VZCZCXRO9348
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHNEH RUEHPW
DE RUEHNE #3072/01 3401115
ZNR UUUUU ZZH
R 051115Z DEC 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 4558
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 06 NEW DELHI 003072 
 
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 EMIN ENRG EPET ETRD
BEXP, KIPR, KWMN, PHUM, SENV, ASEC, KFLU, IN 
 
SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF 
DECEMBER 1 TO DECEMBER 5, 2008 
 
¶1. (U) Below is a compilation of economic highlights from Embassy 
New Delhi for the week of December 1 to December 5, 2008, including 
the following: 
 
-- India's Fiscal Deficit Set to Worsen 
-- GOI Set to Announce a Fiscal Stimulus Package 
-- Mumbai Terror Attack Slows IT Business 
-- Macro Update 
-- Exports Drop 12 Percent for October, Imports Slow Down 
-- GOI May Liberalize Foreign Investment Rules 
-- Anti-Dumping Probe May Give Steel Producers More Protection 
-- Investment Pattern of Pension Funds 
-- Insurance Regulator Speaks to Industry 
-- Private Insurance Companies Prefer Safer G-Secs 
-- World Bank May Suspend $300 Million Loan to Nhai 
-- PM Supports Passage of India's Bayh-Dole Act 
-- Poultry Firms in South India Shut Out of Middle East 
 
India's Fiscal Deficit Set to Worsen 
---------------------------------- 
¶2. (SBU) The Finance Ministry is likely to miss the revenue and 
fiscal deficit targets in FY 2008-09 as budgeted under the Fiscal 
Responsibility and Budget Management (FRBM) Act. The government will 
seek stimulus spending to boost aggregate demand in the economy, to 
offset the slowdown. Under the FRBM Act, the GOI was expected to 
eliminate the revenue deficit and reduce the fiscal deficit to 3 per 
cent of GDP by March 2009.  Former Finance Minister Chidambaram 
stated that the government needs one more year to achieve FRBM 
targets.  The fiscal deficit as a percentage of GDP between 
April-September 2008 stood at 4.1 percent versus 3.8 percent for the 
same period last year.  The revenue deficit was 3.1 percent during 
the same period versus 2.9 percent a year ago.  In addition to 
effects from the global economic slowdown, the fiscal situation is 
likely to worsen this year as the arrears of the Sixth Pay 
Commission awards to central government employees are fully 
disbursed, along with further disbursements under the farm debt 
waiver scheme. 
¶3. (SBU) Gross tax revenues slowed to 20.3 percent between 
April-October 2008 compared to the corresponding period of last 
year.  Growth in direct taxes including corporate taxes and the 
securities transaction tax has slowed down during the period and may 
not recover in the rest of the year, given the weak economic 
environment and lower volumes of trading on the stock markets. 
Corporate earnings have also decelerated in the second quarter of FY 
2008-09 and are likely to register poor growth in the third and 
fourth quarter.  India's nominal GDP in the first half of the 
current fiscal year grew by 17.2 percent to $502 billion (Rs 25112 
billion), as compared to 7.6 percent in real terms.  GDP growth may 
moderate over the next two quarters, as several interest rate 
sensitive sectors (construction and autos) are experiencing a 
dampening of demand. 
GOI Set to Announce a Fiscal Stimulus Package 
--------------------------------------------- 
 
¶4. (SBU) To mitigate the global meltdown's impact on India and to 
revive sagging demand, an economic stimulus package is being 
finalized by a high-level committee headed by Prime Minister 
Manmohan Singh which also includes Commerce Minister Kamal Nath, 
Reserve Bank of India (RBI) Governor Subba Rao, and Planning 
Commission Deputy Chairman Montek Singh Ahluwalia.  Media reports 
that the package to be announced soon will total around $15 billion 
(Rs 750 billion), including the use of foreign exchange reserves for 
funding infrastructure projects, lines of credit to banks, and 
greater flexibility for non-banking financial companies (NBFCs) to 
access foreign loans.  The fiscal measures could also include 
cutting excise duties on commercial vehicles.  RBI Governor Subba 
Rao is quoted as saying that the impact of global turmoil could turn 
out to be stronger than expected in India. 
 
¶5. (SBU) The package will allow RBI to invest up to $10 billion of 
its foreign exchange reserves (out of a total of $246 billion as of 
November 21) in bonds issued by foreign subsidiaries of the Indian 
Infrastructure Finance Corporation Ltd (IIFCL).  The subsidiary will 
 
NEW DELHI 00003072  002 OF 006 
 
 
then bring these funds into India and the parent company will use 
the rupee resources generated to lend for infrastructure projects. 
The government believes that when IIFCL sells the dollars back to 
RBI, the central bank will utilize them to add to the supply of 
rupees in the system, thus easing liquidity. 
 
¶6. (SBU) The RBI will be asked to extend a line of credit of $2 
billion (Rs 100 billion) to the Small Industries Development Board 
of India (SIDBI) to lend to small scale units at 8 percent.  The RBI 
would lend these funds at about 6 percent to SIDBI.  A similar $2 
billion (Rs 100 billion) line of credit will also be opened by RBI 
for the National Housing Bank (NHB).  The NHB will lend to housing 
finance companies at 6-7 percent rate so that they can provide home 
loans to consumers at around 8.5-9 percent to revive demand for 
housing.  NBFCs also will be allowed to access external commercial 
borrowings.  Some NBFCs have existing credit lines with foreign 
lenders and could bring in additional financing, if allowed by RBI. 
 
 
¶7. (SBU) A separate package of around $400 million (Rs 20 billion) 
for exporters will be announced, especially for labor-intensive 
sectors such as textiles, handloom, handicraft, leather, gems and 
jewellery and marine products - which have been hit due to a 
slowdown in the US and European markets. According to India's Export 
Promotional Council for Handicrafts, India's handicraft exports have 
declined by 30 percent during April-October 2008, compared to the 
corresponding period of last year.  Over one million people are 
employed in the most affected handicraft clusters of Moradabad, 
Jaipur, Saharanpur, Jodhpur and Narsapur in Andhra Pradesh.  About 
40 percent of the exporters have closed down their factories.  A 
total of 500,000 people have reportedly lost their jobs.  Commerce 
Secretary G K Pillai has stated that 500,000 people could lose jobs 
in the textile sector in the next five months. 
 
Mumbai Terror Attack Slows IT Business 
-------------------------------------- 
 
¶8. (SBU) Fallout from the terror attacks in Mumbai is hampering some 
high-tech business in South India.  Several companies have told us 
that incoming business travelers from the United States have 
canceled trips, holding back plans for new business.  An Infosys 
executive told Consulate General Chennai that his company was 
expecting to expand business with some recently restructured U.S. 
financial firms.  These deals, however, require U.S. businesspeople 
to travel to India to discuss mergers of software systems and other 
projects.  They have now postponed their travel, stretching decision 
and project cycles.  An official at MindTree Consulting told us that 
his company expects the postponement of business travel by U.S. and 
European customers to impact negatively revenue flows for at least 
the next two quarters. 
 
Macro Update 
------------- 
 
¶9. (U) Forex reserves were down US$550mn to US$246bn for a week to 
November 21. This is for the first time since mid October that the 
reserves have fallen by less than $1bn/week. The recent appreciation 
of the Dollar against the Euro has reduced the dollar value of the 
reserves held in Euros, which has been partly responsible for the 
drop in reserves. Among possible mitigating factors for Rupee 
depreciation, 2 major banks (SBI & ICICI) have reported an influx of 
remittances. Exports in Oct 08 shrank 12.1% yoy, the first time 
since March 02 primarily due to depressed demand in key developed 
markets and unavailability of letters of credit. A stimulus package 
is being formulated by a committee headed by the prime minister to 
address specifically employment intensive export sectors. An 
estimated Rs 2,000 crore will be earmarked for exporters of 
labour-intensive products while Rs 15,000 crore is expected for the 
infrastructure sector. The proposed special package of approximately 
0.3% of GDP will imply a further slippage in the deficit figures. 
While inflation as more widely measured by the WPI continues its 
downward path with the latest data at 8.40% (Nov 22), the CPI for 
industrial workers, that more directly impacts the voters wallet, 
 
NEW DELHI 00003072  003 OF 006 
 
 
has now crossed double-digit levels to 10.45 % yoy in October, 
faster than 9.77 percent in September, on rising food prices. 
 
Exports Drop 12 Percent for October, Imports Slow Down 
--------------------------------------------- ---- 
 
¶10. (U) Latest GOI data shows exports in October were 12 percent 
lower than in the same month of 2007.  Exports were valued at $12.8 
billion in October 2008 versus $14.6 billion for October 2007.  For 
the first seven months of the fiscal year, exports saw growth of 
23.7 percent over the same period in the previous year, totaling 
$108 billion compared to $87 billion the previous year.  Government 
officials predicted that India will likely not meet the target of 
$200 billion in exports this fiscal year; a more likely result is 
$175 billion. 
 
¶11. (U) Import growth slowed in October, recording 10.6 percent 
growth over October 2007, compared to 41 percent growth in the first 
six months of this fiscal year.  Non-oil imports grew by 5.5 percent 
in October, again less than the 29 percent growth during the first 
half of this fiscal year.  A slow-down in non-oil exports may 
reflect not only decreases in import-intensive products for 
re-export, such as a decrease in gems to be cut and polished for 
export, but also an overall demand decrease in the economy. 
 
GOI May Liberalize Foreign Investment Rules 
------------------------------------------- 
¶12. (SBU)  Media report that the Ministry of Commerce and Industry 
intends to do way with mandatory Cabinet Committee on Economic 
Affairs (CCEA) clearance for foreign investment proposals valued 
between $120 million (Rs 6 billion) to $200 million (Rs 10 billion). 
 According to the current rules, foreign investors as well as 
domestic investors with foreign partners have to approach the 
Foreign Investment Promotion Board (FIPB) under the Finance Ministry 
for approval, not only for their initial investment plans, but also 
for any changes in ownership patterns, fresh equity infusions, and 
technology transfer pacts.  At present, if a foreign investor 
invests up to $120 million in an existing venture, it needs only 
FIPB clearance.  Any investments above this amount require both FIPB 
and CCEA approval; thus the proposed change would raise the ceiling 
on FIPB-only investment approvals to $200 million, with investments 
above that amount still requiring both CCEA and FIPB approval.  The 
GOI is also considering a proposal to exclude foreign institutional 
investors' stake from the overall FDI ceiling, a decision on which 
could be taken soon. 
¶13. (SBU) During FY 2007-08, India received FDI totaling $24.5 
billion, up 56% from 2006-07.  The service sectors (both financial 
and non-financial) attracted the highest amount of foreign 
investments last fiscal year.  This was followed by computer 
hardware and software, housing and real estate, telecom and 
construction.  This fiscal year, some commentators expect India to 
receive $25 billion in FDI, lower than the GOI target of $35 
billion, due to the global financial crisis and, to a lesser extent, 
possible changes in risk perception from the Mumbai terrorist 
attacks.  Between April-September 2008, FDI inflows totaled $17.2 
billion.  This represents 137 percent growth over April-September 
2007 FDI inflows of $7.25 billion. 
 
Anti-Dumping Probe May Give Steel Producers More Protection 
--------------------------------------------- ---- 
 
¶14. (SBU) The Directorate General of Anti-Dumping (DGAD) under the 
Ministry of Commerce has initiated anti-dumping investigations 
against imports of cold-rolled stainless steel products from China, 
Japan, South Korea, the EU, South Africa, Taiwan, Thailand and the 
US.  Anti-dumping inquiries have also been initiated against imports 
of hot-rolled steel products from China, Indonesia, Iran, Japan, 
Kazakhstan, Malaysia, the Philippines, Romania, Russia, South 
Africa, Saudi Arabia, Korea, Thailand, Turkey and Ukraine.  Leading 
domestic steel producers filed applications with the GOI requesting 
the anti-dumping investigations, asserting that the inflow of 
below-cost steel items were coming into India from overseas 
inventory that has piled up due to falling demand.  In addition to 
 
NEW DELHI 00003072  004 OF 006 
 
 
falling demand, the domestic steel industry is specifically facing 
the challenge of cheap imports from China, forcing manufacturers to 
reduce production.  It takes about 45 days for investigations to be 
carried out and duties to be imposed.  If dumping is established, 
the DGAD will impose anti-dumping duties (equivalent to the extent 
of dumping) with retroactive effect from the date of filing of the 
complaint by the leading producers. 
 
¶15. (SBU) Minister of State for Steel Jitin Prasada has said that 
the government may impose a 14 percent countervailing duty 
(equivalent excise duty that the local industry pays as 
manufacturing tax) on structural steel products to make imports 
competitive.  Meanwhile, steel producers are set to cut prices of 
hot rolled coils.  The decision is a response to the withdrawal this 
month of a five percent export tax on flat products by China. 
During the week of December 5, the GOI moved to protect local 
industry by placing import restrictions on hot-rolled steel, 
seamless steel tubes and pipes, and wood and wood products used by 
specific sectors, which allows only actual users (autos, 
infrastructure and construction) to bring in these articles with 
GOI-issued import licenses. 
 
Investment Pattern of Pension Funds 
----------------------------------- 
 
¶16. (SBU) Media reports that the Pension Fund Regulatory and 
Development Authority (PRFDA), which will regulate the new pension 
scheme (NPS) beginning next fiscal year (April 1, 2009), will allow 
fund managers to invest only in stocks comprising the benchmark 
indices of the 30-share Sensex of the Bombay Stock Exchange and the 
National Stock Exchange's 50-stock Nifty.  The regulator's 
justification for this rule is to protect small investors from 
market volatility from the global financial crisis and recent stock 
market turbulence. 
 
¶17. (SBU) PFRDA has also set up an expert committee headed by HDFC 
Chairman Deepak Parekh to suggest investment options as well as a 
default option - i.e., the contribution allocation that will 
automatically apply if an investor does not make a specific choice. 
Investment allocation decisions by pension fund managers would be 
patterned on those followed by the Employees Provident Fund 
Organization: only 15 percent of the total money will be invested in 
equities; out of which 5 percent of the savings will go into 
equities while another 10% can go indirectly via equity-linked 
mutual funds.  Next year, the GOI will allow provident fund trusts 
operated by private firms to invest in equities up to 15 percent 
directly or indirectly. 
 
Insurance Regulator Speaks to Industry 
-------------------------------------- 
 
¶18. (SBU) Addressing a FICCI Conference organized this week on 
"Doubling the Insurance Penetration: Imperative for Uncertain 
Times", the Chairman of the Insurance Regulatory and Development 
Authority (IRDA), J Harinarayan, stated that India's insurance 
industry is expected to grow by 17 percent during FY 2008-09 if the 
economy grows at 7.6 percent, as it did between April-September 
¶2008.  He expects the terror insurance pool to grow significantly 
due to the recent terror attacks in India.  The Chairman asked 
insurance firms to use the opportunity presented by the downturn to 
improve their treasury management performance and build a foundation 
for future growth, which would help increase insurance penetration 
in the country.  Chairman Harinarayan expressed concern about the 
widening asset-liability mismatch in insurance companies' balance 
sheets.  He opined that there are insufficient long term debt 
securities available in the market, which may impact certain kind of 
liabilities that would arise in the future.  [Note: He seemed to be 
indicating that because insurance tends to focus on longer-term 
liabilities, the inability of insurance companies to invest in as 
many long-dated assets as is optimal for their business model 
imposed operating constraints and risk-management concerns.  End 
note].  In addition, Harinarayan indicated that IRDA is looking at 
introducing mark-to market norms for the investment portfolio of 
 
NEW DELHI 00003072  005 OF 006 
 
 
companies.  Harinarayan said that IRDA will be taking up this issue 
with the Ministry of Finance at an appropriate time. 
 
¶19. (SBU) The IRDA Chairman further said that, given what is 
happening in financial markets, he expects a wave of consolidation 
in the Indian insurance industry.  In anticipation, IRDA is 
formulating draft guidelines on insurance mergers and acquisitions 
(M&A) in coordination with the Institute of Actuaries.  The draft 
guidelines would be ready by March 2009 for stakeholder discussions 
with industry.  Currently, India has not issued any insurance 
sector-specific M&A guidelines.  Harinarayan also talked about 
rationalizing the insurance intermediary sector (i.e. distribution 
and insurance agents) and was in favor of allowing insurance 
companies to outsource some parts of their non-core business. 
 
Private Insurance Companies Prefer Safer G-Secs 
--------------------------------------------- -- 
 
¶20. (SBU) Media report that private life insurance companies 
including Max New York Life, MetLife, and Aviva have shifted their 
investment preferences from equity markets/corporate bonds to 
central government securities (g-secs) due to the global market 
volatility.  Indian life insurers invest about $20 billion (Rs 1000 
billion) annually in bonds and share markets as part of their 
premium collections.  Now these private firms plan to raise their 
investments to 75 percent in g-secs from the mandated 50 percent. 
In addition, these firms are required to invest 15 percent of their 
total assets in infrastructure bonds.  The rest of the assets could 
be invested in both equities and bonds with a limit of 15 percent in 
equities.  Life insurance companies have unit-linked insurance plans 
(ULIP), the return of which is linked to the performance of the 
equity market and also standard/endowment products which provide 
fixed returns.  IRDA prescribes investment guidelines for standard 
products but has no rules for ULIP products as investment under 
ULIPs are decided by the policyholder. 
 
World Bank May Suspend $300 Million Loan to Nhai 
--------------------------------------------- -- 
 
¶21. (U) Adding to the woes of the National Highways Authority of 
India (NHAI), World Bank has threatened to withdraw $300 million of 
the $620 million loan package for the $933 million 
Lucknow-Muzaffarpur National Highway Project (LMNHP). The bank has 
stated its displeasure at the tardy progress and inadequate safety 
measures followed in this highway development project. World Bank is 
especially concerned over the poor implementation of five road 
packages under the LMNHP which should have been open this month. 
There are also apprehensions about the large number of variations on 
work contracts awarded. These road stretches comprise almost 40% (in 
value) of the LMNHP that seeks to transform this 513 km national 
highway between Lucknow and Muzaffarpur (in Bihar) into a modern, 
four-lane road thus cutting travel time by 40%. 
 
PM Supports Passage of India's Bayh-Dole Act 
------------------------------------------- 
 
¶22. (U) According to local media reports, Prime Minister Singh 
expressed support to pass an intellectual property (IP) law, 
entitled the "Protection and Utilization of Public Funded 
Intellectual Property Bill 2008," or the "Indian IP Bill" that would 
allow for transfer of IP from universities to the public.  On 
December 3, the PM stated during a speech at the Indian Institute of 
Science (IISc) in Bangalore that he supports passage of legislation 
that would create mechanisms and incentives for the transfer of 
intellectual property by publicly funded research to beneficiaries. 
 
 
¶23. (U) The bill, if passed, would be the Indian equivalent to the 
U.S. Bayh-Dole Act, which provides U.S. universities, small 
businesses, and non-profits the right to elect to pursue ownership 
and title of an invention instead of the government.  The Indian 
version of the law would allow academic institutions to patent 
publicly funded research and would reward institutions and inventors 
 
NEW DELHI 00003072  006 OF 006 
 
 
with a share of royalties or licensing fees from any resulting 
commercial products.  While the U.S. version of the law provides 
rights specifically to institutions, the Indian version would 
provide the inventor with at least 30 percent of any royalties 
generated from licensing of an invention. 
 
¶24. (U) The Indian IP Bill was approved by India's Union Cabinet in 
late October and submitted to Parliament, sparking controversy 
because the bill moved to parliamentary review without being 
publicly released.  Opponents of the proposed law argue that it 
limits access to publicly-funded innovation, and that it gives 
scientists little say in the application and licensing of their 
invention. 
 
Poultry Firms in South India Shut Out of Middle East 
--------------------------------------------- ---- 
 
¶25. (U) Another outbreak of avian influenza in northeastern India is 
already hurting South India's poultry farmers.  The managing 
director at one major egg-producing company told Consulate General 
Chennai that the states in the Arabian Gulf, a key market, have 
banned imports of poultry meat and eggs from India.  One exporter 
even had to pay to return to India a shipping container full of eggs 
rejected by Qatar.  The domestic market -- the only one now 
available to India's producers -- is now awash in poultry products, 
reducing prices, and hurting producers' bottom line. 
 
¶26.  (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi 
 
MULFORD