VZCZCXRO6664
RR RUEHBI RUEHCI
DE RUEHBI #0136/01 1050655
ZNR UUUUU ZZH
R 140655Z APR 08
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC 6141
INFO RUEHNE/AMEMBASSY NEW DELHI 7355
RUEHBI/AMCONSUL MUMBAI 1233
RUEHCI/AMCONSUL KOLKATA 1510
RUEHCG/AMCONSUL CHENNAI 1701
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 04 MUMBAI 000136 
 
SIPDIS 
 
SIPDIS 
 
DEPT PLEASE PASS TO USTR/AADLER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PHUM PGOV IN
SUBJECT: MUMBAI MASALA APRIL 14, 2007: SEBI OPENS DIRECT MARKET 
ACCESS, CII ANNUAL CONFERENCE, SUPREME COURT HEARS CASE ON SALWA 
JUDUM, SURAT TEXTILE FACTORY VISIT 
 
¶1.  (U) Sensitive But Unclassified. Please treat accordingly. 
 
-- SEBI Ushers in Direct Market Access for Institutional 
Investors 
 
-- Confederation of Indian Industries Annual Conference in Mumbai 
 
-- Supreme Court Hearing Draws Attention to Controversial Salwa 
Judum Movement in Chhattisgarh 
 
-- Textiles Lead Boom in Surat, Gujarat's Diamond Town 
 
SEBI Ushers in Direct Market Access for Institutional Investors 
--------------------------------------------- ------- 
 
¶2.  (U) On April 3, 2008, the Securities & Exchange Board of 
India (SEBI) issued a circular to the Bombay Stock Exchange 
(BSE) and the National Stock Exchange (NSE) proposing to allow 
the direct market access (DMA) facility for domestic and foreign 
institutional investors.  This facility allows these investors 
to use the broker's infrastructure to directly access and place 
their orders on the trading system of the two exchanges. 
Currently, all investors have to give their buy/sell orders to 
brokers and these orders get executed only after the broker 
enters them into the stock exchange's system. 
 
¶3.  (U) SEBI has for now, limited the direct market access 
facility to institutional investors, but the stock exchanges 
have the discretion to extend this facility to other categories 
of investors in the future.  This step will likely enhance 
trading volumes and market participation as Foreign 
Institutional investors (FIIs) and domestic institutions like 
mutual funds and insurance companies will be able to immediately 
execute trade orders in real time.  These investors can now 
execute algorithm-based, or "quant" trading, which enhances 
liquidity and market efficiency by seeking arbitrage 
opportunities often found in less-traded securities.  The 
automation of the trade order process will also give operational 
freedom and greater control over trading execution strategies. 
(Some institutional investors have complained about 
"front-loading," in which the broker keys in matching trades 
before those of their client.)  The DMA facility also reduces 
the risk of errors in manual order entries, provides greater 
transparency, increases liquidity and lowers impact costs for 
large orders, and facilitates better audit trails.  The speed of 
execution of deals via the DMA facility enables the use of 
decision support tools/algorithms for trading to quickly 
determine hedging and arbitrage opportunities. 
 
¶4.  (U) Ambrish Singh of Enam Securities, one of India's largest 
brokerage firms, told Congenofff that this proposal will allow 
investors and traders to execute their trades - either manually 
or through algorithm-based trading - from outside India by using 
the propriety system of approved dealers.  For this reason, 
Singh expected that this move will be good for derivative 
markets - which see about $10 billion/day in trade volumes - and 
will bring in more market participants.  He expected that this 
would benefit established brokerage houses in India at the 
expense of smaller dealers, who would not be able to develop 
their own in-house proprietary trading systems.  The Vice 
President for Legal Affairs at Merril Lynch echoed these 
sentiments, and said that FIIs especially will appreciate this 
move, as they can invest directly in the market, with no time 
lag.  In addition, investment banks can also offer this facility 
to their clients, one that is normally provided in mature 
capital markets. 
 
Confederation of Indian Industries Annual Conference in Mumbai 
--------------------------------------------- ----------------- 
 
¶5.  (U) On April 4, the Western Region chapter of the 
Confederation of Indian Industries (CII) hosted their annual 
conference titled "Challenges for a Higher Growth Economy."  All 
speakers at the conference were confident that India would 
continue to grow and maintain a high growth trajectory. 
Nevertheless, they acknowledged that internal and external 
challenges could cause the country's growth rate to slacken and 
that inclusive growth is a distant dream. 
 
¶6.  (U) K V Kamath, Chairman of ICICI Bank, believes that India 
can grow at 8-10 percent levels for the next 17-20 years.  He 
said that India is experiencing "transformational growth" which 
he explained is similar to the growth that had earlier 
 
MUMBAI 00000136  002 OF 004 
 
 
transformed the economies of South-east Asia and China.  He 
admitted that global linkages relating to high oil prices and 
commodity prices, the sub-prime crisis, possible U. S. recession 
and high inflation, will cause economic growth in India to 
slacken, but he believes that the extent of coupling of India 
with the world economy is significantly less.  He noted that 
India is not dependent on foreign capital for financing 
investment; the country is not an export economy and is only 
dependent on a few critical imports like oil.  He believes that 
the services sector which accounts for 60 percent of India's GDP 
will experience an assured growth rate of 6 percent annually. 
Kamath acknowledged that growth in the manufacturing sector 
which accounts for around 20 percent of the GDP may slacken but 
he believes that the strong growth in the service sector would 
create opportunities for manufacturing as well.  For these 
reasons, Kamath continued, "overall growth will be robust enough 
to carry on the growth momentum even if some sectors in India 
are impacted by external factors." 
 
¶7.  (U) U K Sinha, Chairman & Managing Director of UTI Asset 
Management Company, said that fiscal prudence and financial 
sector reform impede higher growth.  He believes that the 
government's commitment to fiscal discipline through control of 
the volume and direction of expenditure and disinvestment in 
government and state-owned companies can add 2 percentage points 
to GDP growth.  Sinha noted that 70 percent of Indians have no 
bank account, 80 percent have no insurance, 88 percent have no 
access to pension plans, and 77 percent of the Indian 
populations have loans from sources other than banks.  Therefore 
new regulations and new financial products are needed, he 
continued.   The development of a corporate bond market, foreign 
exchange liberalization, and financial sector reforms, can add 
1-2 percentage points to GDP growth, Sinha contended. 
 
¶8.  (U) Kevan Watts, the President of DSP Merrill Lynch, 
predicted that India will "soft land" to 8 percent real GDP 
growth next year provided the world de-couples from the possible 
¶U. S. recession.  If this does not happen, then India's GDP will 
grow at 6.5 percent in real terms, he continued.  Watts said 
that inflationary pressures caused by excess liquidity, high oil 
prices and a bad winter crop causing stagflation, and supply 
shocks dampening the investment climate are the biggest 
challenges to world growth.  Nevertheless, Watts believes that 
India will continue to grow at a healthy rate as the country has 
enough liquidity to support growth for many years.  However, 
inclusive growth remains a challenge for India, he added. 
 
¶9.  (U) All speakers at the conference emphasized the urgency 
for skill-building for the huge Indian workforce which has been 
touted as an asset for sustained economic growth.   Lt General S 
S Mehta, the Director General of CII, pointed out that India had 
380 million children aged 6-16.  He noted that the country's 
demographic dividend is not everlasting.   If these children are 
not trained, they will become a demographic liability, he 
warned.  Kamath stated that "the education system in India is 
not aligned to the aspirations of a skilled India,; he was 
referring to the educational systems inability to support both 
skilled manufacturing andskilled support jobs but a proper 
educational system was needed to keep the economy growing." 
Fitting the right skills to the right people will create job 
opportunities, empower them financially, and help the economy to 
grow, he continued.  This leads to inclusiveness and sustained 
growth, Kamath added.  Sinha agreed with Kamath and cautioned 
that the demand of the Indian industry is not likely to be met 
by the level of skill available today.  He praised the current 
Budget's initiative to set up 6,000 nodal elementary schools in 
the country which will improve education at the grassroots 
level.  Nevertheless, he called for trade and industry to play a 
greater role in creating skill sets and educating the younger 
generation. 
 
 
SUPREME COURT HEARING DRAWS ATTENTION TO CONTROVERSIAL SALWA 
JUDUM MOVEMENT IN CHHATTISGARH 
--------------------------------------------- 
 
¶10.  (U) On April 15, Indian Supreme court will again hear 
arguments from the Government of India (GOI), Government of 
Chhattisgarh (GOCH) and civil society petitioners about the 
legality of "Salwa Judum" (an all party village defense 
initiative against Naxalites) in the Dantewada district of 
central Indian state of Chhattisgarh.  Supreme Court judges 
hearing the petition remarked March 31, "The allegation is that 
 
MUMBAI 00000136  003 OF 004 
 
 
the state is arming private persons. You can deploy as many 
police personnel or armed forces to tackle the menace. But, if 
private persons, so armed by the state government, kill other 
persons, then the state is also liable to be prosecuted for 
abetting murder."  Though these remarks were widely reported by 
the print media as an indictment of "Salwa Judum", in reality, 
they are just "obiter dicta", remarks made during an ongoing 
hearing.  They are not an order. 
 
¶11.  (U) The hearing is the result of a "Public Interest 
Litigation" against Salwa Judum filed by three social scientists 
in 2007.  Their wish is that government should disband the camps 
and allow tribals to go to their villages for sowing season. 
The first hearing on this petition took place on March 31 in the 
Supreme Court.  GOCH argued that tribals are staying in the 
camps out of their own volition and would find it unsafe to 
return to villages.  GOCH police chief Vishwaranjan told the 
Rediff internet news portal that in fact, in addition to the 29 
official camps, villagers have themselves established several 
informal camps.  GOI counsel told the Supreme Court on March 31 
that GOI is willing to appoint an independent monitoring agency 
to survey camp conditions. 
 
¶12.  (U) The camps are the result of the marches in 2005 by 
Chhattisgarh Congress party and Leader of the Opposition 
Mahendra Karma of tribals against Naxalite activities.  Fearing 
reprisals from Naxalites, the tribals, who had participated in 
the marches, moved to government organized rudimentary refugee 
camps near towns. 
 
¶13.  (U) Various human rights groups such as Asian Human Rights 
Coalition (AHRC), People's Union for Civil Liberties as well as 
GOI's National Commission for Protection of Child Rights visited 
the camps in 2006 and 2007 and wrote about the abysmal 
conditions there.  AHRC estimates that about 45,000 tribals are 
currently in these camps.  The housing is primitive, food 
rations meager, and health and education services non-existent 
for camp inhabitants. 
 
¶14.  (U) The other important point of contention between GOCH 
and civil society is the hiring of tribal youth as special 
police officers (SPO).  Civil society groups say these are child 
soldiers, while GOCH contends that these are youth guarding the 
camps for minimal salary.  Civil society groups have also argued 
that special police officers are guilty of terrorizing villagers 
who were not part of Salwa Judum, while GOCH contends that SPO 
are essentially guarding IDP camp peripheries and do not carry 
out active police tasks.  (In 2006, and 2007, the SPOs have been 
killed with regularity in Naxalite attacks on IDP camps, which 
points to their not being well-armed.) 
 
¶15.  (U)  Congenoffs will follow the Supreme Court hearings over 
the next few months because the fate of Salwa Judum could have 
important implications for state-sponsored anti-terrorist 
initiatives throughout India. 
 
Textiles Lead Boom in Surat, Gujarat's Diamond Town 
--------------------------------------------- ------ 
 
¶16.  (U) In an extensive tour of the facilities in Surat, 
Gujarat, Congenoffs witnessed why Surat is called Western 
India's boomtown.  During a tour of the facilities of the 
Pratibha Group, Congenoffs learned about the manufacture of 
synthetic textiles.  Rakesh Chaudery, Group Director of the 
Pratibha Group, explained that the nylon fabric manufactured in 
Surat starts as plastic.  This is then spun until it is ten 
times thinner than human hair.  The resulting fiber is then 
spliced together to make fabric.  At another facility in Surat, 
chemical dyes are then added to the fabrics to color them; the 
company also sells dyes for other manufactuers.  At still 
another facility, the fabric is embroidered. 
 
¶17.  (U) Chaudery was very candid about the business.  He stated 
that despite booming sales the company's managers were 
constantly looking to reduce costs.  The prime cost that the 
company is trying to reduce is the cost of raw materials so 
despite the rising rupee the rising cost of crude oil has more 
than made up for any benefits that the rising rupee could 
supply.  He laughed that his blood pressure rises and falls as 
the price of crude oil rises and falls.  Briefly explaining the 
production process, Chaudery explained that crude oil is refined 
into benzene which is then used to make another organic chemical 
compound called caprolactam; this product is then used to make 
 
MUMBAI 00000136  004 OF 004 
 
 
nylon chits which are the main raw material that is imported for 
the nylon manufacturing process.  Chaudery said that to continue 
to cut costs the company was looking at backward-integration and 
would begin to manufacture nylon chits on-site soon and thus 
begin to import caprolactum.  By continuing to 
backward-integrate the company would continue to cut the 
value-added cost of production that was absorbed by outside 
vendors.  He explained that the company currently imports nylon 
chits from China and Taiwan as well as Thailand and Germany. 
Once the backward-integration is complete, the company will 
import the caprolactum from China and Taiwan. 
 
¶18.  (U) When speaking of his dye business, he said that the raw 
materials for this are also crude oil based.  However, 70-80% of 
the raw materials are locally produced, some in Gujarat by 
Reliance Industries which has a monopoly in the Indian market 
for some of the chemicals.   Besides using the dyes on his own 
fabrics, he stated that the company sold 90% of the products 
domestically while exporting a few niche products like 
fluorescent dyes and particular shades of yellow.  He said that 
the massive supply at comparatively little cost that China 
produces keeps him from exporting more. 
 
¶19.  (U) Other managers of the Pratibha Group estimated that 350 
textile processing plants existed in the Surat with 30,000 
small-scale power looms that produced an estimated 50,000 square 
meters of fabric every day.  Asked about the booming economy in 
Surat, they noted that much of the credit went to the immense 
improvement in power supply Gujarat had seen in recent years. 
In addition, they noted that they have been able to conduct 
business without bureaucratic hassles and if a hassle does 
arrive they can send an e-mail to the Chief Minister's office 
and receive a reply within 24 hours.  They also noted they are 
having constant problems recruiting employees and increasingly 
they are relying on migrants, usually men, from Orissa, Bihar, 
Maharashtra and Uttar Pradesh for labor. 
OWEN