VZCZCXRO4604
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHNEH RUEHPW
DE RUEHNE #3138/01 3471014
ZNR UUUUU ZZH
R 121014Z DEC 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 4678
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 04 NEW DELHI 003138 
 
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 8 TO DECEMBER 12, 2008 
 
¶1. (U) Below is a compilation of economic highlights from Embassy 
New Delhi for the week of December 8 to December 12, 2008, including 
the following: 
 
-- Macro Update 
-- Speculation on New Finance Minister 
-- World Bank to Address Infrastructure and Poverty 
-- India's Infrastructure Registers Sluggish Growth 
-- GOI Allows Fertilizer Companies to Issue Fertilizer Bonds 
-- India to Go Slow on Bilateral Trade Plans with Pakistan 
-- Renault Scales Down Chennai Facility 
-- Tamil Nadu Changing Policies on Electricity Sales 
 
Macro Update 
------------- 
 
¶2. (U) Economic outlook for India deteriorates with World Bank & 
Morgan Stanley further downgrading India's growth forecasts (5.8% 
for 2009 & 5.3% for FY09 respectively). A blend of monetary and 
fiscal measures were announced, like policy rate cuts (1% reduction 
in Repo and Reverse Repo rates), excise duty cuts (across the board 
4% excise duty cut barring petroleum products) and increased 
government outlays (USD 4 bn), to combat the decelerating growth 
momentum. The fiscal package drew a mixed response from industry 
with some sectors like construction and real estate expecting a 
bigger boost. In addition, the government permitted IIFCL to raise 
tax free bonds to the tune of USD 2 bn, to facilitate financial 
closure for infrastructure projects under the PPP route. The 
government is also taking steps to ensure that the already budgeted 
expenditure of USD 60 bn is actually spent over the next four months 
of the current fiscal year. The recent fiscal stimulus package of 
approximately 0.6% of GDP will imply a further slippage in the 
deficit figures. Inflation rate fell further to a seven month low of 
8% (Nov 29) mainly on account of easing food prices. 
 
Speculation on New Finance Minister 
----------------------------------- 
 
¶3. (SBU) Press reported this week on possible replacements for 
Chidambaram, who became Home Minister following the November 26 
Mumbai terrorist attack, as Minister of Finance.  Names being 
considered include former Karnataka Chief Minister SM Krishna, Union 
Commerce and Industry Minister Kamal Nath, Rajya Sabha Member and 
Former Reserve Bank of India Governor C Rangarajan, and Deputy 
Chairman of the Planning Commission, Montek Singh Ahulwalia.  Some 
Econoff contacts suggest that the most likely of the four is 
Rangarajan because the Ministry needs someone well-versed in finance 
to manage the daily flow of issues and decision-making, especially 
during the ongoing financial and economic slowdown.  The other most 
likely possibility is that no one is named before national 
elections, in which case Montek Ahluwalia will de facto run MOF, 
reporting directly to the Prime Minister as he does now in the 
Planning Commission. 
 
¶4. (SBU) SM Krishna, (76 years old) may be favored because of his 
political credentials.  Krishna, a lawyer by profession has held 
many prestigious positions such as former Governor of Maharashtra 
and former Chief Minister of Karnataka. Krishna resigned as Governor 
of Maharashtra on March 5, 2008 in order to return to active 
politics in Karnataka.  Kamal Nath, (62 years old) Union Commerce 
and Industry Minister, appointed since May 2004 has earlier served 
in various ministerial capacities including as Union Minister of 
State for the Environment and Forests and Textiles. Nath has 
witnessed major trade policy initiatives as Minister of Commerce and 
Industry.  (Comment: One contact theorized that Nath may be 
generally discredited in Congress party circles for having promised 
a definitive win in his home state of Madhya Pradesh, which did not 
happen.  End comment.)  Dr. C. Rangarajan (76 years old), who 
recently became a Rajya Sabha Member, is a leading economist who has 
played a key role as a policy maker.  He has held several important 
positions including as Chairman of Prime Minister Manmohan Singh's 
Economic Advisory Council, Governor of Reserve Bank of India and 
Governor of Andhra Pradesh. Rangarajan may be Prime Minister Singh's 
 
NEW DELHI 00003138  002 OF 004 
 
 
choice because of his vast technocratic experience.  Montek Singh 
Ahluwalia (65 years old) has been the Deputy Chairman of the 
Planning Commission since June 2004 and is considered a close 
economic advisor to the Prime Minister.  He is not a member of 
Parliament could hold the office for six months without being a 
member of either house.  He was Finance Secretary in Manmohan 
Singh's team in the Finance Ministry, which initiated economic 
reforms in the early 1990s. 
 
World Bank to Address Infrastructure and Poverty 
--------------------------------------------- --- 
 
¶5. (U) The Wnrld Bank on December 11 released India's Country 
Strategy for the years 2009-12, anticipating total lending of $14 
billion over the next three years, of which $9.6 billion will be 
from the International Bank for Reconstruction and Development 
(IBRD) and $4.4 billion from the concessional International 
Development Association (IDA).  The strategy aims to fast-track the 
development of much-needed infrastructure and to support the seven 
poorest states (Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, 
Orissa, Rajasthan, and Uttar Pradesh) in achieving higher standards 
of living for their people.  World Bank's Economic Adviser Giovanna 
Prennushi argues that in order to sustain India's rapid growth, it 
needs to include the 300 million people who live below the poverty 
line.  India's vast infrastructure deficits also need to be 
addressed as no Indian city provides water 24 hours a day and only 
half the population has access to safe drinking water.  About 40 
percent of India's 600,000 villages are not connected to a road. 
India was the largest IDA and second largest IBRD borrower from the 
Bank in 2008. 
 
India's Infrastructure Registers Sluggish Growth 
--------------------------------------------- --- 
 
¶6. (SBU) India's infrastructure sector, with a combined weight of 
26.7 percent in the index of industrial production (IIP), slowed to 
3.4 percent growth in October 2008 versus 4.8 percent in the 
previous month and 4.6 percent in October 2007.  The core sector has 
been posting weak growth throughout the fiscal year.  Cumulative 
core sector growth for April-October 2008 was just 3.9 percent as 
compared to 6.6 percent registered during the corresponding period 
of last year.  The steel sector was the worst hit, registering a 
negative growth of 0.5 percent against 5.2 percent in October 2007, 
due to a slowdown in demand and a sharp downturn in steel prices. 
Electricity production remained flat at 4.4 percent.  However, coal 
output was up by 10.9 percent in October 2008 vis-`-vis 8.9 percent 
in the previous year.  Output of petroleum products nearly doubled 
to 5 percent from 2.7 percent.  Cement output grew by a healthy 6.2 
percent in October 2008, with cement inventories at wholesalers 
increasing. 
 
¶7. (SBU) This week, in order to make more funds available to the 
infrastructure sector, the government approved the issuance of tax 
free bonds totaling $2 billion (Rs 100 billion) by the state-owned 
India Infrastructure Finance Company (IIFCL).  The IIFCL will raise 
the funds through a combination of private placement and public 
issue.  The coupon rate for the proposed bonds will be 7.5 percent. 
IIFCL will lend the funds to banks for refinancing infrastructure 
projects, particularly in the road and ports sector, at 8.5 percent. 
 IIFCL will also lend directly through consortium-lending sources. 
The government is expected to invite bids for over 50 highway 
projects worth $10 billion (Rs 500 billion). 
 
GOI Allows Fertilizer Companies to Issue Fertilizer Bonds 
--------------------------------------------- ---- 
 
¶8. (SBU) The Finance Ministry on December 10 gave permission to 23 
government-owned fertilizer companies to issue special bonds worth 
$2 billion (Rs 100 billion) as compensation towards the fertilizer 
subsidy during FY 2008-09.  The largest subsidy ($596 million) is 
being given to Indian Farmers Fertilizer Co-operative Ltd followed 
by Coromandal Fertilizers Ltd ($230 million) and Indian Potash Ltd 
($219 million) to help these firms meet their working capital 
 
NEW DELHI 00003138  003 OF 004 
 
 
requirements.  The 14-year bonds are being issued at the coupon rate 
of 7 percent.  These bonds will not be eligible as statutory 
requirements of banks for investment in government securities. 
However, the investment by the provident funds, gratuity funds and 
superannuation funds in the bonds will be treated as an eligible 
investment.  Banks will be allowed to sell these bonds to the 
Reserve Bank of India whenever they want, thus ensuring liquidity of 
these bonds.  The government received approval for reimbursing 
fertilizer companies for the cost of the controlled fertilizer 
prices for $7.8 billion (Rs 389 billion) by way of cash outgo and 
$2.8 billion (Rs 140 billion) through bonds in the supplemental 
budget passed in October.  With global crude prices now coming down, 
the fertilizer subsidy may also be lower.  Analysts point out that 
the fertilizer companies wanted to receive the subsidy in cash 
rather than through bonds, because they had to sell them at a 15 
percent discount last fiscal year. 
 
India to Go Slow on Bilateral Trade Plans with Pakistan 
--------------------------------------------- ------ 
 
¶9. (U) Last month's Mumbai terror attack will likely affect nascent 
trade openings between the two countries going forward.  Minister of 
State for Commerce Jairam Ramesh has reportedly said that in the 
aftermath of the attacks, no new initiatives will be started and 
India will have to revisit trade plans with Pakistan.  India and 
Pakistan, in September 2008, took steps to promote bilateral trade 
despite the traditional sensitivities involved between the two 
countries.  India's trade plan included removing Pakistan from the 
list of countries from where foreign direct investment was not 
allowed due to security reasons; opening two branches of commercial 
banks of India and Pakistan on a reciprocal basis; permitting trade 
in several hundred items compared with the current 13 across the 
Attari-Wagah border and the Khokrapar-Munabao border; and opening 
the Skardu-Kargil route in Jammu and Kashmir for commerce.  The 
Indian government has also dropped a plan to launch a website 
containing specific details of procedures to be followed by 
Pakistani exporters aiming to trade with India. 
 
¶10. (U) Immediately after the Mumbai attacks, India abandoned plans 
to set up border posts to facilitate movement of goods and people to 
and from Pakistan, Bangladesh, Nepal and Myanmar.  However, India 
will continue to allow trade across the Line of Control in Jammu and 
Kashmir, which is restricted to 21 items including fresh and dry 
fruits, spices, honey, leather slippers, walnut-wood furniture, wall 
hangings, embroidery items, tamarind, green gram, carpets, shawls, 
black mushrooms, pillows and pillow covers, medicinal plants, rice, 
blankets, rugs, woolen garments, saffron and kadam, a vegetable. 
 
¶11. (U) Bilateral legal trade between India and Pakistan increased 
to $2.3 billion in 2007-08 (0.5 percent of India's total trade 
turnover) from $345 million in 2003-04.  According to some trade 
observers, suspension of trade ties has more of an impact for 
Pakistan than for India, given Pakistan's minimal share in India's 
trade. 
 
Renault Scales Down Chennai Facility 
------------------------------------ 
 
¶12. (SBU) Carmaker Renault-Nissan announced on December 9 a scaling 
down of its plans to manufacture automobiles in Chennai.  The 
company is currently building a plant -- due to open in 2009 -- that 
was originally supposed to produce up to 500,000 cars per year.  A 
company spokesman told Consulate General Chennai that the plant will 
now operate only one line and produce only two types of sub-compact 
cars developed for the Indian market, which should be available to 
consumers in 2010.  He said that Renault-Nissan had dropped plans to 
produce a larger sedan at the facility because a key supplier 
withdrew from an agreement to provide critical components for the 
project.  A journalist from a leading business daily told us, 
however, that Renault-Nissan dropped its sedan plans because larger 
cars are selling extremely poorly in India. 
 
Tamil Nadu Changing Policies on Electricity Sales 
 
NEW DELHI 00003138  004 OF 004 
 
 
--------------------------------------------- ---- 
 
¶13. (SBU) Still reeling from electricity shortfalls, the state of 
Tamil Nadu continues to shift policy on sales of power by private 
producers to encourage greater use of as-yet untapped sources of 
electricity generation.  The Tamil Nadu Electricity Regulatory 
Commission (TNERC) has hitherto required that private producers of 
electricity (i.e., producers other than the Tamil Nadu Electricity 
Board, TNEB) pay a "cross-subsidy surcharge" to TNEB.  The purpose 
of this fee was ostensibly to help TNEB compensate for potential 
lost revenues required to achieve its "social goals," which include 
below-cost power to most individual consumers and free power to 
farmers.  (Consulate General Chennai hears frequent complaints from 
companies that farmers tend to sell this electricity rather than use 
it to irrigate crops.)  The actual effect was to discourage 
potential private producers from generating electricity for sale to 
power-starved industries. 
 
¶14. (U) The TNERC will now allow the TNEB to drop the surcharge 
requirement.  This move, championed by the Confederation of Indian 
Industry (CII) and other business groups, should increase the 
incentive for private producers to sell power.  CII argued that many 
companies in the state have installed back-up generators that could 
be used to generate electricity for sale to other companies, 
particularly in the current economic climate, when many 
manufacturers are seeing orders for their products plummet.  The 
chairman of a Coimbatore-based textile company told us that his 
facility has installed back-up generation capacity of 2 MW.  His 
textile facility is operating below capacity and he has long wanted 
to sell electricity to nearby companies to generate additional 
revenue, but the required surcharge made it unprofitable.  He told 
us, however, that he should now be able to do so profitably. 
 
¶15. (SBU) Comment:  Environmentally conscious observers may cringe 
at the prospect of hordes of private producers generating 
electricity inefficiently with relatively small diesel- and heavy 
fuel oil-powered generators, but the shortfall in electricity in the 
state is so acute that such concerns receive scant attention by 
policy makers.  End Comment. 
 
¶16.  (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi 
 
MULFORD