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DE RUEHBI #0273/01 1810611
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R 300611Z JUN 09
FM AMCONSUL MUMBAI
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UNCLAS SECTION 01 OF 04 MUMBAI 000273 
 
SENSITIVE 
SIPDIS 
 
PASS TO USTR FOR AADLER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG EAGR IN
SUBJECT: MUMBAI ECONOMISTS DISCUSS NEXT STEPS NECESSARY TO COUNTER 
THE ECONOMIC SLOWDOWN 
 
MUMBAI 00000273  001.2 OF 004 
 
 
¶1.  (SBU) Summary:  On June 16, a group of leading economists in 
Mumbai discussed possible economic reforms by the newly-elected 
Congress-led government.  All economists agreed that the mood in 
the Indian economy is currently buoyant and confidence ruled. 
Nevertheless, they cautioned that timely government action to 
prove itself capable of tackling the economic slowdown is 
crucial; otherwise all economic exuberance would evaporate. 
They pointed to the mobilization of savings to productive 
investment, the development of the debt market to provide 
long-term project finance, and joint and coordinated 
government-agency action as crucial drivers of economic growth 
during the global economic slowdown.  Most economists did not 
believe that the new government would rush to push big-ticket 
reforms which, they admitted, would accelerate foreign investor 
interest in India.  The Congress Party, although re-elected to 
lead the new government, still has to depend on unreliable and 
unpredictable coalition partners who may be reluctant to lend 
support to initiatives which would boost the economy but not 
necessarily endear them to the common masses.  End Summary. 
 
 
 
¶2.  (SBU) On June 16, CongenOff and U.S. Treasury Attachi to 
India hosted lunch for a group of leading economists in Mumbai 
to discuss the recent upswing in economic confidence and 
forthcoming economic reforms following the Congress Party's 
victory in the national elections.  Economists who attended the 
lunch include Atsi Sheth, Chief Economist for Reliance Capital; 
Jyotivardhan Jaipuria, Head of Research for DSP Merill Lynch; 
Siddhartha Roy, Economic Advisor for Tata Services; Indranil 
Pan, Chief Economist for Kotak Mahindra; Sachchidanad Shukla, 
Economist for Enam Securities; Sonal Varma, Chief Economist for 
Normura Financial Advisors; and Ajit Ranade, Group Chief 
Economist for the Aditya Birla Group.  Jeff Glekin, Deputy Head 
of the British Deputy High Commission also attended the 
roundtable. 
 
 
 
Possible Reforms by the Newly-Elected Government 
 
------------------------------------ 
 
 
 
¶3.  (U)  All interlocutors agreed that there has been an obvious 
"boost of confidence" since the United Progressive Alliance with 
the Congress at the helm was re-elected.  According to Ajit 
Ranade of the Aditya Birla Group, the "positive" sentiment 
fueled by the stock market uptrend has changed the economic 
landscape in India, and will hopefully translate to increased 
investment.  However, Sonal Varma of Nomura Financial Advisors, 
pointed out that the market perception of needed economic 
reforms is different from the government.  Varma observed that 
the positive feeling in the economy since the election results 
has since dissipated and risk aversion is back. 
 
 
 
¶4.  (U) Among the possible reforms is de-regulating the prices 
of petroleum-products in India to enable the market and not the 
government to determine the price of fuel sold to consumers. 
Sachchidanand Shukla of Enam Securities who studies the oil and 
gas sector, believes that market-determined pricing of 
petro-products is unlikely to become a reality in the near-term. 
 He noted that government-owned oil marketing companies in India 
are profitable only if crude oil prices are below $65 a barrel, 
otherwise they lose money.  These companies will, therefore, 
immediately hike petrol and diesel prices if de-regulation is 
implemented as crude oil prices are now hovering at $70 a 
barrel.  Consequently, consumers will have to pay more at the 
pumps, making de-regulation an unpopular move in the current 
scenario, he explained.  This reform can only be implemented 
when there is a sustained downtrend in crude oil prices, he 
said.  Shukla admitted that the doubling of crude oil prices in 
just 75 trading sessions was perplexing, especially since the 
demand for oil is at its lowest since 1982.  He opined that 
financial speculation due to excess global liquidity was driving 
prices up.  Roy of Tata Services added that other precious 
 
MUMBAI 00000273  002.2 OF 004 
 
 
commodities, particularly aluminum and cooper has also seen 
similar unexplained price increases. 
 
 
 
¶5.  (U)  On the controversial topic of disinvestment, Atsi Sheth 
of Reliance Capital noted that the Government of India (GOI) 
mainly sees it as a vehicle for one-time revenue raising.  The 
GOI needs to give up management control and privatize, rather 
than merely disinvest, especially in inefficient loss-making 
government-owned companies she added.  Piece-meal disinvestment 
of a 10 percent stake in government companies may not raise a 
substantial amount if the stock market is depressed, Sheth 
noted.  Roy added that it was important to note that not all 
government-run enterprises were poorly run; he pointed out that 
the navratnas (profitable state-owned companies which the 
government rewards with more management freedom) which he opined 
were mostly free of political control were as professionally run 
as many corporations. 
 
 
 
¶6. (U)  DSP Merrill Lynch's Jyotivardhan Jaipura opined that the 
pending insurance sector bill to raise the Foreign Direct 
Investment (FDI) limit from the existing 26 percent to 49 
percent is likely the first reform to be passed by the 
newly-elected government.  He, however, did not think any major 
reforms in the banking sector would follow suit.  In any case, 
he felt that foreign investors are attracted more towards 
India's government-owned oil companies rather than 
government-owned banks.  Irrespective of whether the government 
raises the FDI cap in the banking sector, Ranade believes that 
many public sector banks would consolidate among themselves to 
streamline operations and improve efficiency. 
 
 
 
Free Trade, Higher Savings and Productive Investment cited as 
Growth Sustainers 
 
------------------------------- 
 
 
 
¶7.  (U) Jeff Glekin of the British Deputy High Commission, 
enquired why there were few calls for protectionism in India. 
Atsi Seth of Reliance Capital, explained that both the Indian 
government and industry understand that when trade barriers are 
raised by one country, other countries reciprocate by raising 
their own barriers and no one wins.  Ranade of the Aditya Birla 
Group, said that Indian companies were advocates of free trade 
rather than protectionism with more and more companies going 
global.  He cited the eagerness of Indian companies to bid on 
contracts in the U.S. that are supported by the U.S. stimulus 
package as an example of the global expansion plans of Indian 
companies.  Ranade noted that India, currently on the observer 
status, is three years away from signing the WTO Government 
Procurement Agreement, which would allow foreign companies to 
bid on government contracts.  However, he admitted that there 
were questions on whether or not Indian companies could 
successfully compete against global contractors and whether 
there was a level playing field for foreign government contracts 
across countries.  Ranade noted that although India is open to 
foreign contractors, such as the Chinese, foreign companies, 
including Indian, are shut out of bidding on government 
contracts in China. 
 
 
 
¶8.  (U)  Responding to a discussion on free trade agreements, 
Sheth observed that trade agreements are more useful for the 
small-scale industries, or "unorganized sectors", such as gems 
and jewelry, and carpets.  Larger industries do not really need 
country-specific trade agreements as they already have global 
vendor-supplier contracts in place.  India needs investments, 
not trade agreements, she concluded.  Indranil Pan of Kotak 
Mahindra Bank, added that in addition to investment, India needs 
more productive channeling of household savings.  Although 
savings in India is increasing (Note: India has one of the 
 
MUMBAI 00000273  003.2 OF 004 
 
 
highest savings rates in the world, hitting 33% in 2007-08.  End 
note.), a major portion of it is being invested in gold which 
does not lead to the creation of a productive asset, he noted. 
India needs to mobilize more foreign capital investment in 
productive assets like infrastructure to achieve a sustainable 
growth rate, he said.  On a positive note, Sonal Varma of Nomura 
Financial Advisors, noted significant changes in investment 
"inflows" returning to India which reflects a change in investor 
sentiment. 
 
 
 
¶9.  (U) According to Varma, India had witnessed the first leg of 
private-sector capital expenditure (capex) spending during 
2006-08.  While government spending accounted for most of capex 
during the last few months during the economic downturn, Aditya 
Birla Group's Ranade pointed out that private sector capex has 
started to slowly pick up again.  Private sector investments 
plans are back on schedule, albeit at a slower pace than before, 
he said.  In this context, the need for government spending and 
investment especially in light of the rising fiscal deficit 
should be re-evaluated, he argued.  Reliance Capital's Sheth 
agreed that federal government spending should be curtailed in 
the present circumstances but highlighted state government 
spending and investment as a beneficial driver of the economic 
growth of Indian states and pointed to Gujarat as an example. 
 
 
 
Illiquidity and Low Volumes in the Debt Market Constrains 
Long-Term Project Financing 
 
--------------- 
 
 
 
¶10.  (U) Following a discussion on how the U.S. bond market 
operates and the issue of retail investments in U.S. bonds, 
Sheth pointed out that where U.S. banks could provide advice is 
actually (or ironically) in the corporate debt market.  Pan of 
Kotak Mahindra Bank pointed out that India lacked a long term 
loan structure" - meaning that corporations could not raise any 
long term funds. Moreover, he noted that India's long-term 
benchmark paper is infrequently traded.  He explained that it 
was very difficult for a corporation to estimate and benchmark 
the cost of raising funds for a longer term in India.  Most 
banks have one to three year deposits and only a few have five 
year deposits.  Banks are, therefore, reluctant to lend for 
longer periods of time, he continued.  The development of a long 
term debt market is, therefore, vital especially for 
infrastructure projects which have longer gestation periods. 
 
 
 
¶11.  (U) Pan also highlighted that while government securities 
have the repo (repurchase) facility, corporate bonds lack these 
capabilities thereby reducing "liquidity in the paper."  Ranade 
pointed out that it was far more difficult for a bank to 
sanction a loan rather than invest in a bond.  However, banks 
still prefer to lend rather than invest in bonds, which 
according to him, does not make sense.  Pan pointed out that 
there is something wrong with how the regulator is dealing with 
the debt market, and that is why the debt market is so small, 
with few trades and few participants. 
 
 
 
Interdependence of RBI and Finance Ministry Not Necessarily Bad 
 
--------------------------------------------- - 
 
 
 
¶12.  (U) Glekin pointed out that in meetings with the G-20 there 
had been lots of talk around the issue of independence of 
government agencies.  U.S. Treasury attachi to India asked the 
group of economists if the government's initiative to create a 
separate, independent agency for government borrowings was 
likely any time soon.  Ranade said that management of government 
 
MUMBAI 00000273  004.2 OF 004 
 
 
debt should be independent of the RBI to allow the regulator 
complete independence in its monetary policy planning, but does 
not necessarily have to be separate from the GOI.  However he 
also stated that independence is over-rated.  He believes that 
the institutional framework and the mechanism to direct, 
formulate and guide the policy should not be questioned, if the 
end policy is sound.  There are allegations about the lack of 
independence of the RBI and how it is subservient to the 
Ministry of Finance's fiscal planning but Ranade noted that 
every government across the world is biased towards running 
fiscal deficits.  He continued that as a democracy, India has 
one-hundred times more bias to deficit financing to enable 
government spending on populist programs.  Ranade pointed out 
that most economists had criticized the government's farm loan 
wavier program and the sixth pay commission hikes at the cost of 
the fiscal balance.  Ironically, these moves helped the economy 
to grow in difficult times, he argued.  Sheth maintained that 
although the decision making of the RBI and Ministry of Finance 
may be intertwined and not truly independent, these two agencies 
worked well together during the global financial crisis. 
 
 
 
Inflation Still a Challenge Even With a Low-Interest Rate Regime 
 
------------------------------- 
 
 
 
¶13. (U) Interlocutors agreed that India's current bout with 
deflation in the wholesale price inflex (WPI) index will be 
short-lived and inflation is still a cause for concern.  Nomura 
Financial Advisors' Varma predicted that inflation will most 
likely return to 6 percent by next year.  Looking at production 
numbers, she believes that India will witness supply-side 
inflation.  Sheth concurred and pointed out that the source of 
consumer price inflation in India stems from food shortages as 
food forms a major part of consumer spending.  A food 
price-driven inflation crisis seems imminent with indications of 
a less than normal monsoon, and constricted purchasing power, 
she continued.  Ranade concurred and added that the main 
challenge facing the Reserve Bank of India will be to maintain 
low prices in a low-interest rate regime or risk high inflation. 
 The conversation came to a close with the group questioning if 
India would inflate itself out of its deficit. 
 
 
 
Comment: 
 
------ 
 
 
 
¶14. (U)  There has been an up swell of euphoria, confidence, and 
high-expectations since the Congress Party-led government was 
unexpectedly re-elected in the recent national elections with a 
larger majority.  All eyes are on the budget scheduled to be 
announced on July 6.  The new government has a fine line to 
tread.  On one hand, populist programs and sops will endear the 
government to the common man but would raise the 
already-ballooning fiscal deficit and could alarm the rising 
markets.  On the other hand, reforms like divestment or raising 
FDI sectoral caps are exactly what the markets and foreign 
investors are eagerly awaiting.  The Prime Minister and his 
economic advisers like Montek Singh Ahluwalia appear to 
understand this delicate balance and their rhetoric is focused 
on improving delivery of basics like health and education. 
Luckily, this seems to be increasingly the type of populist 
programs that many voters are clamoring for.  End Comment. 
FOLMSBEE