VZCZCXRO0321
RR RUEHAST RUEHCI RUEHDBU RUEHLH RUEHNEH RUEHPW
DE RUEHBI #0108/01 0751000
ZNR UUUUU ZZH
R 161000Z MAR 09
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC 7017
INFO RUEHNE/AMEMBASSY NEW DELHI 8258
RUEHBI/AMCONSUL MUMBAI 2196
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
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RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 03 MUMBAI 000108 
 
SENSITIVE 
SIPDIS 
 
PLEASE PASS TO USTR FOR AADLER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV EAGR EIND IN
SUBJECT: INDIAN GOVERNMENT ECONOMIC ADVISORS STAND BY 7 PERCENT PLUS 
GROWTH RATE PREDICTION BUT INDUSTRY IS MORE SKEPTICAL 
 
REF: MUMBAI 0096 
 
MUMBAI 00000108  001.2 OF 003 
 
 
Summary:  1.  (U)  At two recent economic conferences in Mumbai, 
two of the Government of India's top economic advisors 
reiterated their prediction that India would sustain 7 percent 
or higher growth rates  in 2008-09, and 2009-10, and chided the 
Indian private sector for its "irrational pessimism."   They 
identified rural demand fuelled by rising agricultural sector 
growth, low interest rates, high savings rates, the financial 
solvency of Indian banks, and competitiveness of Indian industry 
as key enablers for achieving this growth rate amidst the global 
economic slowdown, and financial crisis.  They also justified 
the government's monetary and fiscal policy measures aimed at 
reviving the economy, and argued that a widening fiscal deficit 
would prevent a steeper slowdown.  While emphasizing that an 
infrastructure push is central to economic revival, they 
admitted that financing infrastructure projects, during an 
external credit crunch and declining capital inflows, may be 
challenging, but was not impossible.  At these conferences, the 
government advisers had to defend their views against skepticism 
from representative from the private sector, who expressed 
impatience and dissatisfaction with government measures 
undertaken to combat the economic meltdown.  End Summary. 
 
 
Government's Economic Advisors Defend over 7 Percent Growth for 
2008-09 and 2009-10 
------------------------------- 
 
¶2.  (U)  Economic advisors to the Government of India separately 
defended growth rate projections of 7.1 percent in 2008-09 and 
7-7.5 percent in 2009-10 for the Indian economy at conferences 
held in Mumbai during the past month.  Dr. Suresh Tendulkar, the 
Chairman of Economic Advisory Council (EAC) to the Prime 
Minister, maintained that the EAC's projection of an over 7 
percent growth in GDP is justified even while the IMF and other 
international agencies have pegged India's growth at a much 
lower 5-5.5 percent for 2009.  He believes international 
agencies consider India in the context of global factors and 
look at India through a "birds' eye view," while Indian agencies 
look at the country through a "world's eye view" by focusing 
more on domestic factors. 
 
¶3.  (U)  At another conference, Dr. Arvind Virmani, Chief 
Economic Advisor of the Ministry of Finance, stated that growth 
would continue to slow until October-December 2009, after which 
the government's monetary and fiscal measures would take effect. 
 Virmani acknowledged that the over 7 percent growth estimate 
for 2009-10 is based on the assumption that the "downside risk" 
to the U.S. economy is eliminated by September 2009.  This will 
change the "risk perception" of investors, and the 
"entrepreneurial spirit" will once again take India to a higher 
growth path, he argued.  Acknowledging the recent release of 
agricultural growth figures for October-December showing a 2.2 
percent decline compared to the year before, Virmani maintained 
that the advance estimates of agricultural accounts in 2008-09 
indicated positive overall growth, and he expects the department 
of agriculture to adjust the final agricultural growth estimate 
upwards.  (Note:  Tendulkar spoke before these agricultural 
figures were released.  Many analysts expect the agricultural 
growth figures to improve, or be revised upwards by the end of 
the fiscal year.  See reftel.  End Note). 
 
Fundamentals Strong Enough to Support High Growth 
----------------------- 
 
¶4.  (U)  EAC's Tendulkar explained that the relatively 
unleveraged rural demand, stimulated by rising incomes during 
the last five years of good growth of the agricultural and 
allied sector, would continue to increase.   He pointed to 
shares of companies with a rural market base like Hindustan 
Lever and ITC which survived the stock market crash as an 
indicator of the isolation of the rural economy from the 
economic meltdown.   Tendulkar also expects a low interest rate 
regime to set in, and banks to move away from high deposit 
rates.  This would boost leveraged consumption demand, and 
consequently raise investment, he explained.   He noted that 
automobile sales had risen in January 2009 after auto loan rates 
were lowered.  Tendulkar also pointed out that most of India's 
investment was mobilized from domestic savings which is a 
positive factor during the current external credit crunch.  He 
believes that the assets of Indian banks may deteriorate, but 
non-performing assets (NPAs) would not be significant due to 
"the unwillingness of Indian banks to lend to exotic (now toxic) 
 
MUMBAI 00000108  002.2 OF 003 
 
 
financial instruments."  (Comment:  This conflicts with reports 
from analysts in Mumbai who point out that banks are now 
"reclassifying" NPAs by extending the time period of delinquent 
loans from 90, to 120, and now to 180 days, with the approval of 
the Reserve Bank of India.  End Comment).  The Indian small 
scale sector has become more competitive, and energy constraints 
would be eased by natural gas discoveries in the Krishna 
Godavari basin and oil finds in Rajasthan.  All these factors 
working together would ensure a growth rate of over 7 percent 
this fiscal year and the next fiscal year, he argued. 
 
¶5.  (U)  Tendulkar also believes that India has a comfortable 
balance of payments position.  The current account deficit is 
1.5-2 percent of GDP which, according to him, is small in 
relative terms, and can be financed through capital inflows. 
Quick recovery of the financial markets of developing countries 
would result in rising capital inflows.  While revival in export 
demand may take longer, domestic demand along with capital 
account relaxation will help in India's economic revival, he 
opined. 
 
Fiscal Push Necessary to Revive the Economy 
------------------------------------- 
 
¶6.  (U)  Tendulkar justified increased public spending as being 
necessary to mitigate the "crisis of confidence."  The fiscal 
deficit acts as a fiscal stimulus, he argued, and a widening 
fiscal deficit is necessary to prevent a steeper slowdown. 
Virmani concurred, and explained that the government can 
increase public expenditure without widening the fiscal deficit, 
either by decreasing expenditures in certain areas or by raising 
taxes.  Both these measures are deflationary, and would worsen 
the economic slowdown, he noted.  Nevertheless, both Tendulkar 
and Virmani cautioned that the fiscal space for government 
spending is narrow, and stressed the need for fiscal 
consolidation as soon as economic conditions improve.  Tendulkar 
blamed the government for being "locked" into a subsidy regime, 
which threatens "fiscal soundness," and crowds out private 
sector investment.  Virmani pointed out that the government had 
met its self-imposed fiscal responsibility targets for the past 
five years.  He believes that any government coming into power 
following the April-May elections will recognize the importance 
of adhering to fiscal prudence norms. 
 
¶7.  (U)  At one of the conferences, Y. Deosthalee, the Chief 
Financial Officer of India's largest infrastructure company 
Larsen & Toubro (L&T), expressed concern over the size of 
India's combined center and states debt to GDP ratio of over 80 
percent, and pointed out that servicing interest payments on 
this mounting debt gave the government limited space for fiscal 
measures. (Note: This is not new; India's public debt to GDP 
ratio hit 80 percent in the early 2000s and declined slightly in 
the last two years. End note.)   The size of the Indian fiscal 
stimulus packages is not comparable to other global stimulus 
packages, he said.  At both conferences, representatives from 
the micro, small and medium enterprises (MSME) complained about 
the lack of credit to the MSME sector, and accused the 
government and the RBI of not doing enough to address their 
concerns (despite fiscal and monetary measures in November and 
December).  At the same conference, the Deputy Governor of the 
RBI Usha Thorat admitted that credit growth to the micro and 
small companies sector had declined but offered no solution to 
fix the problem. 
 
Infrastructure Spending Key Driver for Economic Recovery, but 
Funding a Challenge 
--------------------------------------- 
 
¶8. (U)  Tendulkar said that the government is re-prioritizing 
public expenditure towards infrastructure projects, which can 
generate employment, stimulate investment demand, and spur 
growth.  He claimed that the government was taking several 
measures to co-ordinate, and push infrastructure projects that 
are in the pipeline.  L&T's Deosthalee applauded the 
government's infrastructure push, but noted that private sector 
infrastructure developers faced a capital crunch.  According to 
Deosthalee, international banks have become risk averse, and 
international bank credit is not forthcoming.  Indian 
infrastructure developers have to therefore depend on domestic 
bank credit which is limited, he said. 
 
¶9.  (U)  Virmani admitted that external funding had decreased, 
and reduced demand had dampened corporate profits.  Domestic 
 
MUMBAI 00000108  003.2 OF 003 
 
 
savings increase during a downturn which could cause aggregate 
demand to fall which would worsen the economic slowdown.  He, 
therefore, stressed that potential domestic savings should reach 
the corporate sector for productive investment.  The government 
should accelerate financial sector reform, and private industry 
should explore innovative ways to mobilize the domestic savings 
potential, he said.  The corporate sector could offer company 
fixed deposit schemes to the public for example. 
 
¶10.  (U)  Tendulkar maintained international funding, although 
difficult to secure, is not closed to Indian investors.  He 
expected the global loan market to revive before the equity 
market which may ease infrastructure project funding.  Virmani 
recognized that infrastructure financing requires long-term 
funding.  Banks depend on short-term funding, and financing 
long-term projects adds to their financial stress during a 
downturn, he noted.  Besides stating that financial sector 
reform was needed to address long-term funding requirements of 
infrastructure, Virmani offered no alternative options to 
infrastructure developers. 
 
Private Industry No Longer Quiet Observers, Demand Action 
------------------------------------------- 
 
¶11.  (U)  Despite their optimistic outlook, both Tendulkar and 
Virmani admitted that India's economic revival would be slow and 
painful, especially since it follows five years of over 8 
percent growth.  Tendulkar chided banks, investors and consumers 
for their "irrational pessimism," which he believes, can prolong 
and intensify the economic slowdown in India.  He blamed the 
media for "the import of the psychology of gloom and doom," and 
emphasized that the "unwillingness to spend is not justified on 
the evidence available."  He said that job losses in India, 
while painful, should be considered in relative terms, and is 
not comparable, in magnitude, to global job losses.  Virmani 
echoed Tendulkar's comments and conceded that there is no "magic 
solution to change the sentiment of risk-averse individuals." 
 
¶12.  (U)  Business representatives at the conferences questioned 
the validity of the relatively rosy growth predictions; one of 
the participants accused the government's advisors of making an 
"informed guess" about India's economic outlook.  Impatient and 
dissatisfied with the government's monetary and fiscal policy 
measures to stimulate the economy, private industry 
representatives blamed the government for "doing too little too 
late."  Indian businessman at both conferences verbally attacked 
the government for being too complacent, and not doing enough to 
address slowing demand and the credit crunch.  They also 
complained that the government's multiple clearance processes, 
bureaucratic administrative procedures, duplicative tax system, 
and the "problems with dealing with the government" has 
exacerbated the current downturn in business. 
 
¶13.  (U) Comment: While government advisors remain optimistic 
about the future economic outlook for India, and the country's 
ability to withstand the global economic slowdown and credit 
crunch, private industry is more skeptical.  Discontented with 
what they perceive as government inaction and "hollow" promises 
of a brighter future, private industry has gotten accustomed to 
an over 8 percent growth rate, and appears unwilling to accept 
less.  The aggrieved business community may decide to take out 
their frustration over perceived government inaction at the 
ballot box in the upcoming elections, but whether a new 
government would be more successful in reviving India's economic 
growth during a global downturn is anybody's guess.  End Comment. 
FOLMSBEE