VZCZCXRO1181
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHNE #0644/01 0601205
ZNR UUUUU ZZH
R 291205Z FEB 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 0683
INFO RUEHCG/AMCONSUL CHENNAI 2547
RUEHCI/AMCONSUL KOLKATA 1856
RUEHLH/AMCONSUL LAHORE 4327
RUEHBI/AMCONSUL MUMBAI 1651
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RUEHIL/AMEMBASSY ISLAMABAD 4604
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 000644 
 
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 25 - FEBRUARY 29, 2008 
 
NEW DELHI 00000644  001.2 OF 005 
 
 
¶1.  (U) Below is a compilation of Economic highlights from Embassy 
New Delhi for the week of February 25-29, 2008. 
 
ANOTHER BUDGET THAT PROMISES MUCH, 
BUT FUNDS LITTLE, POPULISM 
---------------------------------- 
 
¶2.  (SBU) Finance Minister Chidambaram presented to Parliament on 
February 29 the UPA's highly anticipated last budget before national 
elections scheduled by May 2009.  Chidambaram met expectations to 
present a budget that was heavily populist in theme and tilted 
towards poor farmers, meant to boost the coalition's flagging 
political fortunes.  However, the Finance Minister revealed the 
lawyer in him by crafting enough fine print in allocations and 
performance requirements that the proposed budget stays well within 
mandated deficit reduction targets.  Chidambaram targeted a 
reasonable 13% rise in revenues and just a 6% increase in 
expenditures (on the expectation that expensive subsidies will be 
kept offbudget), leaving room for overspending.  For the fiscal year 
just ending, the government exceeded planned expenditures by just 
5%. 
 
¶3.  (SBU) The major give-away that was announced was a debt waiver 
program for farmers, that could cost as much as $15 billion.  The 
devil, however, is in the details: after his speech, Chidambaram 
explained to reporters that he would fund the debt write off - which 
only applies to government-owned banks - by providing additional 
liquidity over three years to the affected banks.  Not only does he 
spread the price tag over three years, but "adding liquidity" could 
mean simply lowering the cash reserves that banks are required to 
keep with the central bank.  As expected, the National Rural 
Employment Guarantee Program was doubled to cover the entire 600 
districts of the country; however, funding was only increased by 
one-third; weak disbursement mechanisms have constrained payouts 
under this system.  Peak industrial tariffs are to remain at 10%, 
stalling the target of reaching ASEAN levels.   Few changes were 
made to the direct tax structures.  Post will report in detail on 
the budget septel. 
 
ECONOMIC SURVEY SKETCHES 
REFORM WISHLIST 
----------------- 
 
¶4.  (SBU) The Ministry of Finance released its annual Economic 
Survey on February 28, mapping India's economic performance for 
FY2007-08, which ends March 31.  Much of the economic data simply 
repeats the figures released by the Central Statistical Organization 
(CSO) last month, including an expected GDP growth rate of 8.7% for 
FY2007-08. More interesting was the list of economic reforms that 
the Ministry of Finance supports, including, inter alia, significant 
increases in foreign direct investment (FDI) in retail and insurance 
,privatizations in the energy field, and free entry of foreign 
universities, currently denied by the Left. Finance Minister 
Chidambaram made no mention of FDI increases in his Budget Speech on 
February 29 and Post does not expect any notable investment 
liberalization requiring legislative approval while the Left still 
supports the UPA Coalition.  However, the Economic Survey's reform 
list did read like a statement of intention, should the Left's 
support no longer be needed - or tolerated. 
 
BIOTECH BRINJAL FIELD TRIALS 
DRAW PROTESTS 
--------------- 
 
¶5.  (U) Mahyco, an Indian seed company in which Monsanto holds a 30 
percent stake, began field trials in the South India state of Tamil 
Nadu of genetically modified "brinjal" (eggplant, in American 
parlance) in partnership with Tamil Nadu Agricultural University 
(TNAU).  Some activist groups protested against the trials, alleging 
non-compliance with bio-safety protocols and invoking a litany of 
familiar (and scientifically unfounded) claims against biotech 
 
NEW DELHI 00000644  002.2 OF 005 
 
 
products.  Mahyco's CEO, Dr. Mahendra Sharma, said that the protests 
were organized by the "Organic Farmers Collective," a group based in 
the Tamil Nadu town of Erode.  Sharma told us that Mahyco and TNAU 
applied for and received the necessary clearances from both the 
Department of Biotechnology and Genetic Engineering Approval 
Committee and that the field trials were following all required 
guidelines.  This is not the first time that activists have 
attempted to disrupt biotech crop trials in the state. 
 
TAMIL NADU ANNOUNCES INDUSTRIAL 
POLICY FOR SMALL INDUSTRY 
-------------------- 
 
¶6.  (U) Tamil Nadu officials announced on February 23 a new Policy 
on Micro, Small, and Medium industries.  The new policy seeks to 
encourage the growth of small business by relaxing certain building 
regulations; providing grants for setting up privately owned, 
dedicated industrial estates for small industry; and providing some 
capital subsidies.  Tamil Nadu's Industries Secretary told Consulate 
Chennai that the policy is designed to create a large number of jobs 
by focusing on the labor-intensive small industry sector, which 
tends to rely on the state's large supply of cheap, unskilled and 
semi-skilled labor for production rather than more expensive capital 
machinery. 
 
MUMBAI HIGH COURT TO DECIDE 
CASE ON ENTRY OF FOREIGN 
LAW FIRMS IN INDIA 
------------------- 
 
¶7.  (U) Foreign law firms are entering final arguments before the 
Mumbai High Court in a decade-old case challenging the entry of 
foreign law firms into India.  In 1995, Lawyers Collective, a public 
interest legal services provider, filed a petition opposing the 
legal practice, in India, of three foreign law firms, two from the 
US and one from the UK, after the Reserve Bank of India (RBI) gave 
the three firms licenses to open practices, which would function as 
liaison offices in India. 
 
¶8.  (U) Last year, the Ministry of Law and Justice looked at 
liberalizing the legal services sector and held talks with the 
Indian legal industry, during which the Ministry issued an affidavit 
stating that the practice of law in India is synonymous with only 
practicing Indian laws and regulations.  The Society of Indian Law 
Firms, the Bar Council of India and the British Indian lawyers 
association (BILA), oppose the entry of foreign firms in India. 
There is worry that a court decision in favor of foreign firms would 
allow the entry of more foreign law firms in India, although 
additional steps, including legislative amendments, would be 
required before foreign law firms were allowed to practice in 
India. 
 
BHARTI AIRTEL PARTNERS WITH INTERNATIONAL 
COMPANIES FOR NEW UNDERSEA CABLE 
--------------------------------- 
 
¶9.  (U) Indian telecom giant Bharti Airtel has announced it is 
partnering with five companies to build a $300 million 
high-bandwidth undersea fiber-optic cable that will connect Asia and 
the United States.  Bharti will work with Malaysia-based Global 
Transit Ltd, Google, Japan's KDDI Corporation, and Singapore's 
SingTel and Pacnet to set up the undersea cable by 2010 in order to 
sustain significant growth in data and internet traffic.  The 
undersea cable, Unity, is being built to meet the heightened 
broadband demand as a result of more services being offered through 
the internet and will offer alternative routes to ensure higher 
levels of resiliency and redundancy.  The undersea cable will 
connect Chikura (located off of Tokyo) to Los Angles and other west 
coast points in the US.  The need for more cables was underscored 
recently when several cables serving India were damaged. 
 
 
NEW DELHI 00000644  003.2 OF 005 
 
 
TENSION BETWEEN FCI AND STC 
OVER FAILED QUALITY TESTS 
OF IMPORTED WHEAT 
-------------------- 
 
¶10.  (SBU) Adding to the political storm brewing over the GOI's 
decision to import 2.3 million tons of wheat at a much higher cost 
than originally stated by the State Trading Corporation (STC), the 
Food Corporation of India (FCI) is now asserting that STC bought 
poor quality wheat stocks.  The FCI has claimed the imports were 
"inferior," "failed quality tests", and "would not give a healthy 
picture among the general public at large" since the wheat is 
directly or indirectly given to the consumer. The FCI has taken 
their claim against STC to the Food Ministry and is threatening to 
withhold payment. Based on the test results, FCI is also looking 
into recovering losses due to the inferior quality of the imported 
wheat as a result of STC's failed monitoring. According to its 
laboratory tests, FCI claims that 920,000 tons of the 1.5 million 
tons received were of poor quality and exceeds "contractual limits." 
The "contractual limits," for damaged grains and foreign matter is 7 
percent and the four samples showed damage of 10 percent to 11 
percent. The wheat in question was most likely Russia or Ukrainian, 
which is poor quality. 
 
¶11.  (U) FCI General Manager Kohli wrote in a letter to STC, "...the 
imported wheat stocks unloaded from ships are beyond contractual 
limits." Furthermore, in the letter Kohli contends that test results 
show STC hired surveyors did a poor job at the load port. The tested 
samples were taken from the 1.5 million tons of imported wheat 
stocks and of the 1.5 million tons, one million tons has already 
been distributed nationwide and through the public distribution 
system. Strongly opposing FCI's claims, STC has stated that 
according to their tests, the wheat met PFA standards before being 
shipped, and STC is not accountable for FCI testing done after the 
wheat was received by them. STC contends that they only handle 
pre-cleared cargo. Additionally, food secretary Nanda Kumar stated 
that under contention is not the quality of the imported wheat, but 
the appearance of it. 
 
CAN SMALL STORES AND LARGE, 
ORGANIZED RETAIL CO-EXIST? 
------------------- 
 
¶12.  (U) Indian press has described a new report by the 
International Food Policy Research Institute (IFPRI) that contends 
that India's "mom and pop" stores will continue to grow, but at rate 
of just 2-5 percent, despite the emergence of large, organized 
retail in India, which is expected to grow at a rate of 20-40 
percent.  According to the report, it could be one or two decades 
before small stores begin to lose business due to the presence of 
large retailers, during which time India will have the opportunity 
to create a plan for transitioning small retail owners into the big 
retail sector by either co-opting them or helping them find other 
jobs. 
 
¶13.  (SBU) The study will reportedly become a part of the Indian 
Council for Research on International Economic Relations (ICRIER) 
study on the impact of organized retail on small stores in India, a 
government-commissioned study that has not yet been made public. 
Additionally, the IFPRI report asserts that farmers and consumers 
will benefit early on from a modern retail sector and small stores 
will only be negatively affected when the share of organized retail 
in food approaches 25-30 percent and it is currently at 1 percent, 
but is growing at a rate of 30 percent.  In contrast to the IFPRI 
report, parts of the ICRIER study that have been leaked claim that 
half of small retailers surveyed report decreases in sales and more 
than half of all retailers expressed that competition from organized 
retailers is the reason for their lower sales. 
 
LALU'S POPULIST RAILWAY 
BUDGET 2008-09 
 
NEW DELHI 00000644  004.2 OF 005 
 
 
----------------- 
 
¶14.  (SBU) Railway Minister Lalu Prasad in his fifth consecutive 
railway budget speech presented to parliament on February 25 
announced a number of populist measures keeping an eye on general 
elections due to be held in 2009. With a track record of having 
served as railway minister since 2004 without raising fares, Lalu 
announced token cuts in fares across all classes of passengers, 
including air conditioned classes to take on competition from low 
cost airlines. Minor concessions were awarded to aged women, 
disabled, AID patients and girl children. In addition, a 5% cut in 
freight rates on petrol and diesel was proposed.  The railway budget 
also announced a number of forward looking measures for the average 
passenger including enhanced e-ticketing options, TV and internet on 
trains, raised platforms, better information on tickets and train 
running status through electronic display boards, modular toilets, 
stress on cleanliness, escalators and multi-level parking facility 
at selected stations. He also announced 53 new trains - including 10 
new "Garib Raths" (poor man's chariots), with the maximum number of 
trains going to Bihar, his state constituency and also a special 
train between Delhi-Pune for the Commonwealth Youth Games. 
 
¶15.  (SBU) The railway budget has mapped a massive investment 
blueprint plan of $18.8 billion over the next seven years for 
creating new capacities on high freight traffic routes. Other 
measures announced were a 1,000-MW power plant in collaboration with 
NTPC at Bihar, a new rail coach factory in Kerala, a new wagon 
reconstruction unit in Bihar and stainless coaches for all trains by 
¶2010. Lalu's budget focus was on public-private partnership (PPP) 
projects for expansion of the network, modernization and upgradation 
of the technology, providing world class facilities at metro 
stations, setting up new rolling stock facilities and construction 
of multi-modal logistics parks over the next five years. Out of the 
$62.6 billion investment over the next five years, Lalu hopes to 
attract $25 billion through PPPs.  Newspaper reports that the 
existing players may face competition from foreign players such as 
General Electric, Alstom and Bombardier. 
 
¶16.  (SBU) Greater efficiency attributed to low incremental cost and 
a strategy to increase traffic volume has helped Indian Railways to 
generate an expected cash surplus of $6.3 billion for FY 2007-08 and 
the operating ratio (a broad efficiency indicator of the amount 
spent for earning every rupee) has improved to 76%, one of the best 
in the world. The Sixth Pay Commission report (to be released soon 
by GOI) would entail an additional $1.3 billion for railway staff 
salaries and this would result in  marginally lower cash surplus and 
higher operating ratio of 81.4% next year.  The Railways has about 
1.4 million employees and an equal number of pensioners. 
 
NEW DELHI DEFERS SEZ 
DENOTIFICATION IN GOA 
-------------- 
 
¶17.  (U) The Commerce Ministry halted development of 23 SEZs in Goa 
on February 25, following a request from the state government. 
Three of these SEZs had been notified -- received final approval and 
clearance -- and begun development, including an Indian 
pharmaceutical company that had already spent more than 200 million 
rupees (roughly USD5 million) in a 400 acre pharmaceutical zone in 
Keri.  Commerce Secretary G.K. Pillai, who heads the Board of 
Approvals (BoA) for SEZs, said New Delhi was initiating talks with 
Goa's government to denotify the SEZs, but declined to comment on 
whether these developers will be compensated.  Indian press on 
Thursday noted that denotification would still leave Goa's 
government liable for compensation to the developers. 
 
¶18.  (SBU) Former Goa MLA Mathany Saldhana, who has led state 
protests of the SEZs, said that the Commerce Ministry's move is a 
first step in saving the state from the loss of its "cultural 
heritage" and vowed not to rest until the three notified SEZs were 
also withdrawn.  There is no provision in the 2005 SEZ Act for 
 
NEW DELHI 00000644  005.2 OF 005 
 
 
denotification of a project; however, Commerce Minister Kamal Nath 
in January said that the Act could be reviewed and the issue was 
referred to the Law Ministry.  The SEZ Act currently allows the 
government to issue policy directions to the BoA. Indian press on 
Thursday reported that a century-old General Clauses Act, which 
covers all notifications passed by the center, might be sufficient 
to allow the Center to de-notify the SEZs.  This could allow New 
Delhi to avoid Parliament or a presidential ordinance to amend the 
SEZ Act.  Comment: The central government has deferred a final 
decision on the de-notifications, probably hoping to dissuade the 
Goan government from proceeding or to maximize the compensation to 
the notified companies.  How much the Center allows Goa to get away 
with rescinding SEZ decisions will set a precedent for other states 
and send a signal to potential investors.  End comment. 
 
¶19.  (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi 
 
MULFORD