VZCZCXRO9458
PP RUEHAST RUEHCI RUEHLH RUEHNEH RUEHPW
DE RUEHBI #0573/01 3401302
ZNR UUUUU ZZH
P 051302Z DEC 08
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC PRIORITY 6807
INFO RUEHNE/AMEMBASSY NEW DELHI PRIORITY 8048
RUEHCG/AMCONSUL CHENNAI PRIORITY 1979
RUEHNEH/AMCONSUL HYDERABAD PRIORITY 0011
RUEHCI/AMCONSUL KOLKATA PRIORITY 1774
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEHAAA/NSC WASHINGTON DC
RUEHBI/AMCONSUL MUMBAI PRIORITY 1972

UNCLAS SECTION 01 OF 03 MUMBAI 000573 
 
SENSITIVE 
SIPDIS 
 
DEPT PASS TO EXPORT-IMPORT BANK FOR JESSICA FARMER 
DEPT PLEASE PASS TO USTR AADLER/CLILIENFELD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND ETRD IN
SUBJECT: INDIAN ECONOMY REELING FROM EFFECTS OF FINANCIAL CRISIS, NOT 
TERROR ATTACKS 
 
MUMBAI 00000573  001.2 OF 003 
 
 
¶1.  (SBU) Summary.  Market participants and corporate 
representatives tell Congenoffs that the Mumbai terrorist 
attacks may have a modest, short-term impact on markets and 
economic activity, exacerbating the more serious and ongoing 
deterioration of market conditions due to the global economic 
crisis.  Characterizing the current business climate as "bleak," 
interlocutors pointed to alarming declines in exports and 
consumer spending in November 2008 as signs of a major economic 
slowdown.  Corporate India also displayed immense anger at the 
country's political class and have called for security reforms. 
Though they judged the chances of war with Pakistan as low, they 
considered this the worst possible outcome.  However, NASSCOM 
remained optimistic, stating that India has a cost competitive 
advantage that would continue despite the financial crisis or 
the terror attacks.  End Summary. 
 
Terror Attacks Will Depress Weak Economy in the Short-Term 
------------------------ 
 
¶2.  (SBU)  Interlocutors in Mumbai largely agreed that while the 
terrorist attacks might have a short-term impact on economic 
activity, the larger, ongoing economic slowdown in India, caused 
by the global financial crisis, was far more significant.  Ritu 
Kochchar, Director for Equities for JP Morgan, believes that the 
attacks will dampen investor sentiment, but notes that foreign 
investment in India was already waning, as foreign investors had 
ended their focus on emerging markets, and stopped scouting for 
deals in October-November 2008.  Tushar Poddar, Chief Economist 
of Goldman Sachs, believes that the attacks will have an 
immediate impact on third order activity, such as hotels, 
tourism, and travel, but that the economy was already slowing 
considerably.  Anu Madgavkar, Partner of McKinsey & Co, agreed, 
but pointed out that the Indian economy was not dependent on 
these sectors.  She believes that the Mumbai economy would 
temporarily dip but would bounce back soon.  Madhav Bhatkuly, 
Director of New Horizons Investments, believes that business 
meetings will be postponed following the attacks, which in turn, 
will lead to the postponement of economic activity in the 
short-term.  For example, he said that four current or potential 
foreign investors had already postponed business meetings with 
him. 
 
¶3.  (U)  Madgavkar said that the threat of war with Pakistan 
will hurt investor sentiment and business the most.  However, 
she believes that India's leaders would not let this happen. 
Kochchar said foreign investors are worried about an Indo-Pak 
conflict and political risk in general.  Investors are uncertain 
about the Indian government's next moves, although they expect a 
focus on security rather than economic reform, particularly 
since inflation figures are declining.  Poddar said that a 
possible Indo-Pak standoff will hurt the currency.  During the 
2001-02 standoff with Pakistan following the terrorist attacks 
on the Indian Parliament, the Indian currency depreciated, 
prompting RBI intervention.  Unlike the present situation, there 
was no financial crisis in 2001-02, so the impact this time 
could be worse, he concluded. 
 
Global Financial Crisis Continues to Cause Indian Slowdown 
------------------------- 
 
¶4.  (SBU)  Poddar said that business activity declined 
significantly in October-November 2008.  Bhatkuly concurred, 
characterizing November 2008 as the worst month that he had ever 
seen in 16 years of watching corporate India.  In a review of 
200 Indian companies in which his company has an ongoing or 
potential investment, Bhatkuly concluded that Indian industrial 
activity contracted significantly in November 2008.  He singled 
out the auto component segment as experiencing serious stress 
due to the global contraction of car sales.  In addition, 
companies engaged in the commodities business like Hindalco are 
in difficult straits, as are highly levered companies like those 
in the real estate sector.  While Indian banks have withstood 
the global financial crisis, they will soon start to see a rise 
in non-performing loans, albeit not to alarming levels, he 
continued.  Vikram Shroff, Executive Director of agro-chemicals 
company United Phosphorus, stated that his company, as an 
agricultural-related business, has not been too badly hit by the 
global financial crisis and the U.S. recession.  Nevertheless, 
 
MUMBAI 00000573  002.2 OF 003 
 
 
he said that his company had halted expansion and is conserving 
cash.  He pointed out that United Phosphorus made five 
acquisitions in the first half of 2008, but none in the second 
half of the year. 
 
¶5.  (U) Mohan Nihalani, the President of the All India Importers 
& Exporters Association, noted that Indian exporters are facing 
"tough times" as their export orders have either declined or are 
not being honored.  (Note:  Exports declined by 12.1 percent in 
November 2008 as compared to November 2007, marking the sharpest 
yearly fall in 10 years.  End Note.)  There has been a 
significant decline of export cargo loaded at India's largest 
container terminal port, the Jawaharlal Nehru port, he added. 
He applauded the government's proposal to award concessions to 
exporters, such as the refund of service tax and excise duties 
and the extension of lines of credit as part of the financial 
stimulus package for the economy.  But, Nihalani points out, 
"the government cannot generate export orders."  In a separate 
discussion, Muffadalal Yusuf of Tajir, a company which imports 
almonds from the U.S. for processing and sales in India, 
reported that he had received no new orders for almonds in 
November 2008. 
 
Financial Crisis and Terror Attacks Cannot Defuse India's Cost 
Competitive Advantage 
---------------------------------- 
 
¶6.  (U)  Rajiv Vaishnav, the Regional Director of the National 
Association of Software & Services Companies (NASSCOM), admitted 
that the mood in the economy -- hit by the global financial 
crisis, the recession in the U.S. and now the Mumbai terror 
attacks - is low at present, but argued that the Indian 
industry's cost competitive advantage will enable the economy to 
withstand these shocks.  NASCCOM has earlier revised its export 
growth forecast for the IT sector for 2008-09 from 29 percent to 
21-24 percent.  Vaishnav said that this may be further lowered 
to 20 percent.  However, he believes that the slowdown in growth 
is "temporary" and the mid-term or long-term looks bright, 
especially for IT software and services.  According to Vaishnav, 
companies increase outsourcing and off-shoring during economic 
crises as cost competitiveness becomes central to doing 
business.  Right now, orders are delayed and business decisions 
are being deferred resulting in the slowdown in the growth of IT 
exports.  But once companies re-commence business operations, 
they will choose the low cost option.  Meanwhile, Indian IT 
companies are streamlining their operations and gearing up to 
cater to future needs.  They are focusing on innovation and 
customer servicing and attrition has gone down.  The silver 
lining to the current gloomy economic scenario is that Indian 
companies are improving their productivity and efficiency, he 
said.  Rit Desai, Assistant Manager (International Marketing) of 
Larsen & Toubro, agreed with Vaishnav and added that while the 
Mumbai terror attacks will always be "at the back of the mind" 
of potential investors, there is no denying India's cost 
competitiveness in specific sectors.  Foreign investors cannot 
afford to ignore India, he argued. 
 
¶7.  (SBU) Bhatkuly also pointed out some pockets of growth in 
the economy.  He noted that the hike in salary levels of 
public-sector employees will boost consumption.  The loan waiver 
to farmers has helped the rural economy, but he pointed out, 
this will still not compensate for the problems in the 
industrial sector.  Another bright spot that he noted was that 
Alok Industries, a fabric exporting company, was seeing an 
uptick in orders; this was a result of the vendor consolidation 
on the part of large global retailers like Wal-Mart, which was 
shutting down business with marginal suppliers and giving more 
business to larger suppliers.  He acknowledged that this would 
not help small and medium enterprises in this business. 
 
Mumbai Attacks Not a Factor in Market Activity 
----------------------- 
 
¶8.  (U)  After remaining closed the first day after the attacks, 
the Bombay Stock Exchange's SENSEX - a barometer for Indian 
stock market performance -- closed up one percent when it 
re-opened on Friday, November 28, while anti-terrorist 
operations were on-going.  However, on December 1, markets 
 
MUMBAI 00000573  003.2 OF 003 
 
 
dropped three percent, in reaction to declines in the U.S. and 
Asia, as well as negative information on exports and auto sales 
in India.  According to market participants, three key factors 
cushioned the Indian markets from the impact of the terrorist 
attack.  First, India's unfortunate familiarity with terrorism 
means that markets have grown accustomed to these tragedies, and 
react modestly, if at all.  Second, markets have anticipated an 
RBI rate cut, and these attacks have raised expectations for 
further economic relief.  Third, with an over 50 percent decline 
in the SENSEX since January, and the deterioration of credit 
markets, there wasn't much room to fall.  External credit 
markets are already prohibitively expensive, commercial paper 
markets blocked, and investment plans on hold. 
 
Shocked and Angered Corporate Mumbai Blames the Political Class 
--------------------------- 
 
¶9.  (SBU)  Rajiv Lall, the Managing Director of Infrastructure 
Development Finance Corporation, stated that India was facing a 
crisis of governance.  He condemned the failure to protect 
Mumbai's residents as being emblematic of the politicians' 
failure to build or maintain India's decaying institutions. 
United Phosphorus' Shroff said that bad governance in India is 
the reason why the majority of Indians working overseas do so 
well, while the majority of Indians in India barely survive. 
Madgavkar was saddened that she could not expect much out the 
current group of leaders running India and the state of 
Maharashtra. 
 
¶10.  (SBU) Bhatkuly was disappointed with the economic reforms 
of the Congress-led United Progressive Alliance (UPA) government 
but was even more unhappy with its neglect of security.  While 
not a fan of the rival Bharatiya Janata Party (BJP) either, 
Bhatkuly believes that the BJP was more pro-active in office, 
and initiated economic reforms earlier this decade that enabled 
the Indian economy to grow.  During the past four years of the 
UPA-government's rule, India was awash with excess liquidity 
that was sweeping the globe.  Bhatkuly believes that this 
inflated India's growth rate and allowed the economy to surge 
without reforms.  Even easy reforms which no one would oppose or 
object to -- like unclogging the nation's courts - were not 
carried out.  Instead, he added, the reform process has moved 
backwards.  He pointed to the Finance Minister's statements 
asking the Reserve Bank of India (RBI) to cut interest rates; 
the central bank responded by taking this action the next day, 
bringing the independence of the RBI into question. 
 
¶11.  (SBU)  Pradeep Bhargava, Managing Director of Cummins 
Generator Technologies and Head of the Maharashtra Council of 
the Confederation of Indian Industries (CII), said that CII is 
planning to push the federal government to implement internal 
security reforms, including establishing a single coordinating 
agency to respond and defend against terror attacks.  CII 
spokespersons are also trying to boost investor sentiment and 
restore confidence in investing in India, but Bhargava believes 
that instead of meaningless platitudes, it would be more 
effective if foreign investors can see improved security 
measures in place to protect the country against senseless 
terrorist attacks. 
 
¶12. (SBU) Comment:  In the past, many corporate leaders have 
told Congenoffs that India grows despite the government, not 
because of it.  Business contacts agree that the impact of the 
attacks will be mild, but will exacerbate a longer term decline 
in sentiment and activity caused by the global financial crisis. 
 However, corporate leaders in Mumbai are shaken by the attacks, 
and angry at the inability of their government to prevent them. 
 The Indian government is likely to announce new measures to 
help Indian industry through the financial crisis, but it may 
take longer to relieve the public desire for deep reform. 
Perhaps, even corporate India has reached the end of its 
hands-off approach to the country's political class and 
governance.  The alternative - especially in neglected, 
misgoverned Mumbai - is not clear.  End Comment. 
FOLMSBEE