VZCZCXRO3758
RR RUEHBI
DE RUEHNE #0435/01 0650946
ZNR UUUUU ZZH
R 060946Z MAR 09 ZDK
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 5678
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 06 NEW DELHI 000435 
 
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 
March 2 TO March 6, 2009 
 
NEW DELHI 00000435  001.2 OF 006 
 
 
¶1. (U) Below is a compilation of economic highlights from Embassy 
New Delhi for the week of March 2-6, 2009, including the following: 
 
-- India Continues to Slow Down 
-- Inflation Declines to 7-Year Low; RBI Moves 
-- FDI Clarifications Just Cloud the Issue 
-- FATF Gives Go Ahead for India Mutual Evaluation 
-- Embassies Discuss New International Worker Provisions 
-- Fate of Unfinished Economic Legislation 
 
 
-- Verizon gets approval for its own internet gateway in India 
-- Reliance Petroleum Re-acquired by RIL, Chevron Sells Its 5% 
Refinery Stake 
-- India Amends Chinese Toy Ban to Allow Imports 
With Safety Certification 
-- India's Exports Continue To Decline 
-- IBM Reportedly a Frontrunner for Satyam Purchase 
-- SEZs Will Get Tax Refunds on All Input Services 
-- GOI Appoints Chairman of Competition Commission 
-- GOI Takes Steps to Lift Wheat Export Ban 
 
 
India Continues to Slow Down 
---------------------------- 
 
¶2.  (SBU) India's GDP slowed down to a six-year low of 5.3 percent 
in the third quarter of FY 2008-09 (October-December 2008).  The 
lower-than-expected growth was largely due to a significant drop in 
Agricultural GDP growth rate to(-)2.2 percent from +6.9 percent 
during the corresponding quarter of FY 2007-08 due to a significant 
decline in production of fall-harvested crops, mainly coarse grains, 
oilseeds, pulses, cotton, and sugar cane, due to erratic rainfall 
and high base effect.  Contraction in the manufacturing sector by 
0.2 percent also contributed to the lower output.  Nevertheless, the 
services sector, which accounts for over 57 percent of GDP, remained 
buoyant at 9.9 percent largely due to the Sixth Pay Commission 
outgo.  Sectors such as social community and personal services grew 
by a robust 17.3 percent during the period.  Cumulative GDP growth 
during April-December 2008 works out to 6.9 percent as compared to 
the government estimates of 7.1 percent growth for the full fiscal 
year.  Subir Gokarn, Chief Economist of Standard and Poor's Asia 
Pacific, estimates that an expected weaker fourth quarter 
performance will take the full FY 2008-09 growth rate down to the 
range of 6-6.5 percent, in line with many projections.  To achieve a 
7 percent growth this fiscal, the economy needs to grow by at least 
7.6 per cent in the January-March quarter, which seems unlikely, 
given the weakening global environment. 
 
Inflation Declines to 7-Year Low; RBI Moves 
------------------------------------------ 
¶3.  (SBU) India's wholesale price inflation (WPI) hit a seven-year 
low of 3.03 percent for the week ended February 21 (versus 5.69 
percent in the corresponding week a year ago), due to lower prices 
of food items and select manufactured items, such as metals and 
transport equipment.  Lower prices of some food items, such as rice, 
wheat, pulses, vegetables and edible oils, also contributed to the 
fall. WPI inflation is expected to fall at an even faster rate in 
the next two weeks due to the base effect.  Retail inflation as 
measured by the Consumer Price Inflation (CPI) for industrial 
workers hit an 11-year high of 10.45 percent in January from 9.7 
percent in December.  The Reserve Bank of India expects retail 
inflation to also fall and at a much sharper rate due to the 
declining trend in the WPI of food items. 
¶4.  (SBU) The continuing decline in inflation has provided the 
central bank, the RBI, with more policy room to enact further 
interest rate reductions and indeed it announced 50 basis point 
reductions in both of its main policy rates, the repo and reverse 
repo rates.  The repo rate, at which the central bank lends to 
banks, has been lowered to 5%, while the reverse repo rate, the rate 
at which the RBI pays interest on funds that banks keep with it, was 
lowered to 3.5%.  Mumbai will report more septel. 
FDI Clarifications Just Cloud the Issue 
 
NEW DELHI 00000435  002 OF 006 
 
 
--------------------------------------- 
 
¶5.  (SBU) Econoff attended a panel discussion on March 5, hosted by 
AmCham and led by analysts at PwC, Ernst & Young, Deloitte Touche 
and KPMG, regarding the Ministry of Commerce's recent issuances of 
"Press Note" guidance on foreign direct investment (FDI).  There was 
no real consensus among the panelists of the intent and implications 
of the press notes, although the panelist for Ernst & Young pointed 
to language in the press note that it was issued to address concerns 
for needed investment capital within already-permitted FDI sectors. 
Several in the audience - a combination of foreign firms and local 
accountants - agreed that the press notes were not intended to open 
up previously restricted areas of investment.  Some raised concern 
that the confusion surrounding the press notes might deter new 
investors altogether.  AmCham noted that it was putting together a 
memo of concerns for the Ministry of Commerce, which the Secretary 
covering investment policy had requested.  Given the politicized 
nature of some investment areas and imminent elections, however, 
many expected there will be no further clarification until a new 
government is formed in June. 
 
FATF Gives Go Ahead for India Mutual Evaluation 
--------------------------------------------- -- 
 
¶6.  (SBU) Just days after India's Parliament passed key amendments 
to its Prevention of Money Laundering Act (PMLA), the biennial 
plenary of the multilateral Financial Action Task Force (FATF), 
agreed that India's mutual evaluation on-site visit should be 
scheduled for sometime later this year. India had earlier requested 
a mutual evaluation, which FATF uses to measure a country's 
framework to combat terrorist financing and anti-money laundering 
(AML/CFT).  The FATF Secretariat will coordinate with the Indian 
authorities regarding scheduling -- the on-site will likely take 
place in the last quarter of 2009. It will be a joint evaluation by 
FATF and the Asia Pacific Group (APG), a regional body, with FATF as 
the lead. 
 
Embassies Discuss New International Worker Provisions 
--------------------------------------------- -------- 
 
¶7.  (SBU) Econoff attended a meeting with economic officers from the 
Embassies of Germany, France, Australia, United Kingdom, South Korea 
and Japan on February 25 to discuss the impact on foreign workers 
and companies of India's new category of "international worker." 
Under the new designation, foreign workers must pay in 12% of their 
income to India's Employee Provident Fund, while employers must do 
the same.  The new category does not apply if the foreign worker's 
home country has a "social security totalization agreement" with 
India, which exempts workers from each country from paying into the 
host country's social security system. 
 
¶8.  (SBU) Germany noted that it had signed a "posting agreement," 
which exempt Indian workers in their countries from paying social 
security, but fall shorts of a full totalization agreement.  France 
indicated that they have signed a full social security agreement 
with India, but it has not yet been ratified.  The officers noted, 
with some exasperation, that since their current agreements are not 
yet ratified, they do not exempt their workers from falling under 
the new "international worker" agreement.  France and Germany noted 
that their capitals were still determining what, if anything, they 
might do in response to the new category.  In the meantime, the 
German representative (their Counselor for Social and Labor Affair) 
stated his understanding that Germany would still go ahead with 
plans to ratify and implement the current agreement and even expand 
it to a full totalization agreement by Spring 2010.  The French 
officer did not know when their bilateral agreement might be 
ratified.  Korea noted that his country had a modest reciprocal 
agreement with India, and that the current draft of a bilateral 
Comprehensive Economic Cooperation Agreement (CECA) included a 
paragraph on the Employee Provident Fund.  The rest of the Embassies 
indicated they did not have any bilateral worker agreements with 
India, although Australia said that Canberra had agreed late last 
year to enter negotiations on a social security agreement with 
 
NEW DELHI 00000435  003 OF 006 
 
 
India, partly in response to the new worker requirement. 
 
Fate of Unfinished Economic Legislation 
--------------------------------------- 
 
¶9.  (SBU) When Parliament ended its session on February 26, 37 Bills 
were pending in the Upper House of Parliament (Rajya Sabha). 
Because the Upper House of Parliament technically is a permanent 
body, bills introduced in this house do not lapse. The key pending 
economic bills introduced there are: the Insurance Laws (Amendment) 
bill 2008, which would increase the foreign direct investment cap to 
49 percent from 26 percent; the Foreign Contribution (Regulation) 
Bill 2006 designed to more effectively check the use of foreign 
funds for subversive activities by terrorist and anti-national 
organizations; the Mines and Minerals (Development and Regulation) 
Amendment Bill 2008  which will allow state governments to grant a 
prospecting license/mining lease for coal and lignite to private 
companies through auction by competitive bidding; and the Coal Mines 
Nationalization (Amendment) Bill 2008, which provides for mining of 
coal by the private sector (including foreign firms) to ease the 
demand-supply situation.  Bills which are pending with the Rajya 
Sabha can be considered and passed as it is, as most of the pending 
bills are already with the Standing Committee of Finance and their 
reports are ready.  However, it is also possible that the new 
government may make minor changes in some of the clauses of the 
bills. 
 
¶10.  (SBU) Constitutionally, bills introduced in the Lower House of 
Parliament (Lok Sabha) lapse at the end of the Lok Sabha term.  Some 
of the important financial sector bills that lapsed on February 26 
include the Banking Regulation (Amendment) Bill 2005 which would 
have increased the voting rights for foreign stakeholders in private 
banks; the Pension Fund Regulatory and Development Authority Bill 
(PFRDA) 2005 for pensions sector reforms; the Forward Contracts 
(Regulation) Amendment Bill 2008 bill for improving the commodities 
market; the Micro Financial Sector (Development and Regulation) Bill 
aimed at enabling more loans to the poor; the State Bank of India 
(Amendment) Bill, 2006, which would have allowed the Sate Bank of 
India to access the capital market and allow the Reserve Bank of 
India to reduce its equity; the State Bank of India Subsidiary Laws 
(Amendment) Bill 2009 which could empower the government to increase 
or reduce the capital of a subsidiary bank; and the Life Insurance 
Corporation of India (LIC) (Amendment) Bill 2008 which would 
increase the paid-up capital of  the state-owned LIC.  Bills which 
have lapsed in the Lok Sabha will have to be reexamined by their 
respective ministries and then reintroduced in Parliament.  Lapsed 
bills may even be abandoned, depending upon which government and 
coalition comes into power and their objectives and commitments. 
 
Verizon gets approval for its own 
internet gateway in India 
--------------------------------- 
 
¶11.  (SBU) New York-based Verizon Communications has received 
approval from the GOI's Department of Telecommunications to operate 
international "gateways" in Mumbai and Chennai.  Verizon India's 
General Manager told Consulate General Chennai that this approval 
will allow Verizon to have greater control of its international 
network capacity into and out of India and will allow it to better 
monitor end-to-end network performance and product delivery. 
 
¶12.  (SBU) Verizon will now be able to offer a greater and more 
dependable array of integrated communications, information 
technology, and security solutions to its major customers in India, 
which include Ford, Motorola, Oracle and Caterpillar.  Verizon can 
now more directly link its customers to the 19,000-kilometer 
Southeast Asia-Middle East-Western Europe-4 (SEA-ME-WE-4) undersea 
cable at both points where it comes ashore in India (near Chennai 
and Mumbai).  (SEA-ME-WE-4 serves as the main "internet backbone" 
between Southeast Asia, India, the Middle East, and Europe.)  The 
approval will also allow Verizon to connect to the Europe India 
Gateway (EIG), a submarine cable linking the UK and India via 
several points in Europe and the Middle East currently under 
 
NEW DELHI 00000435  004.2 OF 006 
 
 
construction, due for delivery in 2010. 
 
Reliance Petroleum Re-acquired by RIL, Chevron 
Sells Its 5% Refinery Stake 
--------------------------------------------- - 
 
¶13.  (U) Chairman Mukesh Ambani's Reliance Industries Ltd (RIL) 
decided March 2 to re-acquire refinery giant Reliance Petroleum Ltd 
(RPL) to create the world's largest refining capacity at a single 
location (Jamnagar, Gujarat) and the world's fifth largest 
polypropylene manufacturer, with RPL shareholders getting one share 
of RIL for every 16 shares of RPL held.  RPL commissioned its 
export-oriented 580,000-barrel-per-day (bpd) refinery in December 
2008, located next to RIL's 660,000-bpd refinery in Jamnagar, so the 
combined firm will have 1.24 million bpd refining capacity.  RIL has 
oil and gas production capacity and is bringing on new natural gas 
production in southeast India's Krishna-Godavari offshore basin. RPL 
was de-merged from RIL in January 2006.  U.S. oil and gas giant 
Chevron then picked up a 5% stake in the RPL in April 2006 for US$ 
295 million, just before RPL's public listing that May.  Chevron had 
an option to either increase its share in RPL by another 24 
percentage points to a 29% stake by June 2009 or to sell its 5% 
stake.  Chevron had envisioned sharing RPL's capacity in order to 
sell refined petroleum products and petrochemicals in the Middle 
East and other parts of Asia. 
 
¶14.  (SBU) -- Business Proprietary) Given the plunge in world oil 
prices and refined products demand, and even though RPL share prices 
have also dropped -- Chevron decided against increasing it share in 
India's refinery capacity and opted to sell its 5% RPL stake for USD 
300 million.  RIL will have 70% ownership of RPL, which will reach 
75.38% with the purchase of Chevron's share, and Mukesh Ambani will 
be chairman of both RIL and the RPL subsidiary.  Moreover, RIL's 
acquisition of RPL means that even an expanded Chevron stake in RPL 
would have translated into only a small fraction of total ownership 
of RIL. 
 
 
India Amends Chinese Toy Ban to Allow Imports 
With Safety Certification 
----------------------------- 
 
¶15.  (U) India amended the prohibition against imports of Chinese 
toys on March 2, 2009.  In place of a complete ban on certain 
Chinese toys, the GOI imposed product safety standards conforming to 
standards prescribed by safety bodies such as the International 
Organization for Standardization (ISO) or the American Society for 
Testing and Materials (ASTM).  Commerce Ministry officials have told 
media that the imports will have to be accompanied by certificates 
from laboratories accredited to the International Laboratory 
Accreditation Cooperation. 
 
¶16.  (U) India announced the six-month ban on January 23, 2009, 
prompting trade frictions between the two countries.  The PRC 
government warned that "bilateral trade relations could be seriously 
impacted" and urged India to take "cautious and prudent trade remedy 
measures" at a time when "the world economy faces grim challenges". 
Amid the global slowdown, Commerce Minister Kamal Nath has 
emphasized several times that "New Delhi opposes any form of trade 
protectionism". 
 
¶17.  (U) Chinese toys such as dolls, cars, trains and puzzles make 
up more than half of India's $500 million toy market and the ban 
sent prices of toys soaring in local markets as imported supplies 
declined.  Some Indian analysts had viewed the ban as a 
protectionist measure for the local struggling toy industry, which 
employs about two million workers.  Media report that Indian toy 
industry epresentatives have admitted a lobbying effort for the 
increased protection.  The certification requirement may act as a 
non-tariff barrier to imports. 
 
India's Exports Continue To Decline 
----------------------------------- 
 
NEW DELHI 00000435  005.2 OF 006 
 
 
 
¶18.  (U) India's export performance continues to decline, a trend 
first witnessed with the October 2008 export figures.  Final GOI 
figures for January 2009 show a 16 percent drop in merchandise 
exports to $12.7 billion from $14.7 billion from the previous year's 
period.  In addition, according to preliminary data released this 
week, February exports dropped 13 percent to $13 billion, bringing 
cumulative exports for the 11-month period of the Indian fiscal year 
(IFY ending March 30) 2008-09 to $157.3 billion compared with $142.8 
billion in the corresponding period of IFY 2007-08.  India's exports 
grew 31 percent in the first half of the IFY 2008-09; but have 
turned negative since October 2008 to coincide with the financial 
crisis in its main destination markets.  The monthly export data for 
IFY 2008-09 depict decelerating trends immediately after the first 
month (April 2008) when export growth peaked at 45.7 percent. 
Barring June 2008 with export growth of 38.4 percent, all other 
months of IFY 2008-09 witnessed either a declining or negative 
trend.  The GOI revised its export target for IFY 2008-09 to $170 
billion from the original target of $200 billion. 
 
¶19.  (U) Another significant trend witnessed in the recently 
released GOI trade data is the slump in import growth, suggesting 
the impact of the slowdown on Indian industrial activity, coupled 
with declining commodity prices.  In January 2009, imports fell for 
the first time in IFY 2008-09, declining by 16 percent to $12.4 
billion from $14.7 billion in the year earlier period.  Preliminary 
estimates show that imports fell 18 percent in February 2009.  The 
overall import data for the first eleven months of IFY 2008-09, 
however, still reflect a 21 percent increase to $260.4 billion. 
Monthly data indicate impressive growth pattern in imports until 
September 2008, after which the growth numbers started heading 
downwards, and finally turned negative in January 2009.  Apart from 
lower demand, the price effect of a fall in crude oil prices also 
depressed India's import figures. 
 
¶20.  (U) Delhi Exporters Association spokesperson has said that 
small and medium exporters have been worst hit by the prevailing 
economic slowdown, and many - mostly in the handicrafts, garments, 
leather goods, and jewelry - have already shut down their 
businesses.  Despite three stimulus packages announced over the last 
three months by the GOI, Indian exporters find no hope of revival in 
export activity in the short term. 
 
IBM Reportedly a Frontrunner for Satyam Purchase 
--------------------------------------------- --- 
 
¶21.  (U) A prominent business daily has reported that the global IT 
giant IBM has begun discussions with India's Satyam 
government-nominated board to acquire a majority stake in the 
company.  A team of investment bankers and lawyers from the US and 
Europe has reportedly been brought in to conduct due diligence.  IBM 
declined to comment on the rumors.  Other interested companies 
reportedly in the race to acquire Satyam are Larsen & Toubro (L&T, 
already owning 12 per cent in Satyam) and B.K. Modi's Spice group. 
 
 
SEZs Will Get Tax Refunds on All Input Services 
--------------------------------------------- -- 
 
¶22.  (U) In a bid to clear ambiguity in service tax exemption to 
special economic zones (SEZs), the Government of India (GOI) on 
March 3, 2009, notified a rule change allowing refunds for taxes 
paid on all input services, regardless of whether the services are 
used inside or outside the tax-free zones 
(http://www.servicetax.gov.in/servtax_notfns_ idx.htm). SEZ 
developers and unit owners have been demanding a tax exemption on 
services consumed outside the export zone if the services were 
related to production within the zones.  In accordance with the new 
rules, developers and SEZs will have to first pay the tax on the 
services and then claim a refund from the tax authorities within six 
months.  Until now, the SEZs were exempted from paying a tax on 
services used inside the zones while services used outside the zone 
were taxed at 10 percent with no refunds.  While the GOI views this 
 
NEW DELHI 00000435  006.2 OF 006 
 
 
move as helping the finances of SEZ developers and companies 
operating inside SEZs, exporters have reportedly voiced their 
concern regarding the increased paperwork and transaction costs 
imposed by the refund process. 
 
GOI Appoints Chairman of Competition Commission 
--------------------------------------------- -- 
 
¶23.  (U) After months of speculation after the resignation and 
retirement of Acting Chairman Vinod Dhall of the Competition 
Commission of India (CCI), the GOI this week appointed Dhanendra 
Kumar as the new Chairman.  Kumar, who most recently served as an 
Executive Director at the World Bank, is a retired Indian 
Administrative Service (IAS) Officer.  The CCI leadership will 
comprise of a Chairman and five members.  Two of the members, former 
Ministry of Coal Secretary Harish Chandra Gupta and former Chairman 
of the Central Board of Direct Taxes (CBDT) R. Prasad, have started 
working at CCI while two others have been appointed but not formally 
assumed office, including Geeta Gouri and Prem Narayan Parashar. 
Gouri is a member of the Electricity Regulatory Commission in Andhra 
Pradesh and Parashar is a lawyer and member of the Income Tax 
Appellate Tribunal.  The final member has yet to be nominated. 
These appointments are viewed as a positive move towards 
establishing a functioning anti-trust regulatory body in India. 
 
GOI Takes Steps to Lift Wheat Export Ban 
---------------------------------------- 
 
¶24.  (U) An Empowered Group of Ministers (EGOM) - an intra-Cabinet 
political decision-making body - agreed in principle to lift the 
two-year old ban on exports of wheat and wheat products after 
national elections in May.  The February 2007 ban was instituted 
during a period of rising inflation.  However, now faced with ample 
domestic stocks and declining inflation, the EGOM decided to 
unofficially move forward with lifting the ban.  The government is 
barred from making major policy decisions within two months of a 
general election by an Election Commission code of conduct, thus the 
'unofficial' nature of the proposed change.  Unnamed Food Ministry 
sources indicated that a notification would be issued after May, 
with a group of secretaries in various ministries working out the 
details of the policy in the interim.  Analysts feel India will find 
it difficult to export wheat without an export subsidy given the 
drop in international prices and the fact that the GOI has set a 
high minimum support price (MSP) for procuring wheat from Indian 
farmers.  The high MSP led to heavy wheat planting, which was one of 
the main reasons for a strong wheat harvest last year.  Prospects 
for another strong summer (rabi) crop in May will increase stocks 
further.  USDA/FAS, in a January GAIN report, noted the likelihood 
of the export ban being rescinded after the rabi harvest, and 
further emphasized that India was only capable of exporting with a 
subsidy given the high MSP. 
 
 
 
¶25. (U) Visit New Delhi's Classified Website: 
http://www.state.sgov/p/sa/newdelhi 
 
White