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RUEHCG/AMCONSUL CHENNAI 4699
RUEHBI/AMCONSUL MUMBAI 3740

UNCLAS SECTION 01 OF 03 NEW DELHI 001030 
 
STATE FOR SCA/INS JASHWORTH AND SCA/RA MURENA 
USDOC FOR 4530/ITA/MAC/OSA/LDROKER/ASTERN 
DEPT PASS TO USTR FOR SOUTH ASIA - CLILIENFELD/AADLER 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA - MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD EAGR PREL PGOV PTER IN
SUBJECT: REFORM PROSPECTS IN NEW GOVERNMENT 
 
NEW DELHI 00001030  001.2 OF 003 
 
 
Reftel Mumbai 198 
 
¶1.  (SBU) Summary:  More than 400 million Indians cast their vote in 
India's national parliamentary elections this past month and seem to 
have decisively signaled that they want stability and continuity in 
the national government, handing Congress an 18-year best 
performance of more than 200 seats out of 543 seats in India's lower 
house of Parliament, the Lok Sabha.  With the Left parties reduced 
to a fraction of their prior strength and the Congress-led UPA's 
strength sufficient without Left support, expectations are soaring 
high for Prime Minister Manmohan Singh to move on economic reforms. 
Post expects passage of stalled legislation boosting foreign 
investment in insurance, liberalizing voting rights in the banking 
sector, and empowering the pension regulator, as well as partial 
divestment of government stakes in public companies.  However, 
long-needed reforms in labor, education, energy, as well as FDI in 
retail, may remain elusive or slow in coming.  India Inc tripped the 
upper circuit breakers of the Bombay Stock Exchange on May 16 but 
its euphoria should be tempered and expectations lowered.  Congress 
still has allies to manage, as well as some areas of resistance from 
within its own party and special interests.  The way forward will be 
much clearer in the next few weeks as the new government decides 
ministerial assignments and issues a 100-day plan, which Post will 
cover septel.  End summary. 
 
Unfettered Congress 
--------------- 
 
¶2.  (SBU) India Inc. and economists alike have noted their hopes in 
recent days that the Congress' big win and comfortable margin in 
Coalition numbers, without the Left's impediment, will lead to rapid 
and further progress in reforms.  The markets reflected this when 
they opened on May 16 (reftel), responding with record one-day gains 
to Congress' best win in 18 years, Manmohan Singh becoming the first 
prime minister since Jawaharlal Nehru to be re-elected after serving 
a five-year term, and the Left allies reduced to a shadow that is 
not needed in the formation of a ruling coalition.  All of these 
developments have raised very high expectations that Prime Minister 
Singh can now move unimpeded in implementing a full roster of 
needed, but long stalled, second generation reforms. 
 
¶3.  (SBU) Commentators have been quick to identify both unfinished 
legislative business as well as new reforms that the new government 
is expected to take up.  Post expects quick progress on stalled 
legislation boosting foreign investment in insurance, liberalizing 
voting rights in the banking sector, and empowering the pension 
regulator, as well as partial divestment of government stakes in 
public companies.  But overdue reforms in labor as well as more FDI 
into retail may take a back seat, as resistance and entrenched 
interests exist outside of the Left parties on these issues.  Kamal 
Nath, former Commerce Minister, already claimed on May 16 that FDI 
in retail would not be liberalized in the short term. 
 
Low Hanging Fruit - Stalled Legislation 
--------------------------------------- 
 
¶4.  (SBU) With the Left no longer able to stymie passage of key 
reform legislation, it is expected that already-introduced bills to 
raise FDI in insurance, provide proportionate voting rights to bank 
equity holders, and authorize the new pension regulator, the PFRDA, 
will receive quick passage this summer in the new Parliament.  The 
insurance amendment bill, which proposes raising FDI in insurance 
from the current 26% cap to 49%, was blocked by the Left parties and 
some domestic firms.  With the Left gone and all players now hurting 
for investment, it should face no resistance.  The pension bill, 
named for the creation of the Pension Fund Regulatory and 
Development Authority (PFRDA), has been mostly enacted already by 
administrative fiat, and should easily pass.  While the Parliament 
must sit by June 2, it is likely to adjourn until the new Budget is 
ready for introduction.  Media are currently citing official 
projections of 45 days to finalize and present the new budget, so 
Post expects the Budget Session to kick off in earnest in early July 
and last until early August.  The government is also expected to 
move quickly on permitting partial divestment in publicly-owned 
companies, which not only would inject more discipline and 
 
NEW DELHI 00001030  002.2 OF 003 
 
 
efficiency into such companies, but help raise needed government 
revenues. 
 
Other Reforms Being Floated 
--------------------------- 
 
¶5.  (SBU) Media is also reporting that Ministries have been tasked 
with forwarding new policies to the Cabinet, for formulation of a 
100-day plan for the new government.  Some proposals that have been 
floated before, but not picked up, are supposed to be seeing new 
life.  These include a proposal to allow foreign airline carriers to 
invest in Indian civil aviation companies.  Foreign carriers are 
currently banned, but the struggling aviation industry, hit by the 
economic downturn, could use the capital infusion.  A 3G auction to 
license rights to use and sell "third generation" - 3G - mobile 
phone and IT technology could also finally see the light of day, as 
well as a long postponed spectrum policy.  Licenses to coal mining 
which are heavily tilted towards state-owned companies could be 
expanded to more private players as well.  The restriction on coal 
mining not only prevents foreign investment in the industry but also 
creates upstream input hurdles to prospective energy companies who 
need to ensure sufficient and affordable coal inputs.  The 
government is reportedly also considering revising the highway 
tender and bid process, as more than four-fifths of projects that 
were offered in the last few years received no takers.  All of these 
would help improve infrastructure, which the government still 
prioritizes but lacks sufficient funding to do without more private 
participation. 
 
¶6.  (SBU) Hopes for reform of subsidies are also riding high.  Press 
reported that the Petroleum Ministry is supposedly drafting a policy 
to decontrol fuel pricing, which cost the government, through its 
oil marketing companies, roughly $25 billion last year when global 
oil prices spiked.  There is an argument to be made that most of the 
fuel subsidies benefit the urban middle class.  If many in Congress 
feel that their win is due to their focus on the rural sector, the 
high cost of this subsidy could be seen as usurping funds that could 
be spent on extending the rural employment guarantee program and 
needed rural infrastructure.  Likewise, energy subsidies on kerosene 
and cooking gas could be restructured to better target lower income 
users, perhaps through the use of smart cards.  Such technology 
might also be introduced to streamline food subsidies, which cost 
the government about $12 billion last year (roughly three times the 
cost of the rural employment guarantee program), yet barely gets to 
poverty-line recipients. 
 
Probably Not So Fast 
-------------------- 
 
¶7.  (SBU) After the election results were announced on May 16, many 
press reports quickly pointed to improved chances for increased FDI 
in retail, which was vociferously resisted by the Left parties. 
Currently, only 51% FDI in single-brand retail and 100% FDI in 
wholesale is allowed, while no FDI is allowed in multi-brand retail. 
 However, prospects for further opening the retail sector remain 
questionable, as more than just the Left parties are concerned that 
foreign organized retail will adversely impact the estimated 30-40 
million mom-and-pop stores, known as kiranas.  Reformers can point 
to a report undertaken by prestigious think tank ICRIER that 
indicated that kiranas would not necessarily be hurt by the growth 
of organized retail and could co-exist with it.  However, the 
numerous and vocal critics of organized retail could still 
successfully pressure the government to move very slowly on this 
investment liberalization. 
 
¶8.  (SBU) Talk of reducing government holding in banks to below 50 
percent, in order to facilitate consolidation in state-owned banks, 
which control roughly 70% of total banking assets, may also be 
premature.  The central bank, the RBI, already signaled its 
hesitation to embark on significant banking liberalization in its 
April Monetary Policy Statement, putting on indefinite hold its 
scheduled 2009 consideration of a "banking roadmap".  Contacts and 
commentators perceive that one of the fallouts of the global 
financial crisis is a new wariness of foreign banks and the putative 
benefits they bring to a domestic market.  Finally, labor reform, 
 
NEW DELHI 00001030  003.2 OF 003 
 
 
still a critical project to nurture more employment creation, 
especially in the historically anemic but recently nascent 
manufacturing sector, remains dubious, given the number of 
entrenched interests who are likely to resist such a major change. 
 
Comment 
------- 
 
¶9.  (SBU) Opportunities for reform are significant, but with the 
Left gone, anti-reformists in Congress and the UPA have had their 
fig leaf taken away.  There will still be some resistance to new 
reforms, although existing proposed reforms - legislation to 
increase FDI caps in insurance, give proportionate voting right to 
bank shareholders and enactment of PFRDA - should move forward, as 
will divestment, which the government needs for revenues.  Allies' 
handling of ministries has been a mixed bag and thus the ability to 
implement these reforms will be affected by the assignment of 
portfolios.  On the upside, Congress' position of strength in 
securing support above the minimum 272 seats means that it has more 
leverage over these ministers' performance; something it lacked with 
its razor thin majority in the last Lok Sabha. 
 
¶10.  The current large fiscal deficit (roughly 11 percent of GDP) 
constrains the government from expanding its social programs without 
rationalizing expenditures and finding new revenue sources.  Prime 
Minister Manmohan Singh, himself riding an impressive mandate as 
only the second prime minister besides Jawaharlal Nehru to be 
re-elected after a full five year term, has already tied reforms to 
inclusive growth.  It is likely that Singh will argue that the lack 
of fiscal space requires moving forward with investment 
liberalization and rationalization of expensive subsidies in order 
to free up more government spending and stimulate private sector 
investment in infrastructure.  Fiscal constraints also may 
necessitate more revenues through 3G auction and public sector 
company divestment.  The prospects for these reforms will become 
clearer over the next few weeks, as the government announces 
ministry appointments and possibly releases a 100-day plan that 
could prioritize reform goals.  Post will continue to monitor and 
report. 
 
BURLEIGH