VZCZCXYZ0003
RR RUEHWEB

DE RUEHNE #0280/01 0441235
ZNR UUUUU ZZH
R 131235Z FEB 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 5394
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 NEW DELHI 000280 
 
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: ECON EAGR EAIR ECPS EFIN EINV EMIN ENRG EPET ETRD
BEXP, KIPR, KWMN, IN 
 
SUBJECT: NEW DELHI WEEKLY ECON OFFICE HIGHLIGHTS FOR THE WEEK OF 
FEBRUARY 9 TO FEBRUARY 13, 2009 
 
¶1. (U) Below is a compilation of economic highlights from Embassy 
New Delhi for the week of February 9-13, 2009, including the 
following: 
 
-- India Modifies FDI Procedures 
-- Inflation Continues to Fall 
-- December Industrial Output Falls 
-- Interim Railway Budget Announced 
-- FII Holdings Fall to Five Year Low 
-- J&K Chief Minister Invites India Inc to Kashmir 
-- GOI Waives Duty on Newsprint Paper 
-- Leading Retailer in Trouble 
-- Retailers Back out of Leases 
-- U.S. Retailers Try to Divest IT Assets Without 
   Causing Local Job Losses 
-- McDonald's Plans Expansion in India in 2009 
-- Bharti Foundation Recognized for CSR Activities 
 
India Modifies FDI Procedures 
----------------------------- 
 
¶2. (U) In a bid to address the present economic slowdown in India, 
the Cabinet Committee on Economic Affairs (CCEA) on February 11 
liberalized guidelines used to determine the amount of foreign 
direct investment (FDI) in sectors that are subject to FDI caps. 
The move is geared towards facilitating greater foreign capital 
inflows into the country.  The new guidelines outline procedures for 
the calculation of foreign investments in Indian companies and the 
transfer of ownership or control of Indian companies in sectors that 
currently have foreign direct investment (FDI) caps.  Under the new 
guidelines, downstream investments by an Indian company that has 
foreign investment but is owned and controlled by Indians will not 
be considered FDI. 
 
¶3. (U) Currently, Press Note 9 (1999) governs foreign direct 
investments enabling foreign-owned Indian holding companies to make 
downstream investments under the automatic route.  In recent years, 
the government has counted existing FDI in the Indian partner of a 
joint venture with a foreign company - called indirect investment - 
towards the FDI cap in the joint venture.  In response to industry 
and investor comments, the CCEA press release 
(http://pib.nic.in/release.asp?relid=47408) clarified the norms for 
calculation of foreign investment. 
 
¶4. (U) A real-life example of how the new rules could potentially 
operate is illustrated by the case of the Indian telecom company 
Vodafone Essar (VE).  The overall cap for foreign investment in the 
telecom sector remains 74 percent.  However, the UK parent company 
(Vodafone) will be able to raise more FDI since, in addition to its 
42 percent direct holding in VE, it has an additional 10 percent 
indirect foreign holding in VE - via money invested through other 
companies that are "controlled and managed" by Indians.  Previously, 
Vodafone would be deemed to hold a combined 52 percent stake in VE. 
Under the new policy, Vodafone's 10 percent indirect holding, 
invested through Indian-controlled companies - is not deemed FDI, 
effectively meaning that Vodafone owns 42 percent of VE for purposes 
of the FDI cap and now has an additional 10% of equity that it could 
invest in VE without breaching the FDI cap. 
 
Inflation Continues to Fall 
--------------------------- 
 
¶5. (U) Year-on-year inflation for the week ending January 31 fell to 
4.39%, down from the prior week's reading of 5.07%.  This brings 
wholesale price inflation to its lowest level since January 2008. 
Much of the decline was attributed to the government's reduction in 
controlled energy prices, which was implemented on January 28. 
Energy and mining prices actually experienced contractions, while 
food article inflation remained stubbornly in the double-digit range 
at 11.5%.  The overall continued decline in inflation has fuelled 
expectations that the central bank, the RBI, will institute further 
policy rate reductions.  The last interest rate reductions were on 
January 2. 
 
 
December Industrial Output Falls 
-------------------------------- 
 
¶6. (U) According to the latest official estimates, industrial 
production in India fell 2 percent in December 2008 - the largest 
recorded year-on-year decline in any month in 15 years.  The drop 
was attributed to a 2.5% reduction in manufacturing sector growth. 
The remaining 20 percent of the India's Index of Industrial 
Production (IIP) is comprised of mining and electricity.  Both of 
the latter components showed declining, but still positive, growth. 
Despite the contraction in industrial output, many economists do not 
see this as a threat to the Central Statistical Organization's (CSO) 
advance forecast of 7.1 percent GDP growth for the current Indian 
fiscal year (FY) 2008-09, which ends March 31.  The official 
estimates project manufacturing growth at 4.1 percent for the whole 
fiscal year. 
 
¶7. (SBU) Analysts view the drop in the production of consumer 
durables as industry caution over perceived falling consumer 
confidence in making big-ticket purchases.  However, Prime 
Minister's Economic Advisory Council (EAC) member Saumitra Chaudhari 
has dismissed the 12.8 percent fall in consumer goods output as an 
anomaly, stating that the IIP will show a recovery in the final 
quarter of the current fiscal year (January-March 2009).  (Comment: 
Several Embassy contacts question the accuracy - although not the 
trend direction - of the IIP since its base year is 1993-94 and the 
basket of goods and reporting firms has not been updated since then. 
 End comment.)  Industry, meanwhile, is expecting a revival in 
demand in the second half of 2009.  General Motors India president 
and managing director Karl Slym has told the media that some 
positive results of the fiscal packages are expected in three months 
when the consumer actually increases spending.  Similarly, consumer 
durable firms reported a significant upswing in consumer durable 
sales, such as televisions and refrigerators, in January. 
 
Interim Railway Budget Announced 
-------------------------------- 
 
¶8. (SBU) Railway Minister Lalu Prasad Yadav presented the (interim) 
railway budget for FY 2009-10 on February 13, including a number of 
populist measures aimed at upcoming national elections.  Lalu has 
served as Railways Minister since 2004, proudly avoiding raising 
passenger fares yet still generating revenues.  Some of the 
highlights of his interim budget include a marginal reduction in 
passenger fares for all classes, a 2-percent cut in air conditioned 
and mail express trains, introduction of 43 new train services, 
plans to start high speed bullet trains, laying of new rail lines 
and more passenger amenities.  Lalu said that Indian Railways plan 
to invest $47 billion (Rs 2300 billion) in the 11th Five Year Plan 
(2007-12) to increase the transport capacity of the railways and to 
reduce the unit cost of operations. 
 
FII Holdings Fall to Five Year Low 
--------------------------------- 
 
¶9. (U) Foreign institutional investors (FIIs) in India's stock 
markets significantly reduced their equity through 2008, in the 
process lowering the percentage of their holdings to 15.5%, the same 
level it was in end-2003.  In value terms, FII equity is still 
higher than December 2003, coming in at $94 billion.  Meanwhile, 
domestic institutional investors (DIIs) - mainly mutual funds, 
insurance companies and banks - have stepped into the breach and 
raised their holdings of portfolio equity to 8.86%, surpassing 
retail investors for the first time.  The rise of DIIs is a sign of 
a deepening financial market. 
 
J&K Chief Minister Invites Industry to Kashmir 
--------------------------------------------- - 
 
¶10.  (U) Recently elected Jammu and Kashmir Chief Minister Omar 
Abdullah addressed members of the Federation of Indian Chambers of 
Commerce and Industry (FICCI) at its annual general meeting on 
 
February 12.  He was part of a "Session with Chief Ministers" that 
also included re-elected Delhi Chief Minister Sheila Dixit and 
Madhya Pradesh CM Shivraj Chouhan.  The 39-year old Abdullah, a very 
comfortable public speaker with good English, exhorted the audience 
to visit Kashmir to discover for themselves the improvement in 
security and the opportunities for investment.  He stressed to the 
packed and receptive audience that he was not trying to pressure the 
FICCI members into business commitments.  Rather, Abdullah invited 
the industry chamber members to vacation in his state, at which time 
they would discover for themselves the investment opportunities that 
Jammu and Kashmir provided.  FICCI General Secretary Amit Mitra 
committed at the panel session to holding a FICCI retreat in 
Kashmir. 
 
¶11.  (U) Abdullah also noted that major cell phone service provider 
Airtel had invested in the state, as well as conglomerate Essar. 
Airtel senior executive Rajan Bharti Mittal shared the dais and 
stated that Airtel has been in the state since 2004 and has always 
got "tremendous support" from the government.  Chief Minister 
Abdullah said his business development goals for the state were 
improving infrastructure, especially connectivity, and tax 
incentives.  He pointed out that a new international air route had 
recently opened between Srinagar, Kashmir and Dubai, which he hoped 
would increase foreign tourism.  Finally, to make the Line of 
Control into a "Line of Commerce," Abdullah identified the need to 
establish communication and financial links across the Line of 
Control between India and Pakistan.  Otherwise, he asserted, trade 
was limited to barter trade, since potential business partners 
cannot place orders or confirm payment. 
 
GOI Waives Duty on Newsprint Paper 
---------------------------------- 
 
¶12. (U) On February 11, the GOI announced a reduction in the duty on 
newsprint (uncoated paper) and lightweight coated paper used for 
newspaper and magazine publishing, respectively.  Previously, the 
duty rates were three and five percent on these two items.  Since 
newsprint is fully exempted from excise duty, it will also be exempt 
from countervailing and special additional duties.  Newspaper and 
magazine publishers had pressed for the measure due to increased 
international prices and declining ad revenues. 
 
Leading Retailer in Trouble 
----------------------------- 
 
¶13.  (U) Subhiksha Trading Services, one of the country's largest 
grocery chains, has closed 1,600 stores and laid- off most of its 
workers, according to media.  Through the end of 2008, the chain was 
opening stores at a rate of 50 per month with the expectation that 
expansion would be funded by an international investor.  When the 
economic crisis struck in September, press reports, the investor 
walked away from the deal and credit to finance store openings was 
no longer available.  As a result, the chain was not able to pay 
salaries, rents or suppliers.  The company is now looking to 
restructure its $153 million debt with the government and 13 
lenders.  Unable to pay employees and security guards, reportedly 
over 600 of the chain's stores have been looted. 
 
Retailers Back out of Leases 
---------------------------- 
 
¶14.  (U) Local media reports that many retailers are currently 
moving out of spaces they had leased due to their inability to pay 
high rental rates that were agreed to prior to the economic 
slowdown.  Over the past two years, projections of the Indian retail 
sector touted its significant growth potential, prompting retail 
chains to rapidly expand and sign leases wherever they could find 
space.  The anticipated increase in business led to an inflation of 
rental rates, so drastic that retailers took their landlords to 
court to dispute sharp rent increases.  As the economic slowdown has 
hit India, retailers have not been able to afford high rental rates 
and have been forced to reevaluate their business strategies, 
resulting in the closure of outlets, store size reductions and 
 
postponement of expansion plans.  They have also seen local 
financing options narrow and become more expensive.  Retailers have 
reportedly been reneging on their leases and moving to cheaper 
spaces in order to cope with the slower economic growth and the lack 
of available credit.  Over the past couple of months, landlords have 
been filing cases against several of India's larger retail 
operations, including Pantaloon Retail and Subhiksha, for failure to 
pay rent.  High rental rates and litigation add to the difficulties 
retailers have faced in expanding and developing their businesses. 
 
U.S. Retailers Try to Divest IT Assets Without 
Causing Local Job Losses 
------------------------------------- 
 
¶15.  (SBU) Retail giants Walmart and Target are each in negotiations 
to sell their information technology (IT) offices in Bangalore to 
information technology majors such as IBM, Infosys, and WIPRO. 
While the price tags for these operations remains uncertain, a 
Walmart Global executive told Consulate General Chennai that his 
company estimates that its Bangalore IT offices provide services 
worth nearly USD 300 million per year.  A Target executive also 
confirmed to us his company's plans to sell its Bangalore IT shop, 
emphasizing that Target sees the move as a way to rationalize its 
cost and personnel structure. 
 
¶16.  (SBU) Both companies are keen on ensuring that the sales of 
their IT arms do not damage their longer-term aims of entering into, 
and succeeding in, India's retail market.  Executives from both 
companies told us that the companies want to shield themselves from 
any bad publicity that would result from a divestiture that resulted 
in job losses (together, Walmart and Target's operations in 
Bangalore employ around 4000 people).  Both companies are therefore 
making sure that any sale includes provisions that the buyer retain 
employees currently working in the retailers' Bangalore offices. 
 
McDonald's Plans Expansion in India in 2009 
------------------------------------------- 
 
¶17.  (U) The fast-food chain plans to open 40 new restaurants in 
India by the end of this year, according to managing director Amit 
Jatia.  McDonalds serves 180 million Indian customers per year 
through its 155 locations and expects its customer growth rate to 
expand at 30-40 percent per year. The company will invest Rs.120 
crore (approx $25 million), excluding real estate costs, in its 
expansion plan this year.  "We are also increasing our headcount to 
7000 from 5000 at a time when most companies are either cutting 
costs or reducing employee numbers," said Jatia. 
 
Bharti Foundation Recognized for CSR Activities 
--------------------------------------------- -- 
 
¶18.  (U) Bharti Foundation, the philanthropy arm of Bharti 
Enterprises, received the 2008 Best Practices Award for its Social 
and Corporate Governance Responsibility activities.   Bharti 
Enterprises is one of India's leading business groups working in 
telecommunication, agri-business, insurance, and retail.  The 
prestigious award was founded by the Bombay Stock Exchange Limited, 
Nasscom Foundation, and Times Foundation to honor organizations for 
their contributions to society.  Bharti Foundation was this year's 
recipient for introducing the Satya Bharti School program which 
provides free, quality education to rural underprivileged children, 
with a focus on the girl child.  At present, about 158 Satya Bharti 
primary schools are operational across the states of Punjab, 
Haryana, Rajasthan, and Uttar Pradesh with a staff of 600 teachers 
and a total enrolment of more than 17,000 children.  Bharti 
Foundation plans to set up another 500 primary schools and 50 senior 
secondary schools to enroll an additional 200,000 children. 
 
¶19. (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi 
 
MULFORD