreme Court ruled in its favor 
in a case concerning its industrial license.  In 2003 the Communist 
Party of India (Marxist)-controlled Pudussery panchayat (village 
level government) canceled Pepsi's industrial license citing 
overexploitation of groundwater by the company's Kerala bottling 
plant.  The February 11 Indian Supreme Court decision upheld an 
earlier Kerala High Court order that quashed the panchayat's 
cancellation of the license.  The Supreme Court ruled that the local 
governmental body had no jurisdiction to cancel Pepsi's industrial 
license because it had been obtained in an area notified as an 
"Integrated Industrial Township." 
 
¶5. (SBU) Coca-Cola and Pepsi both located their Kerala bottling 
plants in Palakkad district.  Pepsi chose to locate itself in an 
Integrated Industrial Township and Coca-Cola did not.  Their 
differing decisions have had a major impact.  Coca-Cola's plant has 
been shuttered since 2004; Pepsi's production has been unaffected by 
the hostile panchayat order in large part because it is within the 
notified industrial area.   Coca-Cola has faced fiercer local 
opposition because of allegations of improper waste disposal and 
groundwater contamination from its plant.   The successful anti-Coke 
agitation has prompted local leftist groups to step up their 
opposition to Pepsi as well.  After the Kerala High Court quashed 
the cancellation of Pepsi's license, leftist leaders suggested 
amending the Industrial Township Area Development Act which provides 
the basis for establishing notified industrial areas. 
 
¶6.  (SBU) COMMENT: Despite the left's demands, the government has 
not taken any steps to amend the law.  This reflects a growing 
understanding in Kerala that rather than deterring potential 
investors -- with acts such as amending away the benefits of setting 
up in notified industrial areas -- the state actually needs to do a 
 
NEW DELHI 00000499  002.2 OF 006 
 
 
lot more to attract investment, especially in light of the proactive 
investment policies of the neighboring South Indian states.  END 
COMMENT. 
 
JAPAN PULLS OUT OF EASTERN DELHI 
FREIGHT CORRIDOR 
------------------ 
 
¶7.  (U) An Indian Express article indicated that the Railway 
Ministry is in a bind to fund the entire Delhi Freight Corridor 
(DFC) after the Japanese government conveyed that a promised loan be 
used only for the western route.  Originally, the Ministry planned 
to use an expected 160 billion INR (4 billion USD) loan from Japan 
to develop links from Delhi to both Mumbai in the west (est. 4.1 
billion USD) and Sonnagar in the east (est. 2.9 billion USD).  Top 
rail officials said the move was linked to Japanese business 
interests in the Delhi-Mumbai Industrial Corridor (DMIC).  The move 
also comes amidst Japanese pressure to use electric rather than 
diesel traction along the Western DFC.   Senior officials of 
Dedicated Freight Corridor Corporation of India Ltd said the loan 
for the project was being "negotiated at the Railway ministry and 
they were not in the loop." 
 
DELHI MUMBAI INDUSTRIAL CORRIDOR 
DEVELOPMENT CORPORATION (DMICDC) 
ISSUES EXPRESSION OF INTEREST 
---------------------------------- 
 
¶8.  (U) Abhaya K. Agarwal, DMICDC Director, issued a circular 
inviting Expressions of Interest (EOI) applications for "1. 
Preparation of detailed perspective plan for overall DMIC region. 2. 
Preparation of development plans for various investment nodes with 
pre feasibility study in DMIC region."  The circular states that the 
GOI envisages the development of the DMIC along the Delhi Mumbai 
Dedicated Freight Corridor.  An advertisement for the EOI ran in the 
February 9, 2008, Economist. 
 
AIR INDIA AND JET AIRWAYS 
NEGOTIATING TO BUY 60 BOEINGS 
----------------------- 
 
¶9.  (U) The Business standard reported that Boeing is in 
negotiations with Air India and Jet Airways for 60 wide-bodied 
aircraft valued at 15 billion USD for international routes.  Both 
airlines already have current deals with Boeing until 2011 and 2012 
respectively.  The two airlines are currently planning for growth 
beyond 2011.  The executive director of finance for Air India 
indicated that the orders would be finalized in the next three 
months while a Jet Airways executive director said a final decision 
would be made, "...only after looking at the market situation." 
 
COMMERCE MINISTER HEDGES 
ON NEW WTO TEXT 
---------------- 
 
¶10. (U) Addressing the press, Commerce Minister Nath welcomed 
revised WTO draft texts on Agriculture and NAMA released in Geneva 
on February 8th.  Nath stressed that before a final view could be 
given, the GOI would need to consult with other developing countries 
and stakeholders.  However, the Commerce Minister did share his 
preliminary views.  On agriculture, Nath stated that "significant 
and effective reduction of trade distorting subsidies of the 
developed countries is an issue on which there can be no 
compromise," but was satisfied that the concept of two thirds 
proportionality in tariff reductions between developed and 
developing countries was back on the table.  On NAMA, Nath said that 
Indian industry would need more flexibilities and was surprised at 
the removal of numbers on Para 8.  The minister concluded on an 
optimistic note, stating that the revised text can form the basis 
for constructive engagement and negotiation in the coming weeks. 
 
 
NEW DELHI 00000499  003.2 OF 006 
 
 
GOI ISSUES TOKEN REFINED OIL PRODUCTS PRICE HIKE 
--------------------------------------------- 
 
¶11. (SBU) After deferring the issue for months, the Cabinet finally 
raised petrol (gasoline) and diesel prices, but by a paltry 4% and 
3% respectively - the first rise since February 2007(more septel). 
According to a Citigroup economist, this price hike is much less 
than what is required to raise prices to global levels.  The price 
hikes would have needed to be 8% for petrol and 22% for diesel to be 
proportionate with international trends.  Although politically 
untouchable, prices would also need to be raised 95% and 300% for 
liquefied petroleum gas (LPG) and kerosene respectively.  Citigroup 
expects the price hike to keep headline inflation trending higher 
from the Jan 26th 4.11% mark but remaining at below 4.7% levels 
until the end of the fiscal year. 
 
¶12.  (SBU) Because the price hike still does not match international 
prices, the GOI is expected to issue oil bonds worth Rs 402 billion 
(about USD 10 billion) to compensate government-owned oil companies 
for their retail marketing losses versus the Rs 240 billion (USD 6 
billion) originally expected.  Citi projects that under-recoveries 
from oil companies will total about Rs 718 billion (USD 18 billion) 
for FY 2007-08, which ends March 31.  As in the past three years, 
these bonds will likely remain off balance sheet to maintain the 
deficit target.  Comment: The small price hike is the victim of a 
weak political coalition entering an election year that has been 
beset by the Left over this issue.  Although token, the Left still 
brayed about it and will be sure to try and make it an issue.  The 
agreement to any hike in this charged atmosphere reflects the strong 
will of the Prime Minister and the Finance Minister, along with the 
Minister of Petroleum and Natural Gas, to inject whatever minimal 
price reforms and expenditure discipline they can.  End comment. 
 
UPDATE ON INDIA'S NEW PENSION SCHEME 
----------------------------- 
 
¶13.  (U) D. Swarup, Chairman of the interim Pension Fund Regulatory 
and Development Authority (PFRDA), while addressing a workshop last 
week, indicated that the New Pension Scheme (NPS) architecture 
(which covers new government employees after 2004) would be in place 
by the end of May 2008.  The PFRDA has already appointed three 
state-owned pension fund managers - the State Bank of India, the UTI 
Asset Management Company and Life Insurance Corporation of India. 
These pension fund managers are expected to start work shortly, 
perhaps by March 31. The government has not allowed PFRDA to appoint 
private firms or foreign firms as fund managers. But once the PFRDA 
bill is passed in Parliament, and if FDI is permitted in the pension 
sector, US firms could be allowed to be appointed as pension fund 
managers.  PFRDA is currently engaged in the process of registering 
the NPS trust and appointing a custodian and a trustee bank. 
 
¶14.  (U) Until the PFRDA bill is passed in Parliament, the NPS will 
offer only two investment choices - to invest employees' entire 
contributions in government securities alone or adopt the investment 
guidelines applicable to non-government provident funds.  For 
non-government provident funds, the current guidelines limit 
investments in equities to 10% in private sector debt instruments 
and/or in equity-linked schemes of mutual funds and 5% in shares of 
companies that have an investment grade debt rating from at least 
two credit rating agencies, while 85% must be placed in 
publicly-owned fixed income instruments.  Once the PFRDA Bill is 
passed by Parliament, the regulator will provide more investment 
choices such as investing up to 50% of the contributions in 
equities. 
 
¶15.  (SBU) Swarup stated that he expects the PFRDA bill to be passed 
in Parliament in the forthcoming budget session. Comment: Swarup has 
not shown this optimism previously, but the bill has been stalled 
since it was introduced in 2005 and there are low expectations of 
major legislation being passed in the current environment.  It would 
be a welcome, assertive move by the ruling coalition if the bill 
 
NEW DELHI 00000499  004.2 OF 006 
 
 
were to get passed.  End comment. 
 
HYDERABAD'S NEW AIRPORT DRAWS 
TEST FLIGHTS AND PROTESTS 
------------------- 
 
¶16. (U) Kingfisher and Jet Airways made successful test flights to 
Hyderabad's new airport in preparation for the facility's March 16 
grand opening.  Anticipating an opportunity to attract more airlines 
to operate more routes from the new airport, the government of the 
South India state of Andhra Pradesh (AP), has cut sales tax on 
Aviation Turbine Fuel (ATF) from 35 to 4 percent.  Several U.S. 
carriers, reportedly including Continental, U.S. Airways, Delta, and 
United, are in discussions with the airport about starting direct 
flights to the United States.  HMS Host, a U.S. food-court 
management firm, will manage the airport's food-and-beverage areas. 
 
¶17. (U) The new airport is not without controversy.  Construction of 
the expressway to the airport is far behind schedule.  Several 
contacts have told Consulate Chennai that they expect that it will 
take up to two hours to get to the new airport from central 
Hyderabad.  Some of the current airport's employees are not happy 
about the plans to close the facility when the new airport opens. 
According to press reports, a group of disgruntled workers staged a 
sit-in at the current airport, preventing the director from exiting 
his office for several hours.  The workers want the airport to 
remain open to domestic air traffic, limiting the new airport to 
international flights.  The press also reports that a former Indian 
Administrative Service officer has filed a public interest lawsuit 
making the case for the city to have two functioning airports. 
 
PARAMOUNT AIRWAYS EXPANDS 
INTO WESTERN INDIA 
------------- 
 
¶18. (U) Paramount Airways, a regional airline operating in South 
India, continues its expansion with the acquisition of two Embraer 
aircraft, raising its fleet size to seven.  A company executive told 
Consulate Chennai that the expansion will allow increased flights on 
popular routes like Chennai-Hyderabad, as well as expanded service 
from Bangalore to Goa and Pune, as well as better connections among 
several cities in the states of Tamil Nadu and Kerala. 
 
BIG BAZAAR EXPANDS OPERATIONS 
IN SOUTH INDIA 
----------- 
 
¶19. (U) National retailer Big Bazaar's South India operations should 
bring in revenues of USD 250 million in 2008, and the company plans 
to expand in the region.  The company began its South India 
operations in 2005 with two stores in Bangalore and two in Andhra 
Pradesh and has seen its annual revenues in the region increase 400 
percent since then.  The region now accounts for nearly a quarter of 
the retail chain's income.  A top Big Bazaar official told Consulate 
Chennai that the chain currently operates 23 outlets in South India 
and plans to add seven more this fiscal year.  Big Bazaar generally 
avoids placing its outlets in the largest metropolitan cities, 
preferring to operate in the so-called "Tier 2" cities of Andhra 
Pradesh, Kerala and Tamil Nadu, a strategy that it tends to follow 
throughout India. 
 
TATAS AND BOEING AGREE 
ON DEFENSE JOINT VENTURE 
------------------------ 
 
¶20.  (U) Boeing and Tata Industries announced a plan to form a joint 
venture company that will initially include more than 500 million 
USD of defense related component work.  The company is to be 
established by June 2008.  Jim Albaugh, president and CEO of Boeing 
Integrated Defense Systems said of the joint venture, "It represents 
another step in our commitment to India," and that it will make, 
 
NEW DELHI 00000499  005.2 OF 006 
 
 
"Boeing products more globally competitive."  Ratan Tata, Chairman 
of Tata Industries, stated, "This joint venture between Tata and 
Boeing is an important part of our strategy to build capabilities in 
defense and aerospace." 
 
¶21.  (U) According to the Hindustan Times, but not announced by the 
companies, the Tatas will control a majority stake in the joint 
venture but the total financial investment is still undisclosed. 
Press releases from Boeing and Tata reveal that in the first phase, 
Boeing will issue contracts to the new company for work on the 
F/A-18 Super Hornet, CH-47 Chinook, and P-8 Maritime Patrol 
Aircraft.  The established manufacturing capabilities would then be 
used as a competitive advantage in future programs such as the 
Medium Multi-Role Combat Aircraft competition.  Aside from 
manufacturing, the two companies also envisage a research and 
development center for advanced manufacturing technologies.  In 
related news, last week Boeing also announced that Tata Group would 
supply components to its 787 Dreamliner program. 
 
AIR INDIA ROUTES 
TO U.S. TAKING OFF 
---------------------------------- 
 
¶22. (U) The Indian Express is reporting that Air India will be 
increasing direct flights to the U.S.  The airline just launched a 
non-stop flight from Delhi to New York last week. Future plans are 
underway to add Bangalore-San Francisco and stops in Texas and 
Washington.  According to an Air India official the Bangalore-San 
Francisco route will be important in "connecting the two silicon 
valleys."  For Air India, US-India routes have become the largest 
revenue earner.  Air India and other Indian airlines are looking to 
grab more of this market, which is predominately serviced by 
European, Gulf, and Southeast Asian carriers. 
 
INDUSTRY REMAINS ENGAGED 
ON COMPETITION LAW 
------------------------ 
 
¶23.  (U) On February 15, FICCI President Khorakiwala welcomed the 
Prime Minister to the 80th annual general meeting and made some 
important remarks about the industry group's engagement on economic 
reforms.  Of note, Khorakiwala pointed out how the new merger and 
acquisition (M&A) provisions of the competition law are problematic. 
 He criticized the legislation for making it too cumbersome for 
Indian and US companies to conduct M&A activities.  Post's lobbying 
on this issue on behalf of the USG is having an impact, as the issue 
continues to be raised by industry groups at the highest levels in 
the GOI. 
 
NEW SEBI CHAIRMAN 
------------------ 
 
¶24. (SBU) The Finance Ministry has nominated Chandrasekhar Bhaskar 
Bhave, Chairman of the National Securities Depository Limited 
(NDSL), as the sixth Chairman of the Securities and Exchange Board 
of India (SEBI), replacing Damodaran who completes his three-year 
term this week. Bhave has been involved with the capital markets for 
many years.  He was Senior Executive Director of SEBI under the 
first Chairman, G.V. Ramakrishna, credited with formulating many 
initial regulations, as well as conceptualizing the National Stock 
Exchange.  He quit the civil service in the mid-1990s to take up an 
assignment with the NDSL.  There, he revolutionized the capital 
market by getting market players to accept the new system of 
dematerialized shares and debentures.  NSDL got into a legal battle 
with SEBI in April 2006 when SEBI uncovered a massive scam involving 
the cornering of share allotments in IPO's for small investors. It 
took an intervention from the Securities Appellate Tribunal to 
settle the matter in NDSL's favor. 
 
¶25. (SBU) As chairman of SEBI, Bhave is expected to bring to the 
table his experience in the capital markets and expertise in 
 
NEW DELHI 00000499  006.2 OF 006 
 
 
building a stronger securities market infrastructure.  He is 
expected to focus on improving the processes of investigation and 
enforcement and take stronger measres to create better investor 
education and institution building. KV Kamath, Chairman of ICICI, 
told Congenoff that Bhave is a very good choice; a practical and 
pragmatic person with regulatory experience.  Kamath noted, thogh, 
that his first choice would have been Damodaran who he thought had 
been outstanding. Press reports that Bhave's appointment has made 
some brokers and fund managers nervous since he commands respect in 
the financial sector for both his integrity and professional 
competence.  Bhave is expected to join as chairman of SEBI on 
February 17. 
 
¶26.  (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi 
 
WHITE