VZCZCXRO8031
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHPW
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R 171100Z OCT 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 3819
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
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UNCLAS SECTION 01 OF 04 NEW DELHI 002735 
 
SIPDIS 
SENSITIVE 
 
STATE FOR SCA/INS AND EEB 
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD 
DEPT OF ENERGY FOR A/S KHARBERT, TCUTLER, CZAMUDA, RLUHAR 
DEPT PASS TO USTR CLILIENFELD/AADLER/CHINCKLEY 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
USDA PASS FAS/OCRA/RADLER/BEAN/CARVER/RIKER 
EEB/CIP DAS GROSS, FSAEED, MSELINGER 
 
E.O. 12958: N/A 
TAGS: EAGR EAIR ECON ECPS EFIN EINV ENRG EPET ETRD BEXP
KIPR, KWMN, PHUM, SENV, ASEC, IN 
 
SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF 
OCTOBER 13 TO OCTOBER 17, 2008 
 
¶1. (U) Below is a compilation of economic highlights from Embassy 
New Delhi for the week of October 13 to October 17, 2008, including 
the following: 
 
-- Chidambaram Still Eager for Reforms as Parliament Opens 
-- Industrial Production Index Drops, Other Data Positive 
-- Eastern India Feeling Pinch From Illiquidity 
-- Industry Chamber Protest Power Cuts in Tamil Nadu 
-- India and Burma Agree to Further Liberalize Trade 
-- Jewelry Exporters Concerned Over Holiday Sales 
-- Kingfisher-Jet Airways Deal Subject To Review 
 
Chidambaram Still Eager for Reforms as Parliament Opens 
--------------------------------------------- ---------- 
 
¶2. (SBU) With the special session of Parliament opening today, the 
Ministry of Finance has submitted for consideration and vote two key 
financial sector reform bills, but it is unclear whether the UPA 
government will take action on them or not.  The Banking Amendment 
Bill, which would raise foreign shareholders' voting rights to be 
commensurate with their equity holdings in banks, and the Pension 
Fund Regulatory and Development Authority (PFRDA) Bill, which 
essentially opens the pension system to India's vast unorganized 
sector, are considered "money bills" where votes count as votes of 
confidence on the government.  The UPA's slim majority, with new 
partners after the July confidence vote, makes a successful vote 
highly uncertain without BJP support. 
 
¶3.  (SBU) A key bill listed for introduction is an insurance 
amendment bill which would raise the FDI cap in insurance companies 
from 26% to 49%.  No one expects the bill to get passed in this 
session, as very few bills come to a vote in the same session in 
which they are introduced.  Thus, the government faces less risk in 
introducing the insurance legislation, and could point to it as a 
successful step in reform.  The bill still requires Cabinet passage, 
which was delayed yesterday, ostensibly because of Finance Minister 
Chidambaram's absence, as he focused on new liquidity measures for 
the country's financial markets.  There is still time for the 
Cabinet to pass the proposed bill and introduce it in Parliament, if 
Cabinet members are not dissuaded by the recent bailouts of global 
insurance companies, AIG and Fortis, both of which have joint 
ventures in India. 
 
¶4.  (SBU) The government has also listed for introduction an amended 
version of the Prevention of Money Laundering Act (PMLA), which is 
supposed to include new provisions reflecting guidelines from the 
Financial Action Task Force (FATF), where India is eager to move 
from observer to full member status.  Also listed for consideration 
and vote is an amended Companies Bill Act replaces a prior submitted 
bill. Press reports indicate that many of the requirements spelled 
out in the earlier bill were removed to streamline the process. 
 
Industrial Production Index Drops, Other Data Positive 
--------------------------------------------- -------- 
 
¶5.  (U) The Industrial Index of Production (IIP) showed an 
unexpectedly large drop in industrial activity for the month of 
August compared to August 2007, down to just 1.3% growth.  The index 
indicated that most of the drop was caused by negative growth in 
intermediate goods.  Capital goods growth also slowed to just 2.3%, 
although that slowdown is partially explained by the high growth of 
30.8% it is being compared to in August 2007.  The surprise drop has 
raised critics' concerns about the reliability and accuracy of the 
index.  The government is in the process of updating the IIP, as 
many consider it outdated and unreliable. 
 
¶6.  (U) Critics note that the IIP base is 1993-94, contains only 400 
items, and neither the basket nor the inter-basket weight 
distribution have been changed in the last 15 years.  Obsolete items 
like black and white televisions and typewriters are in the IIP, 
while goods in the IT and telecom sector are missing, as well as 
consumer items like DVDs and microwaves.  Many analysts thus point 
to other data that indicate still-steady growth across much of the 
 
NEW DELHI 00002735  002 OF 004 
 
 
industrial sector.  These indicators include exports up 35% in 
April-August, a similar increase in corporate tax revenues, a 30% 
rise in listed manufacturing companies' sales year on year in June 
2008 and a 28% increase in the revenues of capital goods firms. 
 
Eastern India Feeling Pinch From Illiquidity 
------------------------------------------ 
 
¶7.  (SBU) In Eastern India, contacts report that India's liquidity 
crunch during the last few weeks has led their infrastructure 
project financing to virtually stop.  Power companies like the 
National Thermal Power Corporation (which has a unit in Farakka in 
West Bengal) and the private sector CESC Limited (which supplies 
power to Kolkata) both had plans for equipment import for upgrade 
and capacity expansion.  Both are finding it difficult to borrow 
money from the banks to finance these plans.  In Kolkata's real 
estate sector, companies that are leveraged are finding it difficult 
to raise the balance finance.  The owner of a leading real estate 
company told post that since his company is not leveraged (which 
means they finance their projects with internal funds) he has not 
had any significant impact and has no liquidity problem.  However, 
he did not rule out the possibility of a general downturn in the 
real estate sector and his company may not be immune to it.  The 
real estate market in Eastern Indian is expecting people to postpone 
their decision to buy homes in the short term as they find it more 
difficult to access home loans from banks.  The same logic holds for 
sectors like automobiles, consumer durables (refrigerators, washing 
machines) that depend on finance-based sales.  A senior financial 
journalist told post that in Eastern India, "recession has already 
set in" for these sectors and will spread to the telecommunication 
sector in the coming months. 
 
¶8.  (SBU) Kolkata has a growing IT sector, although still a modest 
percentage of the national industry, and post contacts report a 
sense of anxiety in many of these companies. IT companies operating 
in financial and accounting space are witnessing a slowdown in 
projects.  The IT segment is likely to get hit because these 
expenditures come out of the corporate budget.  Companies like 
Cognizant are reluctant to talk about the adverse impact and point 
to the 36 percent year-on-year growth in business.  But other 
contacts report that most IT companies in Kolkata and other Tier 2 
cities in West Bengal have either slowed down hiring or 
reduced/eliminated "bench strength" which can go up to 25 percent of 
the number of employees.  A contact told post that the real impact 
of the U.S. financial sector crisis will be felt in India in the 
first quarter of 2009 when bills receivable come up for payment.  IT 
companies in Kolkata are apprehensive that their U.S.-based clients 
may reschedule payments which will mean slow down in turnover growth 
and strain on the cash flow.  Post contacts also reported that IT 
companies in Kolkata may also benefit as U.S. clients shift their IT 
projects to destinations that offer lower costs. 
 
Industry Chamber Protests Power Cuts In Tamil Nadu 
--------------------------------------------- ----- 
 
¶9.  (U) Tamil Nadu Small and Tiny Industries Association (TANSTIA) 
called for a one-day work stoppage on October 22 to protest power 
cuts and high diesel prices.  TANSTIA President Gandhi Kumar told 
Consulate General Chennai that many of his organization's members 
have been unable to meet production deadlines ahead of the busy 
Deepavali (Diwali) holiday season because of power cuts of up to 11 
hours per day in cities outside Chennai.  He said that even though 
many of his members had back-up generators, they are often unable to 
secure adequate supplies of diesel to run them, either because the 
price is too high or because required quantities are not available. 
Particularly hard hit, he said, are those in the textile and leather 
industries, who generally have high demand for their products for 
this holiday season. 
 
¶10.  (U) A former South India Mills Association official told us 
that power outages in Coimbatore, the center of the state's textile 
industry, ranged between 10 and 18 hours a day.  He said that 
Chennai-based production units were faring much better than those in 
 
NEW DELHI 00002735  003 OF 004 
 
 
Coimbatore and Madurai because the power cuts in Chennai were not as 
severe as elsewhere in the state.  He said that he expected 
TANSTIA's call for work stoppage to evoke a strong response, 
particularly outside Chennai. 
 
¶11.  (SBU) Other industry associations have distanced themselves 
from TANSTIA's proposed work stoppage.  Representatives of the 
Federation of Indian Chambers of Commerce and Industry (FICCI) and 
Confederation of Indian Industry (CII) have told us that a dialogue 
with Tamil Nadu power authorities on how best to proceed was the 
best way forward.  A FICCI official said that state politics may be 
driving the strike call, noting that TANSTIA's head is known to be a 
supporter of the opposition AIADMK party. 
 
India and Burma Agree to Further Liberalize Trade 
--------------------------------------------- --- 
 
¶12.  (U) On his third visit to Burma this year, Indian Minister of 
State for Commerce Jairam Ramesh on October 15, signed an agreement 
with the Burmese Minister for Commerce Brig Gen Tin Naing to loosen 
highly restrictive border trade and open an additional border 
trading point in the Indian state of Mizoram.  India shares a 
1600-km long border with Burma, which currently has only three 
border posts allowing only very limited trade in certain goods. 
Both countries have now agreed to expand the list of tradable items 
to 40 from the current 22, with a view to move soon towards 
normalized trade at these border posts.  In addition, India has 
offered to extend trade preferences (covering 94 percent of tariff 
lines) to Burma under its duty-free Tariff Preference scheme for 
least developed countries.  The Commerce Ministers also reviewed 
bilateral cooperation in the field of gas/petroleum, power, 
information technology, telecommunication, and agriculture and 
agreed to implement a new arrangement for trade finance for which 
the Union Bank of India has signed an agreement with the Foreign 
Trade Bank of Burma. 
 
¶13.  (U) The two countries had earlier signed agreements for a $60 
million line of credit from India to Burma for power transmission to 
be executed by the Power Grid Corporation of India and for another 
$60 million line of credit for a 111 MW hydro electric power project 
to be executed by Bharat Heavy Electricals Ltd.  Both Indian 
companies are parastatals.  India is also implementing the Rs.5.4 
billion Kaladan multi-modal transport and transit project to be 
completed in 2012. 
 
¶14.  (U) Burma enjoys a substantial trade surplus with India. 
India's exports to Burma in 2007-08 were USD 185 million and imports 
were USD 810 million (mostly pulses, such as lentils), with total 
two-way trade touching USD one billion.  India imports mustard 
seeds, pulses and beans, fresh vegetables, fruits and soybean from 
Burma, and supplies clothes, shoes, medicines, woolens and 
engineering goods to Burma.  Burma is expected to benefit from the 
Indo-ASEAN FTA to be signed by India and ASEAN in Bangkok on 
December 18th, 2008.  Burma is also a member of BIMSTEC (Bay of 
Bengal Multi-sectoral Economic Cooperation) Agreement involving 
Bhutan, Bangladesh, Nepal, India, Sri Lanka, Burma and Thailand, 
whose summit will be held in New Delhi in mid-November. 
 
Jewelry Exporters Concerned Over Holiday Sales 
----------------------------------------- 
 
¶15.  (SBU) On October 17, Econoff met with K.K. Duggal, Regional 
Director of The Gem and Jewellery Export Promotion Council, which is 
sponsored by the Ministry of Commerce, to discuss current 
developments in the jewelry industry and specifically the impact of 
the Tom Lantos Block Burmese JADE Act of 2008.  The JADE Act amends 
previous Burma sanctions by imposing import restrictions on "Burmese 
covered articles," which consists of jadeite and rubies mined or 
extracted from Burma and articles of jewelry containing such jadeite 
and rubies.  The effective date of implementation of the JADE act is 
September 27, 2008; however, a 30-day grace period was granted to 
the trade community, expiring on October 26, 2008. 
 
 
NEW DELHI 00002735  004 OF 004 
 
 
¶16.  (SBU) Duggal stated that jewelry exporters are very concerned 
about the impact of the financial crisis on retail sales of jewelry 
in the United States, particularly headed into the holiday season. 
Although wholesale orders were placed before the crisis and 2008 was 
a relatively good year, Duggal mentioned that exporters are worried 
that if jewelry does not "move off the shelves" during the holiday 
season in 2008, then 2009 will bring a significant drop in demand 
from retail outlets and not be as prosperous. 
 
¶17.  (SBU) Duggal expected that the impact of the JADE Act on the 
Indian jewelry trade would be negligible since India no longer 
imports rubies directly from Burma and the majority of rubies 
exported are mined in India.  When asked about the new requirement 
for importer certification, Duggal remained unconcerned.  (Comment: 
Duggal's dismissiveness suggests that ruby importers may face 
complications once the 30-day grace period ends, since India imports 
20% of their rubies and they will still need the proper 
certification to prove the rubies are not from Burma.  End 
comment.) 
 
¶18.  (SBU) Duggal also mentioned that the July 2007 removal of the 
Generalized System of Preferences (GSP) duty-free exemption for 
Indian gold jewelry has been difficult on exporters and argued that 
Indian gold jewelry, which is now subject to a 5.5 percent duty, 
should not have to compete with Chinese gold jewelry. 
 
Kingfisher-Jet Airways Deal Subject To Review 
--------------------------------------------- - 
 
¶19.  (U) According to media sources, the Jet and Kingfisher alliance 
is being scrutinized by the Monopolies and Restrictive Trade 
Practices Commission for the possibly anti-competitive nature of 
certain provisions of the agreement.  The deal will eventually 
attract the scrutiny of the Competition Commission of India (CCI), 
as it would directly impact competition in routes where both 
airlines have significant presence.  The arrangement gives the 
company the combined control of over 60% of the domestic civil 
aviation industry. Unfortunately, CCI currently lacks teeth as it 
does not have a chairman or voted members and its powers have not 
been notified. Once CCI gets its enforcement and adjudication 
powers, which could happen soon as the government is selecting the 
chairman and members, it is expected to closely look into the legal 
aspects of the agreement to make sure that the alliance does not 
adversely affect consumers and competition in markets. 
 
¶20. (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi 
 
White