VZCZCXRO9134
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHNEH RUEHPW
DE RUEHNE #2995/01 3301318
ZNR UUUUU ZZH
R 251318Z NOV 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 4358
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHGV/USMISSION GENEVA 7965
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 03 NEW DELHI 002995 
 
SIPDIS 
SENSITIVE 
 
STATE FOR SCA/INS AND EEB 
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD 
DEPT PASS TO USTR MDELANEY/CLILIENFELD/AADLER 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EFIN EINV ETRD IN
 
SUBJECT: INDIA'S ECONOMY: INVESTMENT COULD BE HARDEST HIT, 
GOVERNMENT TRYING TO MITIGATE 
 
¶1.  (SBU) Summary. As economists the world over grapple with the 
specter of a significant global slowdown, several groups in India 
have downgraded their GDP growth projections for the current and 
next fiscal years, mainly on the expectation that slower world 
growth will cut export demand.  However, while true, merchandise 
exports comprise less than 20% of GDP.  More important, it is the 
investment boost to the economy through infrastructure that is most 
under threat and most critical to sustaining India's strong GDP 
growth rate, as the last five years of growth has been domestic 
investment and consumption led.  The signs are troubling, as India's 
infrastructure growth had benefited from global financial flows that 
have virtually disappeared since October.  The government itself is 
prioritizing the infrastructure sector as it considers fiscal and 
monetary responses to the global slowdown.  A proposed $10 billion 
infrastructure financing facility funded out of foreign exchange 
could directly alleviate credit constraints.  Whether the government 
can act in a timely fashion in the midst of state elections and 
imminent national elections remains to be seen. 
 
¶2.  (SBU) Summary continued: Meanwhile, lower inflation brings some 
respite.  The significant drop in inflation boosts the RBI's ability 
to reduce interest rates, whose tightening since 2007 had 
contributed to a slowdown in consumer durable and real estate 
activity.  Lower interest rates are therefore likely to boost 
domestic consumption, which will also be aided by a recent increase 
in government salaries and the expansion of the rural employment 
guarantee program.  Plummeting commodity prices will also help ease 
input costs for Indian companies, who saw profits eaten up in the 
July-September quarter, although they will cause a drag on farm 
exports in the longer-term.  End summary. 
 
Recent Round of Growth Downgrades 
------------------------------ 
 
¶3.  (SBU) The latest worries over a deeper-than-expected global 
slowdown prompted several revisions to India's projected GDP growth 
for this fiscal year and next.  Citi has revised its GDP growth 
projection for the current fiscal year to 6.8% from an earlier 
expected 7.2%, and next fiscal year to 5.5%, while Goldman Sach's 
expects 6.7% and 5.8% growth during FY09 and FY10.  Edelweiss, a 
local investment bank, has also downgraded its projections in recent 
weeks from 7.8 to 7.4% for the current fiqcal year.  Citi expects 
much slower manufacturing from decreased export demand and lower 
construction amidst signs of slowing real estate and infrastructure 
activity. 
 
¶4.  (SBU) Data from October definitely suggests a slowdown, with 
initial estimates of exports in October indicating a 15% 
year-on-year contraction, excise taxes down by about 8%, and sales 
of commercial vehicles and 2-wheelers also off.  However, it is yet 
unclear how much of the October slowdown was caused by 
unavailability of financing versus a drop in demand.  Many areas of 
purchasing power are still strong.  The government raised public 
employee salaries in September, while a rural employment guarantee 
program was extended across the country last March, and 
disbursements have far exceeded the last two years'.  Indian 
companies' revenues were quite strong through September, suggesting 
many areas of domestic demand levels have been sustained. 
 
¶5.  (SBU) In addition, some assumptions that economists are using 
seem overly pessimistic - for example, Edelweiss' service GDP 
projection assumes that trade, transport, hotels and restaurant 
growth will mirror that of India's downturn in 1999-2003 - a period 
that includes world sanctions against India for its 1998 nuclear 
test and fallout from the 2001 recession and 9/11.  Citi is assuming 
that the agricultural sector will clock only 2% growth this year, 
but focuses its analysis on grain production, when half of 
agricultural GDP comes from horticulture, livestock, dairy and 
fisheries.  A few economists expect agricultural growth of 3 to 
3.5%.  Indeed, there are a few signs the rural economy is doing 
well.  Regional, rural retail franchises reported that September and 
October were good months for them, as farmers' purchasing power has 
benefited from recent strong harvests and high government support 
prices.  The $17 billion farm waiver program may also have helped 
support spending.  However, some parts of the farm economy dependent 
on international markets, like cotton, rice, spices, shrimp or 
 
NEW DELHI 00002995  002 OF 003 
 
 
cashews, face greater volatility in the months ahead and a possible 
slowdown in export orders. 
 
Infrastructure Momentum Threatened 
---------------------------------- 
 
¶6.  (SBU) The biggest apparent threat to India's economy from the 
world slowdown comes more from the disappearance of global financing 
than of global demand.  That is because India's infrastructure boom 
has relied on cheap foreign financing which has dried up. 
Infrastructure not only adds critically needed productive physical 
assets to the country, but also has a multiplier effect in the 
economy through employment and different ancillary sectors, such as 
construction, steel, cement, and transport.  The disappearance of 
foreign financing is behind Citi's estimate that investment growth 
will halve from 13% growth last fiscal year to about 6% in the 
current fiscal year. 
 
¶7.  (SBU) In addition to public infrastructure, such as roads and 
ports, Indian companies, on the back of rising purchasing power and 
profit levels, have been investing in significant capacity expansion 
over the last three to four years.  ICICI Managing Director and CEO 
KF Kamath has estimated that Indian companies spent $200 billion on 
expansion in the last two years, which he estimates to come down to 
around $140 billion through FY2010.  With cheaper foreign financing 
disappearing, uncertainty about a demand slowdown in India, and 
potential political volatility from next spring's national 
elections, companies are starting to postpone expansion plans. 
 
Export Sector Mixed Bag, Modest GDP Importance 
------------------------------------------ 
 
¶8.  (SBU) Gems and jewelry, carpets, and textile exports have been 
hit, according to local media, but together they are less than 
one-fourth of total exports.  More important than their impact on 
GDP is their effect on employment, since these are labor-intensive 
industries.  While media reports of more than 500,000 job losses are 
probably an exaggeration, as these industries are seeking 
concessions from the government, the lay-offs do affect economically 
vulnerable casual laborers with few other options for work. 
 
Available Policy Options 
------------------------ 
 
¶9. (SBU) The government has indicated that it considers 
infrastructure growth a policy priority.  Prime Minister Singh 
identified, prior to the G-20 Summit, the need for international 
funds to sustain infrastructure projects in developing countries. 
Planning Commission Deputy Chairman Montek Singh Ahluwalia stated at 
a conference in New Delhi on November 19 that for fiscal stimulus, 
there is some room for "quick start" projects, both by accelerating 
existing road projects and by moving quickly on power mega-projects. 
 Recent news reports indicate that the government is considering a 
roughly $10 billion foreign exchange reserves fund routed through 
the India Infrastructure Financing Company Ltd.(IIFCL) to finance 
infrastructure projects. Further, Ministry of Finance Joint 
Secretary (Multilateral Institutions) Alok Sheel told Econoff on 
November 20 that the Ministry was engaged in discussions with the 
World Bank on how to avail of the new infrastructure facility, which 
could make as much as $6 billion available to India. 
 
¶10.  (SBU) Most analysts, like CRISIL chief economist DK Joshi, feel 
there is not much general fiscal stimulus the government can enact, 
as its fiscal deficit is already high and its current budget has 
already raised government salaries and rural employment funding, 
among other expansionary spending.  However, Ridham Desai of Morgan 
Stanley told econoffs on November 15 that the government could do 
"pump priming" through re-starting the privatization of state-owned 
companies to earn more revenues, as well as cutting taxes.  Ajit 
Renade, Chief Economist, Aditya Birla Management Corporation, also 
told econoffs that he thought the government could provide some 
fiscal stimulus through tax cuts, especially for corporations.  He 
also pointed to the implementation slowdown in the National Highway 
Development Program as a labor-intensive, material-intensive effort 
that could boost demand if re-energized. 
 
 
NEW DELHI 00002995  003 OF 003 
 
 
¶11. (SBU) On the monetary policy side, Citi macroeconomist Rohini 
Malkani expects recent moves by India's central bank, the Reserve 
Bank of India (RBI), to ease credit availability for exporters to 
help.  She notes the RBI has extended the period for concessional 
pre-shipment credit from 6 months to 9 months. In addition, it has 
increased the limit for banks to extend the export credit refinance 
limit from 15% of outstanding rupee export credit eligible for 
re-finance to 50%, which she anticipates will provide an additional 
$4 billion of liquidity support to exporters. The government is also 
considering a $4 billion fund for small and medium enterprises 
(SMEs), which have been especially hurt by reduced liquidity and 
lower banking confidence. 
 
Easing Inflation Helps Too 
-------------------------- 
 
¶12.  (SBU) Inflation's surprise drop to below 9% in recent weeks has 
increased the odds that India's central bank will lower the 
benchmark interest rate, currently at 7.5%.  Loosening monetary 
policy should boost consumer durable spending, as lower rates make 
purchases more affordable, reversing the tightening of the last two 
years.  In addition, steeply lower input prices - from oil to steel 
to cement - should help improve company's bottom lines.  In the 
July-September quarter, many companies' quarterly results showed 
strong sales, but erosion of profits from high input costs. 
 
Comment 
------- 
 
¶13.  (SBU) While external factors are undeniably hitting India, it 
is not yet clear how much is currently attributable to a loss of 
global financing and how much to lower global demand.  The picture 
in India is further muddied because, as one contact noted, some 
companies or sectors are exaggerating the damage in hopes of 
obtaining additional concessions from the government.  India's 
substantial domestic consumption and investment relies more on 
available financing than global demand, so improvements on the 
financing front could blunt a lot of the potential damage to India's 
economy.  The converse is also true.  In the meantime, the 
government's plan to channel a fiscal stimulus through 
infrastructure is a well-targeted approach to increase demand for 
construction, cement, steel, and employment.  Though it may take 
time to implement, it would provide good multiplier effects in the 
economy and a long-term investment of resources that helps set the 
groundwork for higher efficiency and productivity once the economy 
returns to a higher growth trajectory.  The poor fiscal practice of 
funding it off-budget through foreign exchange reserves - even if 
the reserves can be spared - may have to be overlooked. 
 
WHITE