VZCZCXRO8709
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHNE #1638/01 1651244
ZNR UUUUU ZZH
R 131244Z JUN 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 2190
INFO RUEHCG/AMCONSUL CHENNAI 3082
RUEHCI/AMCONSUL KOLKATA 2352
RUEHLH/AMCONSUL LAHORE 4447
RUEHBI/AMCONSUL MUMBAI 2165
RUEHPW/AMCONSUL PESHAWAR 4879
RUEHIL/AMEMBASSY ISLAMABAD 4985
RUCPDOC/DEPT OF COMMERCE WASHDC
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 001638 
 
SIPDIS 
SENSITIVE 
 
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 
EEB/CIP DAS GROSS, FSAEED, MSELINGER 
USTR FOR CATHERINE HINCKLEY 
 
E.O. 12958: N/A 
TAGS: EAGR EFIN EINV EPET ETRD SENV IN ECPS BEXP
 
SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF 
JUNE 9 TO JUNE 13, 2008 
 
REF  A) 
 
NEW DELHI 00001638  001.2 OF 005 
 
 
¶1.  (U) Below is a compilation of Economic highlights from Embassy 
New Delhi for the week of June 9 to June 13, 2008, including the 
following items: 
 
-- RANBAXY FOUNDING FAMILY SELLS INTEREST TO DAIICHI SANKYO 
-- INDIA FACES HIGHER FERTILIZER COSTS AND 
   SUBSIDIES AS GOI ANNOUNCES NEW POLICY 
-- INDIA'S INDUSTRIAL SECTOR REBOUNDS IN APRIL 
-- SAJJAN JINDAL NEW ASSOCHAM PRESIDENT FOR 2008-09 
-- U.S. COMPONENT MAKERS EYE NEW RENAULT-NISSAN PLANT 
-- FERTILIZER SHORTAGES CAUSE RIOTS IN KARNATAKA 
-- BUOYANT DIRECT TAX REVENUES 
-- INSURANCE REGULATOR GETS A NEW CHAIRMAN 
-- AIRLINE MARGINS HIT BY RISING FUEL PRICES 
 
RANBAXY FOUNDING FAMILY SELLS INTEREST TO DAIICHI SANKYO 
--- 
 
¶2. (U)  Malvinder Mohan Singh, son of the founder of India's largest 
generic-drug manufacturer, Ranbaxy Ltd., and CEO of the company, 
this week agreed with other family members to sell their entire 
34.8-percent stake in Ranbaxy.  The purchaser is Daiichi Sankyo, the 
third-largest Japanese pharmaceutical company, which bought the 
shares for USD 2.23 billion.  The deal is subject to regulatory 
approvals with anticipated completion by March 2009.  Daiichi will 
also launch an open-market tender on the Bombay Stock Exchange to 
buy another 20 percent of Ranbaxy shares, thereby establishing a 
controlling stake in the company of 50.1 percent or more.  According 
to press, Daiichi had been looking at opportunities to buy a generic 
major with R&D facilities.  The Ranbaxy deal gives Daiichi access to 
the generics market in 60 countries, including emerging markets. 
India's own pharmaceutical market is projected to expand by more 
than 12 percent a year in the short to medium term. 
 
INDIA FACES HIGHER FERTILIZER COSTS AND 
SUBSIDIES AS GOI ANNOUNCES NEW POLICY 
--- 
 
¶3. (U) Indian fertilizer subsidies may be the next locus for a 
crisis, after the recent reduction of oil subsidies in response to 
negative impacts on oil-marketing companies' liquidity.  The 
fertilizer subsidy is estimated at USD 22 billion for FY 
2008-09--more than double last year's USD 10 billion.  Last year, 
however, government bonds used to pay fertilizer manufacturers 
covered just one fifth of the subsidy.  The remainder of the subsidy 
was covered by direct cash payments from the government.  This year, 
fertilizer bonds are slated to cover two thirds of the subsidy, as 
the government only marginally increased the cash subsidy in the 
budget, while fertilizer prices soared.  This has prompted the 
Fertilizer Association of India (FAI) to write a letter to Prime 
Minister Singh to intervene in the matter.  Industry experts opine 
that fertilizer bonds are an inefficient form of assistance for the 
industry's working-capital needs, as they are typically 
substantially discounted to face value when sold in the secondary 
market.  FAI further argues that the issuance of bonds will not 
reduce the severity of the cash-flow problem, as suppliers of 
fertilizer feedstock are not keen to extend further credit to the 
industry on the basis of the bonds.  Banks and financial 
institutions also do not want to extend their working-capital limit. 
 Fertilizer manufacturers claim that selling the bonds at discounted 
rates will badly affect the bottom lines of the cash-strapped 
fertilizer units and will threaten their supply and operations. 
Most of the 22 fertilizer companies have incurred losses on the 
resale of USD 1.9 billion in bonds from last year's allocation of 
the instruments. 
 
NEW DELHI 00001638  002.2 OF 005 
 
 
 
¶4. (U) Indian fertilizer companies, which must sell to farmers at 
government-mandated prices, are facing soaring input prices in 
global markets.  India consumes about 48 million metric tons of 
fertilizers, of which 14.5 million tons are imported.  While urea 
was priced at USD 341/ton last year in the international market, 
this year, its price has almost doubled to USD 625/ton.  The current 
average landed price of di-ammonium phosphate (DAP) exceeds USD 
1,300/ton, compared to USD 644/ton in 2007-08.  Similar trends are 
evident in all other fertilizers.  Claims of shortfalls in Andhra 
Pradesh and Maharashtra this past week are partly because of 
disruptions in freight movement due to ongoing Gujjar agitation in 
Rajasthan, but also due to fertilizer manufacturers' cutting back 
production in light of what they say is the government's refusal to 
clear last year's subsidy bill of USD 10 billion. 
 
¶5. (U) Meanwhile, the Cabinet Committee on Economic Affairs on June 
12 finally approved the much-awaited fertilizer pricing policy.  The 
new nutrient-based subsidy policy lowers the mandated prices of more 
complex fertilizers to remove the price bias and overuse of urea and 
DAP fertilizers.  The Cabinet hopes to encourage farmers to apply a 
more appropriate mix of fertilizers to increase yields.  The prices 
of complex fertilizers will fall by an average of USD 33 (INR 1,416) 
per metric ton.  Prices of other fertilizers like urea would not 
change.  The new policy also provides for a uniform freight subsidy 
for all fertilizers which will help farmers to obtain fertilizers in 
the crucial sowing season.  Analysts indicate that nutrient-based 
pricing is likely to increase the government's subsidy bill, 
primarily on account of high raw-material prices.  The existing 
price of urea, an already heavily subsidized nitrogen input, will 
continue to dictate the price of nitrogen-based complex 
fertilizers. 
 
INDIA'S INDUSTRIAL SECTOR REBOUNDS IN APRIL 
--- 
 
¶6. (U) The latest economic data indicates that India's industrial 
growth for the month of April recovered to 7 percent, higher than 
the revised growth of 3.9 percent in March 2008, although lower than 
the 11.3-percent growth of April 2007.  Mining output rose by 8.6 
percent during the month, faster than the 2.6 percent of April 2007. 
 The manufacturing ector grew by 7.5 percent in April 2008, after 
growing at 3.9 percent in March.  This, however, is lower than the 
12.4-percent growth recorded in April 2007.  The capital-goods 
sector improved its performance and registered a healthy growth of 
14.2 percent, versus 10.9 percent in April 2007.  The consumer-goods 
sector posted a growth of 8.9 percent, recovering from a low of 0.9 
percent in the previous month.  However, the food-products sector 
registered a minus-6.3-percent growth in April 2008, compared to a 
high of 50.8 percent in April 2007.  Electricity generation grew by 
just 1.4 percent, compared to 8.7 percent a year ago.  Economists 
expect industrial growth to average in the range of 7.5 to 8 percent 
in FY 2008-09, as compared to 8.3 percent last year. 
 
SAJJAN JINDAL NEW ASSOCHAM PRESIDENT FOR 2008-09 
--- 
 
¶7. (U) Mr. Sajjan Jindal, Vice Chairman and Managing Director of 
Jindal South West Steel (JSW Steel), on June 3 became the President 
of the Associated Chambers of Commerce and Industry of India 
(ASSOCHAM) for the year 2008-09.  Jindal started his career with the 
western-region operations of O. P. Jindal Group in 1983 after 
graduating from Bangalore University.  He was the Senior Vice 
President of ASSOCHAM during 2007-08 and succeeds Venugopal Dhoot of 
the Videocon group. 
 
U.S. COMPONENT MAKERS EYE NEW RENAULT-NISSAN PLANT 
 
NEW DELHI 00001638  003.2 OF 005 
 
 
--- 
 
¶8. (U) On June 7, a USD 1 billion Renault-Nissan joint venture broke 
ground for its Chennai plant.  The plant is expected to begin 
operations in 2010 and will have the capacity to produce 400,000 
cars per year.  Renault-Nissan officials told Post that the company 
expects to source over 70 percent of its components locally, 
including from the many U.S. component makers based in Chennai.  The 
U.S. component makers are planning to expand capacity to meet 
increased demand when Renault-Nissan begins production.  The 
managing director for component maker Visteon said that his company 
will expand operations to meet the expected growth in demand from 
Renault-Nissan.  Radiator manufacturer Modine is planning to 
construct a second unit even before the company's first Chennai 
facility comes on line later this year. 
 
FERTILIZER SHORTAGES CAUSE RIOTS IN KARNATAKA 
--- 
 
¶9. (U) Fertilizer shortages led to riots in northern Karnataka.  The 
state-run cooperative outlets that normally meet over 60 percent of 
the demand for fertilizer in the South Indian state found themselves 
short of supplies.  As the monsoon set in earlier than usual, the 
shortages in the government cooperatives forced farmers to look to 
private traders, who hiked prices in response to the unusually high 
demand for their fertilizer.  The farmers lashed out at the state 
government, blaming procrastination by bureaucrats for their 
predicament.  A senior government official responsible for procuring 
supplies told Post that the state's recent elections were to blame. 
He said that he had requested funds in March 2008 but that the 
Governor's office, which was in control after the November 2007 
imposition of President's rule in the state, was focused on the May 
2008 elections. 
 
BUOYANT DIRECT TAX REVENUES 
--- 
 
¶10. (U) India's direct tax revenues have tripled over the last four 
years.  The Ministry of Finance released revised figures on June 6, 
indicating direct tax collection reached roughly USD 79 billion (INR 
3,145 billion) in FY 2007-08, up 36 percent from FY 2006-07.  Of 
this, corporate taxes grew by 32 percent to USD 48 billion (INR 
1,907 billion), while personal income tax grew by 42 percent to USD 
29 billion (INR 1,142 billion).  The robust revenue growth is due to 
high economic growth, better tax compliance by taxpayers, and 
improved tax administration and enforcement by the Income Tax 
Department.  Finance Minister Chidambaram at a recent conference of 
Chief Commissioners and Director Generals of Income Tax asked the 
Central Board of Direct Taxes (CBDT) to collect more revenues to 
meet the requirements of the social sector, health, and education. 
The budget estimate for direct tax collections for this fiscal year, 
previously set at the end of February at USD 86 billion (INR 3,650 
billion), is likely to be revised upwards to USD 94 billion (INR 
4,000 billion).  Robust tax revenues may help the center and state 
governments to improve their fiscal situation, especially in the 
face of rising subsidies and recently reduced oil tariffs and excise 
duties. 
 
¶11. (U) The Finance Minister also expects the number of tax returns 
filed to cross 35 million this fiscal year, versus 27.3 million 
filed in FY 2007-08.  He noted that the Ministry recently instructed 
tax officials to prosecute those who have never filed returns or not 
filed for three years, if identified during search and seizure. Upon 
prosecution, tax evaders will have to pay a fine and, depending on 
the severity of the case, could also face imprisonment.  The tax 
authorities are also concerned about non-compliance with "tax 
deducted at source" regulations (i.e., tax withholding at the 
 
NEW DELHI 00001638  004.2 OF 005 
 
 
payroll level) by government ministries, particularly large 
employers Defense and Railways.  The CBDT is taking steps to 
"sensitize" government ministries to the need to ensure payroll 
deductions take place. 
 
¶12. (SBU) Comment:  Chidambaram's move to increase revenues this 
year demonstrates how important it is to him to try to keep to the 
fiscal-deficit targets mandated in the Fiscal Responsibility and 
Budget Management (FRBM) Act.  The loss of customs and excise duties 
as part of last week's oil price-hike package, combined with growing 
subsidies for oil, food, and fertilizer, and payments for the farmer 
debt-waiver program and the pending federal pay hike, are putting 
real stress on the fiscal deficit.  The proposed new direct-tax 
revenue target of INR 4,000 billion represents a 27-percent increase 
over last year.  Compared to the 36-percent increase in revenues 
from FY 2006-07 to FY 2007-08, this somewhat reflects the expected 
moderation in economic growth this fiscal year.  However, in order 
to really hit the proposed revised target, the Ministry of Finance 
will have to improve compliance.  There's plenty of room in India's 
generally weak tax-collection system for improvement, but much of 
that stems from special interests that may push back.  End comment. 
 
INSURANCE REGULATOR GETS A NEW CHAIRMAN 
--- 
 
¶13. (U) Effective June 10, Jandhyala Harinarayan, former Chief 
Secretary of Andhra Pradesh, has been appointed the new Chairman of 
the Insurance Regulatory and Development Authority (IRDA) by the 
Finance Ministry.  He replaces C. S. Rao, whose five-year term ended 
May 14.  Harinarayan, an Indian Administrative Services officer of 
the 1970 batch from the Andhra Pradesh cadre, has administrative 
experience serving in senior positions as Union Secretary to the 
Ministry of Water Resources and Principal Secretary, Irrigation in 
Andhra Pradesh.  He will have a five-year tenure at IRDA and is 
joining at a time when many new global insurers have lined up to 
enter the Indian market in joint ventures with local firms. 
Harinarayan is seen as a regulator with a broad vision who can carry 
forward more reforms.  The UPA government has been unable to push 
through legislative changes in the Insurance Act--specifically, 
raising the FDI cap in insurance--due to opposition from Left 
parties.  Finance Minister Chidambaram has recently indicated that 
efforts to convince coalition partners to increase FDI in the sector 
will continue. 
 
¶14. (U) Harinarayan told reporters that his mission is to widen and 
deepen insurance penetration in India, especially in the rural and 
health sectors, and encourage competition among insurers to give a 
better deal to consumers.  Measured in terms of premium collections, 
the penetration is close to 4.1 percent of GDP in the life segment 
and 0.6 percent of GDP in the non-life segment.  Harinarayan 
estimated that there is a case for lowering the premium on voluntary 
health-insurance policies that are renewed annually to make them 
more affordable to consumers.  He also identified a need to ensure 
greater transparency in unit-linked insurance plans, savings 
instruments that offer both life insurance and investment 
flexibility. 
 
AIRLINE MARGINS HIT BY RISING FUEL PRICES 
--- 
 
¶15. (U) Air traffic in India has grown tremendously in the last 
couple of years.  This growth has been fueled largely by cheap fares 
pioneered by low-cost carriers.  However, most airlines are losing 
money on their current operations.  Most of the domestic operators 
in India are new entities and are yet to break even.  While domestic 
capacity has increased sharply in the past year, mounting losses 
have forced the industry to reduce operating costs and rationalize 
 
NEW DELHI 00001638  005.2 OF 005 
 
 
passenger fares.  The need to add capacity while keeping losses in 
check has resulted in industry consolidation, by way of mergers and 
acquisitions.  Low-cost carriers that already operate on wafer-thin 
margins are planning to cut down on flights to reduce losses. 
 
¶16. (U) Aviation Turbine Fuel (ATF) now accounts for 35 to 40 
percent of airlines' total operating costs.  The unprecedented 
increase in fuel prices has compounded their losses.  Indian 
domestic carriers pay a 66-percent tax on ATF, eight times higher 
than what international carriers pay.  The higher rate of tax is 
eroding the profitability of Indian carriers by 11 to 16 percent. 
 
¶17. (U) The recent decision of state-run oil firms to cut ATF prices 
by 4.3 percent provides little relief, as ATF prices have doubled 
over the last year.  Indian carriers incurred losses of INR 40 
billion during the last fiscal year; the industry's health does not 
permit it to lose any more.  Airlines are expected to register a 
combined loss of INR 80 billion in 2008-09. 
 
¶18. (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi 
 
DAVISON