VZCZCXRO0767
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHNEH RUEHPW
DE RUEHNE #3195/01 3541146
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R 191146Z DEC 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 4790
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 003195 
 
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, IN 
 
SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF 
DECEMBER 15 TO DECEMBER 19, 2008 
 
¶1. (U) Below is a compilation of economic highlights from Embassy 
New Delhi for the week of December 15 to December 19, 2008, 
including the following: 
 
-- GOI Banking on Infrastructure Projects to Revive Faltering 
Economy 
-- Telecom Regulator Seeks Clarity on 3G Policy 
-- Bail-out Package for Air India Likely in January 
-- Inflation Hits a 9-month Low 
-- NHAI Again Falls Short of Project Deadlines 
-- Parliament Passes the Unorganized Sector Bill 
-- World Bank to Further Assist Infrastructure Sector 
-- States Ask for Money to Cover VAT Revenue Losses 
-- Retail Sector Slows Down Expansion Plans 
 
GOI Banking on Infrastructure Projects 
to Revive Faltering Economy 
-------------------------------------- 
 
¶2. (U) At an infrastructure roundtable on December 19 organized by 
the Confederation of Indian Industry (CII), several industry 
analysts discussed and debated the impact and possible solutions to 
the liquidity crisis in the infrastructure sector.  The panelists 
agreed that the GOI is relying on the infrastructure sector to 
revive and kick start the economy.  The Planning Commission has set 
a target of investing $500 billion in the infrastructure sector 
during the Eleventh Plan.  Of the planned total investment 
requirement, the government is planning to raise 30 percent (or $150 
billion) of the funds in the private sector.  At present, India 
currently invests 5 percent of GDP in infrastructure and aims to 
increase this to 9 percent by the end of the Eleventh plan period 
(2012).  In comparison, China is currently investing 15 percent of 
its GDP in infrastructure projects.  Project developers and 
promoters cite the current liquidity crunch, higher interest rates, 
and delayed rollout of infrastructure projects by the GOI as 
important factors leading to the slowdown in this sector. 
 
¶3. (U) According to representatives from the financial institutions, 
the liquidity crunch has only extended to promoters who so far have 
been unable to garner adequate equity.  However, debt financing for 
infrastructure projects, albeit at higher interest rates, is 
available. Both Chairman Kohli of India Infrastructure Finance 
Company and Chairman Chakrabarty of Punjab National Bank shared the 
view that interest rates are bound to come down as a response to the 
fiscal stimulus measures which have been announced by the GOI. 
Also, the decision to put in place refinancing schemes as well as 
the subordinate debt scheme will likely ease the liquidity crunch. 
According to Kohli, an additional $100 million will be in place for 
financing infrastructure projects by April 2009.  Yet, he commented 
that the problems of identifying and bringing forth bankable 
projects will remain.  Kohli pointed out this will be further 
exacerbated if adequate and urgent measures are not taken in the 
infrastructure sector like increasing efficiency in implementing 
on-going projects, providing non-fiscal incentives (such as faster 
project clearances and more efficient land acquisition procedures), 
and a single window approach for monitoring and facilitating 
projects. 
 
Telecom Regulator Seeks Clarity on 3G Policy 
--------------------------------------------- 
 
¶4. (U) Telecom Regulator Trai has requested that the communications 
ministry address several controversial issues prior to going ahead 
with the 3G auctions, particularly how the government plans to issue 
licenses to new companies that enter India via the 3G route.  Trai 
has requested clarification on whether or not companies entering via 
the 3G route will have to pay an entry fee for a license and if 2G 
spectrum would be allotted to companies entering under successful 3G 
bids.  Trai's questions to the ministry closely coincide with USG 
requests for clarification on the same policy. 
 
Bail-out Package for Air India Likely in January 
--------------------------------------------- -- 
 
NEW DELHI 00003195  002 OF 004 
 
 
 
¶5. (U) According to local media sources, a draft Cabinet note 
proposing a bailout for the National Aviation Company of India 
(NACIL), which operates Air India, has been submitted by the civil 
aviation ministry.  The bailout package would be approximately USD 
500 million to be put into effect in January.  The government 
assistance would help Air India cope with high losses and the 
fibancial burden of fluctuating jet fuel prices.  The additional 
costs of jet fuel prices from April to October were approximately 
USD 500 million.  The civil aviation sector has been one of the most 
affected by the financial slowdown:  the accumulated losses for the 
sector this fiscal year may reach USD 1.7 billion, with Air India 
accounting for almost half of this total.  Air India currently owes 
about USD 150 million to the Airport Authority of India. 
 
Inflation Hits a 9-month Low 
--------------------------- 
 
¶6. (U) The annual inflation rate, as measured by the WPI, dropped to 
6.84% for the week ending on December 6 (from 8% the week prior), 
primarily due to a fall in fuel prices.  The declining inflation 
rate has again sparked hope in the private sector that the RBI will 
consider cutting interest rates again soon.  Along with the drop in 
fuel prices, prices of food products have also decreased for the 
second straight week.  This drop, analysts report, may provide the 
government with room for more aggressive monetary policies without 
inflationary consequences. 
 
NHAI Again Falls Short of Project Deadlines 
------------------------------------------- 
 
¶7. (U) Continuing its poor record of meeting project deadlines, the 
National Highway Authority of India (NHAI) once again failed to meet 
its October 2008 target date for completion of projects first 
launched in 2004.  NHAI did not finish any of the 47 projects in the 
second phase of the North-South-East-West (NSEW) corridor. 
According to media reports, less than 50 percent of the work has 
been completed on 23 projects.  The NSEW corridor is part of the 
government's flagship National Highway Development Program (NHDP), 
aimed at approximately 32,939 of four-lane highways across India. 
 
¶8. (U) Also, 83 other projects which were launched in May 2004 and 
are scheduled to be completed by 2010 are behind schedule. 
According to press reports quoting a senior NHAI official, the 
organization has been giving a free run to its contractors for the 
past four years.  The official added that there is a "total lack of 
supervision and the authority has not made any effort to remedy the 
situation."  However, the same report also quotes another official 
from the Ministry of Road Transport and Highway (MORTH) who asserted 
that the NHAI has sent show-cause notices to a dozen non-performing 
contractors who have not even completed 50 percent of the work. 
 
¶9. (U) Highway development in India is expected to absorb USD 60 
billion in investments over the next five years and has been 
identified as a key sector for sustained economic growth by the 
government.  That said, problems with land acquisition, escalation 
of input costs, lack of cooperation by some state Governments, and 
interference by MORTH in day to day functioning of NHAI operations 
are causing significant delays in the commissioning of these 
projects. 
 
Parliament Passes the Unorganized Sector Bill 
--------------------------------------------- 
 
¶10. (U) The long pending Unorganized Workers' Social Security Bill, 
2008 was passed by both houses of Parliament, after rejecting 
amendments by the Left Parties that would have created a national 
welfare fund and extended health and insurance schemes for the 
workers.  The legislation will provide social security and job 
protection to 375 million workers in the informal sector (including 
agriculture and construction sector) in the next five years.  It 
will enable about 94 percent of workers below the poverty line in 
the informal sector to receive health, life, and group accident 
 
NEW DELHI 00003195  003 OF 004 
 
 
insurance, as well as pension benefits.  Labor Minister Oscar 
Fernandes indicated that the national and state governments will 
establish social security advisory boards to recommend suitable 
welfare measures for different sections of unorganized sector 
workers.  Certain health insurance and old age pension schemes for 
those below the poverty line have already been implemented. 
Fernandes described the legislation as the "first step in 60 years" 
to address the difficulties of the poor.  The Communist Party of 
India (Marxist) who had supported the bill previously complained 
that the legislation fails to cover 90 percent of the workforce in 
the unorganized sector because most of them do not fall below the 
poverty line under the legislation.  The bill now goes to President 
Patil for final review and signature. 
 
World Bank to Further Assist Infrastructure Sector 
--------------------------------------------- ----- 
 
¶11. (SBU) The World Bank plans to provide an additional sum of USD 3 
billion for investment in India's infrastructure sector.  The Bank 
has stipulated this additional amount is part of the total financing 
of $14 billion proposed for India's Country Strategy for fiscal 
years 2009-2011.  This additional amount will be channeled through 
the India Infrastructure Finance Company Limited (IIFCL) to help 
finance public-private partnerships in the infrastructure sector; 
fund Small Industries Development Bank of India so that it provides 
credit to small and medium firms; and provide money to the power 
grid to expand the transmission network.  Some amount may be kept 
aside for recapitalization of some loss-making government-owned 
banks and for the National Housing Bank. 
 
States Ask for Money to Cover VAT Revenue Losses 
--------------------------------------------- --- 
 
¶12. (SBU) Indian states are demanding an additional assistance of 
USD 4.3 billion (Rs 200 billion) from the Central government because 
of a sharp decline in state revenue.  Value-added tax (VAT) revenues 
have declined in sectors such as real estate, iron and steel, cement 
and petrochemicals.  Asim Dasgupta, Chairman of the Empowered 
Committee of State Finance Ministers on VAT, has proposed that this 
money be distributed to the states as per the formula laid under VAT 
rules and each state's need. (Note: the 2008-09 budget had allocated 
$700 million (Rs 3292 crore) as compensation to states facing losses 
due to VAT implementation. End note.)  The assistance would be spent 
on infrastructure, rural housing, and the social sector to stimulate 
the economy.  The Empowered Committee has also asked the national 
government to allow states to borrow more under the special 
additional market borrowing window. 
 
Retail Sector Slows Down Expansion Plans 
------------------------------------------ 
 
¶13. (U) The economic slowdown, combined with over-optimistic 
projections, may stunt the growth of organized retail this year. 
The Retailers Association of India stated this week that organized 
retailers will register approximately 15 percent growth in sales 
this year compared with 35 percent annual growth experienced in each 
of the past three years.  Retail companies are adjusting their 
initial plans for expansion due to the slowdown: Reliance Retail, 
which set out to open 3,000 outlets of its grocery store Reliance 
Fresh in addition to hundreds of other formats by 2011, is well 
below this target.  The retailer opened 800 outlets, but plans to 
shut or restructure 200 stores that are not profitable.  Shuhiksha 
Trading Services, India's largest discount retailer that also 
planned to open hundreds of outlets across the country, has closed 
several stores amidst accusations that the company had not paid 
staff or vendors for months.  Indiabulls Retail Services Ltd. has 
closed four out of nine hypermarkets and has lost approximately 90 
percent of its stock value.  HyperCity Retail Pvt. Ltd. has 
dissolved plans to open 250 outlets and 6Ten of REI Agro Ltd. has 
closed several dozen stores and cut employees. 
 
¶14. (U) While several retail firms are reconsidering their growth 
and expansion plans, Bharti Retail Pvt. Ld is continuing to follow 
 
NEW DELHI 00003195  004 OF 004 
 
 
its strategy for a slow roll-out of 30 stores (varying from grocery 
stores to supermarkets to hypermarkets) in New Delhi by the end of 
¶2009.  Working with Wal-Mart Stores as their technical adviser and 
joint venture partner, Bharti Retail also plans to open 15 
cash-and-carry stores that will supply retailers rather than 
household consumers.  The Future Group's Pantaloon Retail Ltd. also 
appears to be doing well despite the economic slowdown and 
reportedly expects 30 percent growth in sales and at least 40 
percent growth in net profit over the next two years. 
 
¶15. (U) COMMENT: Organized retail sector growth, which has been 
expected to be the next big growth sector in the Indian economy as 
middle class consumer spending increases, has taken a hit from 
rising inflation over the past several months and the financial 
slowdown, or at least the perception of one.  Analysts report that 
the crisis has affected consumer sentiment and predict discretionary 
spending to grow at only 4.5 percent this fiscal year, compared to 
14-15 percent a year for the past four years.  As consumers spend 
less and retail outlets remain unprofitable, organized retailers 
will likely revise their business plans. END COMMENT. 
 
¶16. (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi 
 
¶17. (U) This is the last weekly ECON Office highlights for 2008. 
Happy Holidays and a prosperous new year! 
 
MULFORD