VZCZCXRO9297
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHNE #1845/01 1851309
ZNR UUUUU ZZH
R 031309Z JUL 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 2501
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
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

UNCLAS SECTION 01 OF 04 NEW DELHI 001845 
 
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 MNUGENT 
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 30 TO JULY 3, 2008 
 
¶1. (U) Below is a compilation of economic highlights from Embassy 
New Delhi for the week of June 30 to July 3, 2008, including the 
following: 
 
-- INDIA AND JAPAN INK CURRENCY SWAP DEAL 
-- DRAFT CCI REGULATIONS EXCLUDE SMALL MERGERS 
-- INDIAN DOMESTIC CARRIERS FORCED TO INCREASE AIR FARES 
-- NEW DIRECTOR GENERAL OF CIVIL AVIATION (DGCA) 
-- NEW FERTILIZER POLICY - SMALL POSITIVE STEPS, MORE AWAITING 
--UPDATE ON INDIA'S EXTERNAL SECTOR 
-- CHENNAI'S DRIVERS PANIC OVER FUEL SHORTAGE 
-- CATERPILLAR TO INVEST USD 200 MILLION IN TAMIL NADU 
 
INDIA AND JAPAN INK CURRENCY SWAP DEAL 
-------------------------------------- 
 
¶2. (U) India and Japan signed a bilateral swap arrangement (BSA) at 
Basel in Switzerland on June 29 to help safeguard their economies 
from any future balance of payments crisis.    The BSA, signed by 
Reserve Bank of India's Governor Reddy and Bank of Japan's Governor 
Shirakawa, enables both countries to swap yen and rupees against the 
US dollar for up to $3 billion.  In practice, as needed, Japan will 
accept rupees and give US dollars to India while India will accept 
yen against dollars.  According to a joint press release, "the 
arrangement aims at addressing short-term liquidity difficulties and 
supplementing the existing international financial arrangements as 
one of the efforts in strengthening mutual co-operation between 
Japan and India."  A currency swap agreement to address the 
short-term liquidity crunch was first announced in August 2007 
during former Japanese Prime Minister Abe's visit to India. 
 
¶3. (U) During early negotiations on the BSA, Japan insisted that a 
swap agreement would only be possible if both countries had 
IMF-support programs.  For several years now, the IMF has not had a 
program in India.  In the end, the GOI successfully negotiated a 
swap agreement to allow up to 20 percent of the maximum amount ($3 
billion) of drawing to be disbursed without an IMF-support program. 
This is India's first-ever currency swap agreement.  Japan has 
similar arrangements with countries like China, South Korea, and 
Thailand.  Some Asian countries, including China, South Korea, and 
ASEAN members, are negotiating arrangements to convert bilateral BSA 
pacts into a multilateral scheme.  India may consider joining the 
proposed ASEAN-plus-three currency swap scheme in the future. 
 
DRAFT CCI REGULATIONS EXCLUDE SMALL MERGERS 
------------------------------------------- 
 
¶4. (U) The Competition Commission of India (CCI), likely to be 
operational by the end of 2008, has released amended draft 
regulations regarding mergers and acquisitions of companies.  The 
CCI has proposed that the commission will only be responsible for 
approving large mergers and acquisitions (M&As). Small and 
insignificant M&As will no longer require the CCI's approval, as had 
been earlier proposed under the Competition Act amendments passed in 
September 2007.  Under the proposed rules, a large company will be 
allowed to acquire a smaller firm with a turnover of up to $140 
million (or assets of up to $47 million) without having to get a 
clearance from CCI, even if the combined turnover of the two 
companies exceeds $700 million - a previously defined limit under 
the amended Competition Act for notifying and securing approval from 
CCI.  To ensure CCI rules are aligned with those of the stock market 
regulator, Securities and Exchange Board of India (SEBI), firms 
would be allowed to acquire up to 15 percent equity in other 
companies (without a controlling stake) or up to 5 percent a year 
without having to inform the CCI.  These and other draft regulations 
have been designed to ensure the CCI does not act as a bottleneck to 
merger activity, and the pace of small M&A activity continues 
smoothly.  Draft regulations are available on the CCI's website: 
http://www.competition-commission-india.nic.i n/ 
 
INDIAN DOMESTIC CARRIERS FORCED TO INCREASE AIR FARES 
--------------------------------------------- -------- 
 
 
NEW DELHI 00001845  002 OF 004 
 
 
¶5. (U) Rising aviation turbine fuel (ATF) prices have led to higher 
operating costs for air carriers in India, which in turn has 
resulted in higher air fares of 10 percent and reduced passenger 
growth of 11 percent over the last few months, according to media 
sources.  This has adversely impacted the low cost carrier model in 
India and has retarded future growth prospects in the aviation 
industry. Budget airlines serve roughly half of India's 38 million 
domestic passenger market.  Last year, India witnessed a growth of 
30 percent in air passengers, largely due to cheap fares offered by 
these budget carriers. 
 
¶6. (U) Public sector oil marketing companies have again raised the 
prices of ATF by 4 to 7 percent for domestic airlines and by 5 
percent for international carriers as of July 1. ATF prices for 
domestic operators include customs duty of 10 percent, excise duty 
of 8.16 percent and local sales tax of 23 percent.  Recently, four 
Indian State governments - Andhra Pradesh, Kerala, Maharashtra and 
Rajasthan, reduced the sales tax on ATF to 4 percent.  ATF prices 
for domestic operators in India are approximately 60 to 70 percent 
higher than international benchmarks. 
 
¶7. (U) Most domestic carriers have announced fare hikes even as data 
on air passenger growth showed a deceleration to 6.8 percent in May 
as opposed to a high of 35.7 percent growth rate in the same month 
in 2007.  With mounting losses and dwindling investor confidence, 
some of the airlines have no choice but to cut down on scheduled 
flights.  The Indian civil aviation industry is expected to lose of 
over $ 2.2 billion this financial year.  Jet Airways CEO Wolfgang 
Prock-Schauer said publicly that it is unlikely that prices will 
come down soon. 
 
NEW DIRECTOR GENERAL OF CIVIL AVIATION (DGCA) 
--------------------------------------------- 
 
¶8. (U) The Union Public Service Commission has selected Dr. Zaidi, 
an Indian Administrative Service (IAS) officer of the 1976 batch 
from the Uttar Pradesh cadre, to succeed Kanu Gohain as DGCA.  Dr. 
Zaidi is currently India's representative to the International Civil 
Aviation Organization (ICAO) in Montreal and earlier served as a 
Joint Secretary in the Ministry of Civil Aviation.  A.K. Chopra, the 
current Joint Director-General at the DGCA, has filed a petition 
with the Central Administrative Tribunal (CAT), challenging the 
entire selection process and guidelines followed for appointment of 
the new DGCA.  Chopra who is an experienced officer in the aviation 
sector strongly feels the regulation that made him ineligible to 
compete for the DGCA post could have been waived as it was done to 
accommodate Zaidi.  Post expects Zaidi to be the final appointee. 
 
NEW FERTILIZER POLICY - 
SMALL POSITIVE STEPS, MORE AWAITING 
----------------------------------- 
 
¶9. (U) Last week, the Indian Cabinet approved the Department of 
Fertilizer's new subsidy policy for phosphate and potassium 
fertilizers.  The old policy, which expired this past March, 
resulted in a difficult situation where manufacturers lacked 
government approved cost for raw materials and finished fertilizers 
to refer to.  Some Indian states witnessed shortages of complex 
fertilizers in recent weeks as fertilizer companies stopped imports 
of raw materials such as sulphur and phosphoric acid due to high 
global prices. 
 
¶10. (U) Di-ammonium phosphate (DAP), urea, and muriate of potash 
(MoP), are the three most widely used fertilizers in the country. 
Under the new scheme, retrospectively effective April 1, 2008, 
subsidies paid to domestic producers of DAP has been brought in line 
with imported DAP.  The domestic cost of producing the phosphate 
component of a fertilizer will be linked to the international cost 
of production of phosphorus as calculated from imported DAP.  A 
similar pricing mechanism is likely to be utilized for MoP as well. 
In FY 2007-08, India produced 32.3 million tons of fertilizer and 
imported 14 million tons (with DAP imports alone totaling 8 million 
tons).  The previous policy allowed only a small price margin making 
 
NEW DELHI 00001845  003 OF 004 
 
 
domestic production unviable and increased dependence on imported 
fertilizers. 
¶11. (U) The new policy also brings two new products, triple super 
phosphate fertilizer (a cheaper substitute for DAP) and ammonium 
sulphate under the subsidy scheme.  A buffer stock of 350,000 tons 
of DAP and 100,000 tons of muriate of potash will be required to be 
kept by the Department of Fertilizer for meeting any exigency.  The 
policy also introduces an "outlier" concept under which importers 
contracting phosphate and potassium fertilizers at prices lower than 
the industry's collectively bargained average import prices will be 
entitled to retain 65 percent of the price difference, with the 
remaining balance of 35 percent going to the government. 
¶12. (U) According to the press note of the Ministry of Chemicals and 
Fertilizers, the concession scheme will allow the government to save 
$274 million (Rs 12 billion) on subsidy payments.  Analysts indicate 
that given the rise in input costs, coupled with the fact that 
retail prices have remained unchanged since 2002, India's subsidy 
bill will continue to rise.  The fertilizer subsidy bill is 
estimated to reach $22 billion (Rs 950 billion), versus the budgeted 
amount of $7.3 billion (Rs 310 billion) for FY 2008-09.  The 
additional amount of subsidy will be kept off-balance sheet and paid 
in bonds to fertilizer companies. 
¶13. (U) Comment:  The new policy seeks to support the balanced use 
of nutrients and to encourage the domestic fertilizer industry to 
seek long-term supply arrangements for fertilizer raw materials, 
intermediates, and finished products.  Ultimately, however, since 
the end use - the farmer - still pays only a fraction of the actual 
cost of this product, inefficient resource allocation continues on a 
large scale.  In addition, despite cosmetic attempts to keep the 
expenditure off the GOI's fiscal account, the damage to the GOI 
fiscal situation will increase if international fertilizer prices 
remain high.  Whether this policy will continue after Indian 
domestic elections take place remains to be seen.   End Comment. 
 
UPDATE ON INDIA'S EXTERNAL SECTOR 
--------------------------------- 
 
¶14. (U) The Reserve Bank of India's data released this week shows 
that India's current account deficit (CAD) widened in FY 2007-08 to 
$17.4 billion, about 1.5% of the GDP, versus $9.8 billion, or 1.1% 
of GDP in the previous year. The CAD continued to be financed by a 
comfortable margin with capital inflows of $26 billion and $110 
billion in Q4 and full-year FY 2007-08, respectively.  The immediate 
cause of the higher-than-expected CAD was a sharply higher 
merchandise trade deficit for Q4 FY 2007-08 at USD 23.8 billion. 
The full-year merchandise trade deficit rose to $90 billion from $63 
billion.  In the first two months of the current fiscal year, the 
trade deficit further widened to $20.6 billion, largely due to 50.8 
percent rise in oil imports and a sharp slowdown in exports growth 
in May. 
 
¶15. (U) Latest Ministry of Commerce's data shows that after 
registering a robust growth of 31.8 percent in April 2008, India's 
exports slowed in May, registering a growth of 12.9 percent in 
dollar terms at $13.8 billion.  Exports slowed due to lower global 
demand, a ban on food grain and steel exports. The rupee depreciated 
nominally five percent in May, but with inflation currently at 11.4% 
rupee appreciation continues in real terms, further eroding export 
competitiveness.  Imports remained strong in May at $24.5 billion 
growing by 27.1% in dollar terms over the same period last year. 
Cumulatively exports between April-May grew by 21.7 percent to reach 
$28 billion while imports rose by 31.7 percent at $48.8 billion. 
The large increase in imports was mainly caused by oil imports 
valuing $16.5 billion. 
 
¶16. (U) The 30 percent growth in invisible earnings at $72.7 billion 
helped reduce the margin of the CAD.  Private transfers, mainly 
including remittances from overseas Indians ($42.8 billion) and 
software service exports ($37 billion) were primarily responsible 
for the strong rise in invisibles. 
 
¶17. (U) Buoyant capital flows in FY 2007-08 were led by foreign 
investment and external commercial borrowing.  $29.3 billion was 
 
NEW DELHI 00001845  004 OF 004 
 
 
portfolio investments, while foreign direct investment (FDI) totaled 
$15.5 billion.  Indian companies acquired nearly $22 billion through 
external commercial borrowings during the fiscal year.  However, 
during the final quarter portfolio flows were negative by -$3.7 
billion and external commercial borrowing, hampered by restrictions 
imposed in August 2007, dropped 24 percent over the previous quarter 
to $4.8 billion.  This left FDI as the largest component of capital 
inflows for the quarter at $6.4 billion.  The surge in capital 
inflows led to an additional $110.5 billion in foreign exchange 
reserves during FY 2007-08, including valuation changes.  On June 
27, total foreign exchange reserves totaled $312.5 billion. 
¶18. (U) India's outstanding external debt rose to $222.1 billion at 
end March 2008, compared with $169.7 billion at end March 2007. The 
external debt to GDP ratio rose to 18.8 percent at end March 2008 
from 17.8 percent at end March 2007.  The rise in debt was mainly 
due to external borrowings by companies to finance technological 
upgrading and capacity expansion.  Long-term debt on a residual 
basis accounted for $137 billion or 62.4 of the total debt during 
the year, while the remainder, short-term debt stood at $82 billion 
or 37.6 percent.  Rupee debt continued to remain constant at $2 
billion.  The ratio of foreign exchange reserves to short-term 
external debt rose to 140 percent from 117 percent in the previous 
year. 
CHENNAI'S DRIVERS PANIC OVER FUEL SHORTAGE 
------------------------------------------ 
 
¶19. (U) Chennai's drivers faced long queues at the pump on June 30 
and July 1 as fears of a "fuel shortage" gripped the public.  Some 
customers waited hours for a fill-up of gasoline; diesel was even 
harder or impossible to obtain.  Recent price hikes, the 
unavailability of regular-grade petrol, supply disruptions, and 
fears of the impact of a national truckers' strike (which began on 
July 2) all apparently combined to cause the panic-buying in Chennai 
and some other cities in Tamil Nadu and Puducherry.  The long queues 
generally disappeared on July 2 following government assurances that 
fuel supplies were not in danger. 
 
¶20. (U) An executive from the Bharat Petroleum Corporation Limited 
(BPCL, which runs the largest network of retail gas stations in 
South India) told Consulate Chennai that delays in awarding 
contracts to coastal shippers disrupted the movement of supplies, 
particularly of diesel.  He said that BPCL began rushing supplies to 
Chennai from Kochi in response to the panic buying and long queues. 
 
 
¶21. (U) The efforts to ensure that Chennai remained well-supplied 
with diesel, however, caused some shortages elsewhere in Tamil Nadu, 
an official from the Tamil Nadu Petroleum Dealers Association told 
the Consulate.  He said that it would take a week to restore the 
usual distribution system. 
 
CATERPILLAR TO INVEST USD 200 MILLION IN TAMIL NADU 
--------------------------------------------- ------ 
 
¶22. (U) Chairman and CEO of Caterpillar James Owen announced while 
visiting Chennai on June 25 his company's plans to invest an 
additional USD 200 million in India.  A Caterpillar executive told 
Consulate Chennai that investments will focus on the company's Tamil 
Nadu facilities.  This investment, he said, will allow Caterpillar's 
Chennai facility to expand its product range, efficiency, and 
research and design capabilities.  The company hopes to make its 
Chennai factory a major production hub for the south and south-east 
Asian markets. 
 
¶23. (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi 
 
MULFORD