VZCZCXRO8875
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHNEH RUEHPW
DE RUEHNE #0103/01 0161249
ZNR UUUUU ZZH
R 161249Z JAN 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 5082
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
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 03 NEW DELHI 000103 
 
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 MANAGING IMPACT OF GLOBAL FINANCIAL CRISIS ALTHOUGH 
DISTRACTED BY ELECTIONS AND REGIONAL TENSIONS 
 
REF A) SECSTATE 00134459 B) 08 NEW DELHI 002995 C) NEW DELHI 00022 
D) 08 NEW DELHI 00003177 E) 08 NEW DELHI 3143 F) NEW DELHI 000044 
 
¶1.  (SBU) Summary.  Per Ref A, Mission provides an update on how 
India is weathering the global financial crisis and subsequent 
economic slowdown and on the political economy of the impact and 
government response.  India's economy, already slowing from lower 
domestic spending in a high interest regime, has also been hit since 
October by decreased global demand for its textiles and jewelry, as 
well as seeing private and public investment in infrastructure and 
capacity expansion stymied by frozen credit markets (ref B).  Two 
stimulus packages were dominated by relatively aggressive monetary 
loosening and foreign financing liberalization, along with some 
targeted fiscal support.  Most economists still expect the Indian 
economy to expand between 6-7% in the current fiscal year, ending 
March, and then to fall to a 5-6% growth band for the rest of 2009. 
National elections by May and tensions with Pakistan may limit Prime 
Minister Singh and his economic team from contributing more to G-20 
efforts than these domestic responses.  End summary. 
 
FISCAL STIMULUS PACKAGES 
----------------------- 
 
¶2.  (SBU) The Government of India and the central bank, the Reserve 
Bank of India (RBI), have created two stimulus packages in the last 
month (ref C and D).  Since big populist programs this year already 
limited the government's capacity to spend, the fiscal stimuli were 
very modest, mainly targeting the hard hit sectors of 
infrastructure, real estate, and SMEs, which are labor-intensive. 
CRISIL's principal economist, DK Joshi, and IMF resident 
representative, Sanjaya Panth, both think there is little left the 
government can do on the fiscal side because of spending 
constraints.  Indeed, when the government announced the January 2 
package, it noted its intention that this would be the last fiscal 
package of the year, although a fuel price reduction is rumored. 
 
¶3.  (SBU) Monetary policy has notably loosened since September, and 
the two stimulus packages cumulatively brought the main policy 
lending rate down by 100 basis points to 5.5%, while the reverse 
repo rate, the rate at which the RBI pays banks for parking their 
funds with it, has been brought down to 4% to deter banks' 
preference to keep funds safe with the central bank rather than 
lend.  These moves, along with reductions in the cash reserve ratio 
(CRR) and government pressure on public sector banks, have prompted 
a few banks to lower their deposit and lending rates, although the 
prime lending rate has barely moved.  Vaishali Nigam Sinha, Senior 
Vice President, Macquarie Capital Advisers, thinks the first 
stimulus package has eased borrowing for some companies, especially 
in the infrastructure and real estate sectors.  In addition, bankers 
in Mumbai think that trade finance has eased recently.  However, RBI 
data shows banks are still parking significant funds with the 
central bank, suggesting that liquidity has eased but banks are 
still hesitant to lend.  Meanwhile, regional economic differences 
limit the usefulness of looser monetary policy.  Our Consulate in 
Kolkata noted that commodity-consuming industries in resource-rich 
eastern India are struggling with lower commodity prices and higher 
inventory and are not in need of working capital. 
 
FINANCIAL REFORMS SLOWLY SOLDIER ON 
---------------------------------------- 
 
¶4.  (SBU) Commendably, the regulators have continued with planned, 
albeit incremental, financial liberalization while the government 
has introduced newer measures to encourage capital inflows.  In 
response to a net outflow of portfolio investment, the stock market 
regulator, SEBI, removed the ban on participatory notes, a form of 
derivative portfolio investment.  The Ministry of Finance also 
loosened the restrictions on external commercial borrowings and 
raised the cap on foreign portfolio investment in the corporate debt 
market.  Finally, RBI continued with its rollout of futures 
derivatives last fall and is on track to launch interest rate 
derivatives this month. 
 
ECONOMIC OUTLOOK: STILL MIXED, LESS DIRE 
----------------------------- 
 
¶5.  (SBU) Since steep contractions were noted in October export and 
production data (ref B), recently released November production and 
 
NEW DELHI 00000103  002 OF 003 
 
 
infrastructure data shows a return to positive territory, although 
still off from strong showings last year at the same time.  The 
index of industrial production (IIP) rose 2.2% in November compared 
to 4.9% growth in November 2007; April-November growth was 3.6% 
compared to 6.4% during the same period in 2007.  Preliminary 
estimates of exports in December were still off, but only down by 
1%, compared to the October year-on-year plummet of 12%.  Meanwhile, 
some major Indian steel companies noted this week that domestic 
demand seems to be picking up and they are planning to return to 
full production after having cut back in late 2008. 
 
¶6.  (SBU) Some sectors of the Indian economy continue to hurt, 
especially textile and gems and jewelry exports and auto component 
domestic and export sales (ref F).  The Ministry of Commerce has 
revised downwards its export target for the fiscal year from $200 
billion to $175-180 billion.  Total exports last fiscal year were 
$162 billion; exports from April to December were $130 billion, 
representing the 30% growth exports experienced in April to August. 
The stimulus packages had some targeted concessions for these 
groups, but industry representatives say they are not enough. 
 
¶7.  (SBU) Although the balance of payments turned negative in the 
April to September quarter (latest available data), foreign exchange 
reserves, at $250 billion, remain sufficient to cover 2.5 times 
short term debt.  Since much of the April-September trade deficit 
was due to the peak oil prices over the summer, analysts expect the 
import bill to fall in the coming months, although declining exports 
mitigate the improvement.  Anecdotally, foreign worker remittances 
remained strong through December, especially through 
government-sponsored Non-Resident Indian (NRI deposits), whose 
deposit rates were raised to attract such funds.  India leads the 
world in remittances, last year earning roughly $40 billion. 
Foreign exchange reserves have not fallen in recent weeks and the 
rupee has remained in the 48-49 range.  This suggests that capital 
flows may have stabilized compared to the $60 billion loss in 
reserves last year as the RBI intervened in forex markets to 
mitigate the rupee's roughly 20% depreciation from September to 
December. 
 
BILATERAL TIES NOT HARMED 
------------------------- 
 
¶8.  (SBU) Post has not seen any signs of negative fallout from the 
financial crisis on bilateral relations.  Indeed, when Post 
delivered the recent G-20 demarche to the Ministry of Commerce and 
Industry (ref E) on how the government's November increase in 
several import tariffs went against the G-20 Communique, the 
Ministry's response was mild and rather technical in nature. 
Government officials have not spoken critically of any US domestic 
policy moves, and in recent months, have not framed the global 
economic slowdown as the US' fault.  The government has not 
instituted any additional tariff increases since the raising of 
several import duties in November, although it remains under 
pressure from industry to do so. 
 
ELECTIONS LOOMING; GOVERNMENT DISTRACTED 
-------------------------------------- 
 
¶9.  (SBU) While the GOI has crafted two stimulus packages, domestic 
politics are strongly dominating government bandwidth these days. 
The two main events are approaching national parliamentary 
elections, which must take place no later than the April-May 
timeframe, and ongoing tensions with Pakistan in the wake of the 
November Mumbai attacks.  The government was probably motivated to 
move quickly on the stimulus packages, a key recommendation of the 
G-20 summit, because mitigating the economic slowdown is in the 
ruling coalition's interest as it prepares for elections.  However, 
active G-20 participation by India in the next few months may be 
constrained by election preparation.  In addition, the government is 
preoccupied with a "coercive diplomacy" effort to pressure other 
governments to apply harder pressure on the Pakistani government to 
move against the perpetrators of the Mumbai attacks. 
 
¶10.  (SBU) India's apparent attempt to pursue non-military responses 
could lead it to seek punitive economic steps against Pakistan, 
which would go against the spirit of the G-20 Communique supporting 
united efforts towards world growth.  Home Minister Chidambaram was 
quoted in the London Times this week (and widely re-quoted) as 
 
NEW DELHI 00000103  003 OF 003 
 
 
threatening to sever trade and civil ties with Pakistan if it did 
not take adequate steps to help find those responsible for Mumbai. 
Meanwhile, Chidambaram's move to the Home Ministry in December has 
left the Finance Minister's position empty.  Contacts have told 
Econoffs that Planning Commission Deputy Chairman Montek Singh 
Ahluwalia is informally filling the role in conjunction with Prime 
Minister (and a former Finance Minister) Singh.  While they are both 
highly capable economic managers, the elections and regional 
tensions leave less room for the Prime Minister to dedicate to 
global issues. 
 
COMMENT 
------- 
 
¶11.  (SBU) India's top economic leadership has so far rather deftly 
handled the impact on India of the global financial and economic 
downturn.  But looming elections and regional tensions, combined 
with double-hatted economic management, could constrain India's 
ruling coalition from active leadership in the G-20 process in the 
coming months.  However, these distractions may not matter much to 
India's economic performance during the next six months as several 
economists tell Econoffs that there is little left the government 
can do to mitigate the crisis.  While forecasts on India's growth 
diverged significantly late last year, there is growing consensus on 
India's growth projections for the coming year as its trajectory 
becomes clearer.  India's exports will have to ride out the global 
slowdown, but the country's domestic demand appears resilient enough 
to maintain growth in the 5-6% range through the worst of the global 
downturn and keep India as one of the fastest growing economies. 
 
WHITE