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UNCLAS SECTION 01 OF 04 NEW DELHI 002781 
 
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E.O. 12958: N/A 
TAGS: EAGR ECON ECPS EFIN EINV ENRG EPET ETRD PGOV IN
 
SUBJECT: RESURGENT RAJASTHAN: EFFORTS TO PUT THE STATE ON INVESTMENT 
RADAR SHOWING SUCCESS 
 
Reftel A: New Delhi 2666  B: New Delhi 2110 
 
¶1. (SBU) Summary: An economic reporting trip to bellwether state, 
Rajasthan, in late September, indicated strong government 
implementation of infrastructural and educational improvements 
(reftel A).  The trip also demonstrated that the Government of 
Rajasthan's efforts to attract new manufacturing and IT industries 
to Rajasthan is working.  Major foreign companies have chosen 
Rajasthan to expand their presence in India, drawn by improved 
infrastructure, a trained labor pool, and Rajasthan's proximity to 
India's northern market.  Innovative land acquisition policies and 
streamlined bureaucratic requirements have been welcomed by new 
investors and old.  Business interlocutors were complimentary of the 
improved business and investment climate in the state and were very 
upbeat on Rajasthan's growing business opportunities.  End summary. 
 
Rajasthan Undergoes Major Investment Push 
----------------------------------------- 
 
¶2.  (SBU) Having worked to get the basics right in infrastructure 
and education, government and private sector interlocutors alike 
told Econoffs during their visit September 23-25 that the current 
Rajasthan government has undertaken a major push in the last 18 
months to bring in significant foreign investments and put Rajasthan 
on the map for investment.  The results so far are impressive: the 
state has attracted Honda to set up its second auto plant in India, 
along with new facilities by French glassmaker St. Gobains, 
construction materials company Lafarge, and IT companies such as 
Infosys and Genpact.  Honda's choice of Rajasthan for its second 
automotive plant in India was mentioned by nearly every interlocutor 
in Jaipur as a major accomplishment.  Industry Secretary Sampatram 
claimed that Honda's decision had reassured other smaller Japanese 
companies to choose Rajasthan, and that several had already started 
purchasing land.  A recent investment promotion conference, titled 
Resurgent Rajasthan, yielded 300 signed memoranda of understanding 
and letters of intent with investors that could result in as much as 
$40 billion in investment. 
 
Incentives Don't Matter To Companies; Basics Do 
--------------------------------------------- -- 
 
¶3.  (SBU) Both Industry Secretary Ashok Sampatram and Bureau of 
Investment Promotion Commissioner Umesh Kumar observed that the 
government in 2003 had switched from industry promotion to 
investment promotion.  Sampatram explained that an industry policy 
is inherently problematic because different industries need 
different help and there is no one size that fits all.  Further, he 
maintained, offering incentives does not work because it is not what 
most companies base their decisions on.  That is because most 
incentives only last 4-5 years, but investment decisions are for 
decades.  Instead, he claimed, investors look to infrastructure, 
power, telecom, law and order and labor relations.  Easy clearances 
are also a major attraction, according to Sampatram, a goal the 
government is working on.  He cited as an example that Deutsche Bank 
was able to move into its new premises within six months of 
approaching the government for permission to set up a new building. 
 
¶4.  (SBU)  Umesh Kumar of the Bureau of Investment Promotion noted 
that his five years of experience being the Joint Secretary for the 
Ministry of Commerce's Department of Industrial Policy and Promotion 
(which overseas national investment policy) had helped him 
understand that incentives are not important to foreign investors. 
He claimed that if concessions mattered the most, then the states 
with the most generous concessions - Himachal Pradesh, Uttarakhand 
and Jammu & Kashmir - should have the highest investment rates, but 
they don't, he noted.  Instead, the Government of Rajasthan works on 
the issues that worry companies - for example, land acquisition and 
infrastructure. 
 
¶5.  (SBU)  Kumar is also trying to improve GoR's bureaucratic 
responsiveness to investors.  He notes that a "single window" of 
clearances does not really work, because it assumes a transfer of 
power from all the other approving agencies to just one agency, but 
that hasn't been achieved in any state.  Instead, Kumar has proposed 
an electronic single window - a portal - where a company can input 
all its relevant information just one time, after which the portal 
sends it to all the concerned departments.  Individual approvals 
 
NEW DELHI 00002781  002 OF 004 
 
 
will still be necessary, he conceded, but the business will not have 
to spend time going physically to each place.  His idea of an 
e-window would also create one single ID for the company across all 
the government agencies, rather than separate file numbers, making 
it less cumbersome for the business. 
 
¶6.  (SBU)  Another innovation that Kumar has just started is the 
notion of reverse incentives - he is convincing new investors to 
give the government of Rajasthan 5% equity in projects, so that the 
investor is in essence paying the GoR to be able to invest, rather 
than the state paying the investor in incentives.  Kumar stressed 
that the government receives no role on the board of the company and 
thus has no leverage in the company's decisions.  In exchange, the 
government is leasing state-owned land, rather than selling it 
outright, which lowers the upfront cost to the company. 
 
Proximity to Northern Market 
---------------------------- 
 
¶7.  (SBU) Kumar observed that Rajasthan is not a big consumer 
market; because of its large land size, it is really several 
fragmented markets, by themselves not worth servicing.  However, he 
noted, Rajasthan is close to New Delhi and the National Capital 
Region (NCR), which also includes the fast-growing and affluent 
suburbs of Noida and Gurgaon.  His plan is to attract manufacturing 
companies to eastern Rajasthan, closest to the NCR markets to serve 
the Delhi market.  Meanwhile, he sees Jaipur as a good choice for 
services-based businesses, because it has the social amenities, 
including schools and colleges, to attract IT and related companies. 
 
 
¶8.  (SBU) Rajasthan's proximity to the NCR has emboldened the GoR to 
start approaching businesses to invest in Rajasthan.  Kumar stated 
that he sent a team down to French glass maker St. Gobain's factory 
in Chennai, when he heard they were looking to set up a second 
factory to serve the northern market.  Glass' fragility requires 
that companies set up close to markets and Kumar's team was able to 
convince the company to locate in Rajasthan.  Similarly, the Bureau 
of Investment Promotion has approached garment manufacturers in the 
Delhi region to expand by coming out to eastern Rajasthan.  The team 
also encouraged the manufacturers to create a special purpose 
vehicle (SPV) to join in together and buy land and source 
electricity and water together as a unit, rather than individually. 
The result, according to Kumar, was that 18 companies have agreed to 
start up new production in Rajasthan and provide employment to 
25,000 people.  Rajasthan's proximity to consumer markets in 
Northern India is expected to be even closer after completion of the 
planned Delhi-Mumbai freight corridor, of which 30-40% is expected 
to run through eastern Rajasthan. 
 
Land Policy Enables Smoother Industrialization 
-------------------------------------------- 
 
¶9.  (SBU) The state government appears to be drawing lessons from 
other states' highly publicized land acquisition woes.  Sampatram 
noted that the GoR had begun a new land policy where there is no 
forcible acquisition of land.  (Note: In July 2008, per Reftel B, 
contacts reported GoR misuse of land acquisition initiatives, in 
which prime real estate was purchased below-market prices or 
confiscated from farmers, although it is unclear whether they 
referred to the old or new land policy.  End note.) In addition, 
compensation is based on rates determined by local district 
committees.  In projects near Rajasthan's largest cities, landowners 
who sell will be able to receive one-fourth the size of their sold 
landholding in nearby commercial and residential land in a landswap. 
 The landowner receives the new land on the outskirts of the project 
site, which allows the project developer to obtain the contiguous 
land it needs, while giving the landowner new land close by the 
project, ensuring an appreciating land asset. 
 
Private Sector Welcomes Improvements 
------------------------------------ 
 
¶10.  (SBU) Members of Rajasthan's Federation of Trade and Industry 
appreciated the steps the state government has taken to improve the 
business environment in the state.  Members told Econoff that the 
Chief Minister is doing well for corporates and makes decisions to 
 
NEW DELHI 00002781  003 OF 004 
 
 
get things going.  They see the Raje government as adopting modern 
practices and "professionalizing" the bureaucracy.  They noted that 
the current focus is infrastructure, roads and private education. 
 
¶11.  (SBU) Gems and jewelry businessowners had different 
perspectives on the current economic outlook, depending on the size 
of their export operations.  Ashok Goyal of Dwarka Gems, a large 
jewelry designer and exporter which employs nearly 400 people, 
explained that his business is large enough and has sufficiently 
large margins that the stronger rupee and removal of US Generalized 
System of Preferences (GSP) privileges last year did not hurt his 
company.  He sees a big opportunity for his company and Rajasthan in 
the global gems and jewelry market.  He noted that the US used to be 
the biggest market, but his company is focusing more on Europe, 
especially Italy, now.  His company is also working more with 
European designers, who are sourcing more of finished jewelry from 
India, as they close down manufacturing units in Europe because of 
labor costs.  Goyal finds the infrastructure to be sufficient to his 
needs and better than Delhi's, the bureaucracy fine to work with, 
and labor availability very good. 
 
¶12.  (SBU) The Gem and Jewellery Export Promotion Council provided a 
different view, noting that most of its 1000 members were smaller 
companies that operated on small margins that were eroded by the 
prevailing higher global gold and silver prices.  Sanjay Singh, 
Regional Director, noted that the big fluctuations in the rupee 
exchange rate over the past year have created uncertainty in buyers 
and most of the Council members were too small and inexperienced to 
hedge their foreign exchange transactions.  However, even with those 
difficulties, Singh described strong growth in Jaipur's jewelry 
industry.  He noted strong participation by jewelry firms in several 
government-sponsored industrial parks, including a Special Economic 
Zone that was sold out within 48 hours.  In response to the growth 
of gem and jewelry businesses and the need for more employees, the 
council is sponsoring the creation of an Indian Institute of Gems 
and Jewelry in Jaipur, focused on design and manufacturing.  The 
building is currently under construction and targeted for completion 
by 2009. 
 
¶13.  (SBU) Singh opined that the loss of US GSP was a setback to 
many smaller jewelers.  He explained that the removal of GSP meant a 
new imposition of 6% import duty, yet most of his members operated 
on margins of just 3-4%.  Small companies have switched to other 
foreign markets or to the domestic market.  But operating in the 
world markets faces another challenge, according to Singh: the world 
demand for gems and jewelry is not growing and the sector is facing 
competition from white luxury goods, which could prompt some 
consolidation in the market. 
 
¶14.  (SBU) US-based BPO Genpact has been in India for ten years and 
branched into Jaipur about five years ago.  Diwakar Singhal, Senior 
Vice President, told Econoffs that when Genpact decided it needed to 
expand, most of the large metros were getting "full" and that 
employees were getting poached by other firms.  The company 
considered 40 cities across India for a second office and decided on 
Jaipur, because the government was "quite supportive," and the city 
had a good education hub, reasonably good infrastructure, and low 
crime.  He noted that Jaipur's heritage reputation was also helpful, 
as their mostly-foreign clientele appreciate the chance to have 
business meetings in a tourism destination. Singhal judged that the 
Rajasthani bureaucracy was of "good caliber", supportive and overall 
"clean". 
 
¶15.  (SBU) He identified talent as a challenge, as Genpact currently 
employs 2500 people in Jaipur and plans to build a third facility in 
a Rajasthan SEZ next year.  He conceded that there was good raw 
talent locally, but that Genpact had to "upskill" the graduates and 
provide corporate cultural training.  He also pointed to several 
collaborations they are doing with training institutes. On the 
positive side, Singhal noted that attrition in their Rajasthan 
facilities is only half that of the industry average. Another 
advantage of smaller cities that Singhal identified is that of lower 
wages than cities like Bangalore or Hyderabad.  He said that Genpact 
expected revenue growth to be 26-28% in the current fiscal year. 
 
¶16. (SBU) Members of the Jaipur chapter of the Confederation of 
Indian Industries (CII) echoed many of the themes that other 
 
NEW DELHI 00002781  004 OF 004 
 
 
businesses had sounded and identified IT services, tourism, and the 
planned Delhi-Mumbai freight corridor as large business 
opportunities.  CII members representing industries from heritage 
hotels to Vodafone to Bosch Auto Components agreed that the 
government of Rajasthan was increasingly pro-active in industrial 
development and infrastructure, with improved infrastructure and 
land acquisition assistance.  They noted with approval that 
consecutive governments in Rajasthan did not "undo good work" being 
undertaken by the bureaucracy and allowed the continuation of good 
projects. 
 
¶17.  (SBU) Bosch Vice President Dinakar Murthy-Krishna explained 
that during the ten years they have been in Rajasthan, the 
government has done well to improve the trained labor pool, with a 
number of training institutes and public-private partnerships.  He 
feels that GOR officials are very professional and transparent in 
their dealings, especially when compared to the Maharashtra 
government.  Infrastructural improvements are occurring very rapidly 
and Bosch is in the midst of building another plant in Rajasthan. 
Vodafone's Legal Head, Pradeep Mehra, reiterated Murthy-Krishna's 
points, observing that the bureaucracy is open and receptive and has 
been pro-active in improving roads, water, and electricity.  He 
noted that people are returning to Rajasthan because they see the 
opportunities.  He was pleased that 12 private universities are 
being established in Rajasthan. 
 
Comment 
------ 
 
¶18. (SBU) A professional state government bureaucracy and sound and 
consistent policies have yielded higher economic growth and 
employment opportunities in Rajasthan.  Rajasthan registered a 
remarkable compounded annual growth rate of 15.2% between 2002-03 
and 2006-07, nearly doubling its GDP in the process and raising 
Rajasthan from near the bottom of the pile to India's eighth largest 
state economy. As the large Tier-1 metros become tapped out of 
affordable real estate and labor, Tier-2 cities like Jaipur become 
increasingly viable, if infrastructure and education are put in 
place.  Rajasthan's cities demonstrate that there is another chapter 
in India's growth story unfolding and proper state policies can 
write new destinies.  Rajasthan is also benefiting from its 
proximity to India's northern market - demonstrating the strong 
economic engine that the country's large domestic market can spark 
in new regions of the country.  As Rajasthan continues to show up on 
investors' radars, that spark is likely to expand in tourism and 
hospitality, manufacturing, education and Rajasthan's more 
traditional industries like textiles and mining. 
 
¶19.  (SBU) The improving business environment, strong growth and 
responsive government policies bode well for the incumbent Bharatiya 
Janata Party as it prepares for state assembly elections on December 
¶4.  A few months ago, the GoR appeared to be in trouble as it faced 
a growing communal rift as communities quarreled with one another 
over economic benefits based on caste.  The GoR has successfully 
defused that issue and instead managed to make governance and 
development important campaign issues. 
 
MULFORD